The ethanol subsidy and import tariff are set to expire at the end of the month, but there are representatives in Congress that want to extend them even though CBO findings indicate that taxpayers pay $1.78 to reduce gasoline consumption by one gallon from ethanol made from corn and $3.00 for cellulosic ethanol made from energy crops such as switch grass, poplars, corn stover, and woodchips. The analogous cost for biodiesel is $2.55, but its subsidy ran out the end of 2009.

The cost to taxpayers for providing tax credits to biofuels to reduce carbon dioxide emissions is enormous: $754 per metric ton for corn-based ethanol, about $275 per metric ton for cellulosic ethanol, and $306 per metric for biodiesel. To put these numbers in perspective, it currently costs less than $15 a ton to purchase a certified carbon dioxide allowance traded on the European Climate Exchange.

Biofuels Production and Tax Subsidies

Biofuels are added to petroleum products in the transportation sector. In 2009, the United States produced 11.4 billion gallons of biofuels, of which 10.9 billion gallons was ethanol, produced mostly from corn, and 0.5 billion gallons was biodiesel, produced mostly from soybean oil[ii]. A tax credit of 45 cents per gallon of ethanol blended with gasoline is given to blenders of transportation fuels and is set to expire at the end of this month. Biodiesel produced from animal fats and recycled plant oils received a tax credit of one dollar per gallon before it expired in December 2009. Because tax credits for renewables are frequently reinstated, the CBO included the biodiesel tax credit in their analysis. All forms of cellulosic ethanol, made from energy crops that are grown specifically for fuel (switchgrass and poplars), corn stover, and woodchips, receive a tax credit of $1.01 per gallon if blended with gasoline. In fiscal year 2009, the biofuel tax credits reduced federal excise tax collections by about $6 billion.[iii]

Federal Renewable Fuel Mandate

The Energy Security and Independence Act passed in 2007 creates Federal renewable fuel mandates that require the production of specified volumes of renewable fuels to be blended with traditional transportation fuels, with targets increasing to 36 billion gallons by 2022.[iv] So far, corn-based ethanol has met its targets, but cellulosic ethanol has not since it is not yet a commercially viable technology. The Environmental Protection Agency recently lowered the mandate for cellulosic ethanol from the legislated target of 250 million gallons in 2011 to 3.94 million gallons, 1.6 percent of the original target.[v]

While some biofuels are imported to meet the mandates, Congress has imposed a tariff of 2.5 percent and 54 cents per gallon to discourage the importation of ethanol.[vi] The tariff is also set to expire at the end of this month.

The CBO Study Results

The CBO calculated the costs to taxpayers of using ethanol to reduce gasoline consumption by one gallon to be $1.78 for ethanol made from corn and $3.00 for cellulosic ethanol. Based on the tax policy in place through last year, the cost of reducing an equivalent amount of diesel fuel using biodiesel is $2.55.

According to the CBO, using biofuels to reduce greenhouse gas emissions by using tax credits would cost taxpayers $754 per metric ton of CO₂ for ethanol, about $275 per metric ton of CO₂ for cellulosic ethanol, and $306 per metric ton of CO₂ for biodiesel. The estimates exclude emissions of carbon dioxide that occur when the production of biofuels results in forests or grasslands being converted to farmland to grow the fuel. According to the CBO, taking those emissions into account could raise the cost of reducing emissions substantially.

Source: Congressional Budget Office, Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals, July 2010, http://www.cbo.gov/doc.cfm?index=11477&zzz=40959

Conclusion

Apparently, some of our Congressmen have not read the CBO study. For example, Senator Tom Harkin from Iowa recently said, “The 45 cents per gallon comes back to consumers in cheaper gasoline prices. Consumers are better off. If we do away with that, gasoline prices are going to go up and they are going to pay for it at the pump, and the oil companies will get the profit, not American farmers, not American producers, not American shippers.”[vii] Senate Finance Committee Chairman Max Baucus has a plan to extend the tax credit for ethanol through 2011, but to reduce it from 45 cents to 36 cents per gallon. He would also extend the 54 cent per gallon tariff on imported ethanol through next year.[viii]

Our politicians when they passed the renewable fuel mandates in 2007 failed to recognize the shortcomings of biofuels, including their lower efficiency resulting in less miles per gallon than traditional transportation fuels, the resultant increase in food prices from diverting corn to the transportation fuel market, and the unlikeliness of cellulosic ethanol to be commercially viable to meet its increasing mandates. We need to recognize that tax subsidies and federal mandates cost the American public both directly and through secondary effects.

