Putting A Price On Cutting CO₂

Uncertainty underscored expert testimony last week at a Senate hearing that examined the long-term cost to U.S. industries, workers, and households of legislation that would cut U.S. carbon dioxide emissions.

Although the four government economists who testified at the hearing warned of the difficulty in making accurate long-range estimates, they agreed that the overall economic impact is likely to be minor when compared with the size of the nation’s economy. That impact, however, would hit some households and industrial sectors hard, they said, much to the chagrin of senators who represent fossil-fuel-dependent regions.

The Senate Energy & Natural Resources Committee hearing was one of several taking place as a half-dozen committees try to fashion a Senate climate-change bill (see page 30). Addressing climate change will require “a radical transformation of our energy sector,” committee Chairman Jeff Bingaman (D-N.M.) cautioned. Interest groups have been circling Capitol Hill with various analyses, Bingaman said, and some are asserting that cap-and-trade provisions will “wreck the economy,” while others are pointing “only to benefits of job creation and a new industry.”

In an attempt to sort out this disparity, the committee heard from top officials at the Congressional Budget Office (CBO), Energy Information Administration, Environmental Protection Agency, and Congressional Research Service. Those officials based cost projections on a House of Representatives-passed bill (H.R. 2454) that would cut greenhouse gas emissions 17% by 2020 (from 2005 levels) and 83% by 2050 through a CO₂ cap-and-trade system.

CBO Director Douglas Elmendorf predicted that the House bill would result in a 0.25–0.75% reduction in gross domestic product by 2020 and a 1.0–3.5% cut by 2050. “By comparison,” he said, “we project real inflation-adjusted GDP will be roughly 2.5 times as large in 2050 as it is today.” Considering this, the economic impact from climate-change legislation is “comparatively modest,” he said.

In terms of average annual household income, CBO finds that changes won’t be uniform. The bottom fifth of households would actually gain in income because of benefits they will receive through provisions in the House cap-and-trade system. The middle fifth, on the other hand, would be the most negatively affected, losing about 0.6% of income in 2020 and about 1.0% in 2050.

Looking at industries, Elmendorf said, climate-change legislation would bring permanent shifts in production and employment from carbon-based industries to noncarbon industries, but replacement jobs in these new industries would lag those lost. This “churning of jobs,” CBO said, would be small compared with normal workforce turnover but could still give rise to shifts in “hundreds of thousands to millions of jobs” in some sectors.

Sen. John Barrasso, a Republican from the coal state of Wyoming, quizzed Elmendorf over how quickly these carbon-based jobs will be replaced. Elmendorf had little to say, pointing out that the rate of transition is a guess and that it is “difficult for us in the projection business.”

But simply putting a price on CO₂ emissions will help drive the growth of those low- and no-carbon technologies and jobs, stressed Reid P. Harvey, chief of EPA’s economics branch. EPA estimates that House bill provisions will spur clean technologies to account for 18% of U.S. electricity generation by 2020 and 38% by 2050, compared with a business-as-usual level of 14%.

A shortcoming in the analyses, Harvey added, was a failure to examine the economic benefits of avoiding climate-change effects such as floods, droughts, and wildfires.