The CBO has issued a new report [.pdf] that summarizes the economic effects of greenhouse-gas legislation, relying on previously published analyses. The report shows just how weak the case for the proposed cap-and-trade plan really is. In fact, the CBO demonstrates that the theoretical benefits of Waxman-Markey to the United States fall far short of its 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 21st 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.


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:

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