[i] Congressional Budget Office, Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals, July 2010, http://www.cbo.gov/doc.cfm?index=11477&zzz=40959

[ii] Energy Information Administration, Monthly Energy Review, http://www.eia.gov/mer/pdf/pages/sec3_3.pdf, http://www.eia.gov/mer/pdf/pages/sec10_8.pdf and http://www.eia.gov/mer/pdf/pages/sec10_7.pdf .

[iii] Congressional Budget Office, Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals, July 2010, http://www.cbo.gov/doc.cfm?index=11477&zzz=40959

[iv] http://energy.senate.gov/public/_files/RL342941.pdf

[v] Open Market, Ethanol Mandates Meet Reality, November 4, 2010, http://www.openmarket.org/2010/11/04/ethanol-mandates-meet-reality/

[vi] Congressional Budget Office, Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals, July 2010, http://www.cbo.gov/doc.cfm?index=11477&zzz=40959

[vii] The Hill, Harkin: Ethanol tax credits could move in the Omnibus package, December 2, 2010, http://thehill.com/blogs/e2-wire/677-e2-wire/131743-harkin-ethanol-tax-credits-could-move-in-omnibus?page=2#comments

[viii] E2 Wire, Energy Roundup: Baucus floats energy subsidy compromise, December 3, 2010, http://thehill.com/blogs/e2-wire/677-e2-wire/131809-e2-morning-roundup-baucus-floats-ethanol-compromise-renewable-power-grant-extensions-plus-big-hurdles-for-offshore-inspectors-bingaman-laments-obamas-drilling-retreat-and-more

Elmendorf’s testimony was in response to a revision of CBO’s original report on the cost of the Waxman-Markey bill. When the original report came out, IER showed that CBO’s own numbers demonstrated that the economic costs of Waxman-Markey’s cap-and-trade scheme far outweighed its benefits to American citizens, and arguably even to the world as a whole. In the present post, we explain why Elmendorf’s three key points are misleading. Elmendorf calls hundreds of billions of dollars in lost future economic growth a “modest” reduction, he obfuscates by focusing on purchasing power instead of on the reduction in total income, and contrary to economic theory, assumes that low- and middle-income families will benefit from free allowances handed out to utilities. By simply stressing different aspects of the same underlying CBO analysis, one could have painted a much bleaker picture of the costs of cap-and-trade than Elmendorf chose to convey.

Writing off Billions of Dollars in Lost Future Economic Growth as “Modest”

The first trick Elmendorf deploys is to dismiss reductions in GDP as “modest” because they won’t occur until Americans are wealthier than they are today:

Reducing the risk of climate change would come at some cost to the economy. For example, the Congressional Budget Office…concludes that the cap-and-trade provisions of H.R. 2454…would reduce gross domestic product (GDP) below what it would otherwise have been—by roughly ¼ percent to ¾ percent in 2020 and by between 1 percent and 3½ percent in 2050. By way of comparison, CBO projects that real (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.

Although the CBO director brushes it off, a potential cost of 3.5 percent of total economic output is enormous. In 2008, US GDP was $14.4 trillion. The high-end cost estimate of 3.5 percent works out to $504 billion. Yes, it’s certainly true that if you asked people back in 1970 if 3.5 percent of GDP forty years in their future was a big deal, they probably would have said “Not really.” Yet the people in 2008 would certainly have been upset if $504 billion were sucked out of the economy because of a program implemented forty years earlier.

While CBO calls a 1 percent to 3.5 percent reduction in GDP by 2050 a “modest” cost, what about the benefits? The true irony here is that Elmendorf’s testimony provides an estimate of the cost of global warming. CBO argues that “a relatively pessimistic estimate for the loss in projected real gross domestic product [GDP] is about 3 percent…by [the year] 2100”. So if Elmendorf is allowed to blow off 1 percent to 3.5 percent in GDP because people will be so much richer by 2050, why are we rushing through legislation to avert potential climate change that the same CBO predicts might cost 3 percent of GDP at the end of the century? Won’t Americans be really wealthy by 2100?

Focusing on Consumption Purchasing Power Rather Than Total Income

After assuring the senators that reductions in GDP were modest, Elmendorf then changed the measuring rod:

In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP. Projected GDP impacts include declines in investment, which only gradually translate into reduced household consumption.

This statement is technically true but it is very misleading. Suppose a household currently enjoys a take-home income of $100,000, out of which they put $10,000 into funding retirement and the kids’ college tuition, while the other $90,000 they spend on the mortgage, dining out, clothes, gasoline, and other household necessities. The politicians come along and propose a new tax that will grab an extra $5,000 a year, leaving the family with a new after-tax income of $95,000.

Now most people would think, “Wow, I’m $5,000 a year poorer.” But the apologists for the tax hike could argue, “Actually you’re not really $5,000 poorer, in terms of your lifestyle. You won’t cut out your spending on groceries and food by the full $5,000. Because of your lower income, you will reduce your savings to $9,000 a year, and your other spending down to $86,000 a year. So really the hit to your household’s consumption is only $4,000 per year.”

Would anybody buy that argument? Of course not. Income is income. The “long-run cost to households” will certainly be affected by declines in investment spending, which is counted in GDP. By focusing on a decline in “purchasing power” of 1.2 percent for households by 2050—rather than their estimate of 1.1 percent to 3.5 percent of lost GDP—the CBO is effectively sweeping half the impact under the rug.

Reporting Allowance “Rebates,” Not Gross Compliance Cost

The last trick we’ll note is that the CBO analysis simply takes the government at its word that low-and middle-income families will benefit from the free allowances that will be handed to utilities under the provisions of Waxman-Markey, even though this flies in the face of standard economic theory. As a recent IER study showed, Congress plans on using allowance handouts in order to transfer money from consumers (through higher prices) into the pockets of special interests.

The reader may be interested to see the CBO’s estimates of the actual hike in household costs from Waxman-Markey’s cap-and-trade scheme, before adding in the free allowance handouts:

As the first column makes clear, middle class families are expected to suffer a hit of more than $1,000 per year in higher prices. (And remember, this figure is the one that has already been cut in half using the total output vs. consumption trick explained above.) Whatever happened to “a postage stamp a day”? Does the CBO know something about the Postal Service’s intentions that we don’t?

Conclusion

During a recent hearing, Elmendorf made clear there were substantial costs to cap-and-trade. According to the Washington Post he said:

“The shifts will be significant,” the CBO director said. “We want to leave no misunderstanding that aggregate performance—the fact that jobs turn up somewhere else for some people—does not mean that there are not substantial costs borne by people, communities, firms in affected industries and affected areas. You saw that in manufacturing, and we would see that in response to changes that this legislation would produce.”

Even Elmendorf agrees there are substantial costs to cap-and-trade. And as we have shown, he and the CBO are still underestimating the costs.

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/

First, the drama. Shortly before the Waxman-Markey energy tax passed the House of Representatives, the Congressional Budget Office (CBO) released an analysis of one specific portion of the 1400-page bill. Responding to a specific information request from Representative Dave Camp (R-MI), the CBO found that the cap-and-trade section of the measure could cost American households $175 per year in 2020.

Based on this snippet, proponents of the scheme, including President Obama, repeatedly claimed that the Waxman-Markey bill would cost consumers a mere “postage stamp a day.” And while it is unlikely that we will ever know the bill’s exact overall hit to our pocketbooks, the claim that Waxman-Markey bill will only cost $175 per household withers under scrutiny.

As mentioned, the CBO very specifically estimated the cost of the cap-and-trade component of the bill at a very specific point in time—the year 2020. There are many other aspects critical to the overall proposal adding further costs to businesses and making households poorer, and the cap-and-trade restrictions become far more onerous after the year 2020. (We’ll come back to this point later on.) This was of course by political design, despite cloaking the bill in the ritual mantra of “we must act now.”

But the fact that the CBO study only looked at one section of the bill was lost in media reports on the bill. Time Magazine, for example, stated that “the bill would cost the average U.S. household $175 in higher energy costs” and a similar claim was made by the New York Times, stating that the provision might cost “just” $175 per year.

Ironically, the New York Times piece acknowledges, yet buries, one of these important points in its second paragraph:

Comprehensive climate legislation pending in the House would cost an average of about $175 per household every year, though the price tag would be even larger for wealthier Americans while the poorest can expect to get a small dividend, according to a Congressional Budget Office study released late Friday.

The CBO report studied only the cap-and-trade provisions of H.R. 2454, a major climate bill that Democratic leaders expect to bring to the floor early next month for a vote on final passage. [emphasis added]

Yes, the Times acknowledges in a later paragraph that the opening paragraph is simply not true, though few readers would catch the error-slash-admission. It is blatantly false to say that CBO claimed “[c]omprehensive climate legislation…would cost an average of about $175 per household.”

Unfortunately there are numerous other provisions in the Waxman-Markey bill which add to its burden on Americans, such as a mandate for government-approved renewable energy to produce up to 20 percent of our electricity, a requirement dictating a certain percentage of cars be flex-fuel vehicles, additional mandates for renewable fuels, new regulation of local building codes, new restrictions on the types of electric lighting Americans can use, and many other expensive provisions. These mandates all come with a cost that each and every American will bear in the form of higher energy prices, higher prices for goods and services, and potential lost jobs.

So we see that even taking the CBO analysis at face value reveals the media coverage—as typified in the New York Times article—as inaccurate, because they ignore the costs of Waxman-Markey that the CBO did not estimate.

Beyond this media distortion, the New York Times and other media outlets also botched the story by ignoring the timing. The CBO reported on the annual cost to households in the year 2020. Recall here that even Waxman-Markey supporters rushed to the podium to defend their votes by admitting the bill wouldn’t really kick in for more than a decade. The NYT article says:

Under the House bill, U.S. industries would be forced to reduce their emissions 17 percent below 2005 levels, a regulatory burden that would be accomplished by stemming demand for carbon-based energy through higher prices.

What the article doesn’t tell the reader is that the 17 percent cut is only an intermediate benchmark, a fraction of the actual mandate, which businesses must hit by the year 2020. By the year 2050, Waxman-Markey cap-and-trade regulations require total emissions to drop 83 percent below 2005 levels. That is (only partly) why the CBO figure is so misleading, because it studies the impact of Waxman-Markey before the true economic impacts really kick in, as admitted by none other than Waxman-Markey supporters themselves. Oddly, this material fact is nowhere mentioned in the article.

We have previously detailed the glaring substantive flaws with the CBO’s $175 figure. In short, the CBO counts all of the auction receipts and “free” allowance handouts as flowing back into households’ income, thus offsetting some of the gross costs of the cap-and-trade program. That sort of book-cooking rightfully earned a black eye thanks to Enron and others. The CBO’s own figures reveal that before throwing this pork back into the mix of the “average” household’s income, gross costs in 2020 would be $890 per household.

This is just the tip of the caveat’s iceberg. Even if we throw out the increased costs of all of the other elements of Waxman-Markey and just focus on cap-and-trade, and we just focus on the year 2020 with blinders about the later years when the bill’s mandates actually kick in (2021–2050), and we ignore the redistribution of wealth from consumers to politically-connected groups getting “allowance” handouts, it’s still not true that the CBO claims that the comprehensive bill carries only a net cost of $175 per household. There are still other basic and inescapable considerations the CBO estimate omitted. For example, footnote 3 on page 4 of the study says:

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.

Translated into English, what the above escape hatch means is that the CBO study only looks at the direct hit to the economy caused by the cap-and-trade program in Waxman-Markey, acknowledging that the total hit—including both direct and indirect mechanisms—will therefore be greater than the CBO’s estimate for 2020 alone.

For example, since the cap will by necessity drive up the price of gasoline, the CBO counts that as a direct resource cost of Waxman-Markey. However, with higher gasoline prices, some truckers who are already barely making ends meet may have to switch occupations. They could try selling their eighteen-wheeler to another trucker, but the whole industry would be shrinking due to the higher gas prices (with other knock-on effects of higher shipping costs). Thus total economic output would fall as previous truckers now worked in jobs at which they were less qualified, and because large numbers of trucks would stay idle. These indirect reductions in total GDP were not analyzed by the CBO, which admits as much when it says on page 8:

The measure of costs described above reflects the costs that would occur once the economy had adjusted to the change in the relative prices of goods and services. It does not include the costs that some current investors and workers in sectors of the economy that produce energy and energy-intensive goods and services would incur as the economy moved away from the use of fossil fuels. [emphasis added]

To say that the CBO estimate of a very specific section of the Waxman-Markey energy bill for a very specific timeframe is the total household impact of the Waxman-Markey bill is misleading. Yet even if we take the CBO report as gospel, the major media are still misreporting its findings. The “$175 per household” figure is not the cost of Waxman-Markey, but only of its cap-and-trade component. Further, the $175 figure refers exclusively to the year 2020, before the meat of the bill’s emission cutbacks occur, and it admits to ignoring all of the transition losses that will accrue to firms that are heavily dependent on carbon based energy. It isn’t that they aren’t real; it is simply that CBO ignored them. The $175 figure is unsupportable.

It is no surprise that proponents of the Waxman-Markey energy tax bill cling to the CBO projection while conveniently omitting the fact that the $175 annual household impact number only takes into consideration one portion of the entire bill’s impacts. You can expect these people to manipulate information to put their position in the best possible light.

The fact that the media are not doing their jobs by telling the whole story behind the CBO number is an entirely different matter. Most Americans have little idea just how much the Waxman-Markey energy tax will cost them, which does seem to be the objective of many of its proponents. It is up to journalists to present the facts about this issue in a straightforward manner so that American consumers will know that true costs of policies that deliberately increase the price of the energy we use to heat our homes, power our cars and run our businesses.