The Heritage Foundation's Climate Costs Lunacy
While Congress continues to review the details of the Waxman-Markey draft climate bill, a recent analysis of their proposal by the Environmental Protection Agency makes the cost of capping our carbon emissions seem quite reasonable. Indeed, at a cost of $98-$140 per household per year over the life of the program, not only would the bill provide a very low cost insurance policy against an uncertain climate future, it would also increase job growth, accelerate near-term investment, and reduce dependency on foreign oil.
This rather positive take on the costs of climate legislation by the government itself seems to be in direct contrast to the loud proclamations to the contrary from the three big studies widely cited by opponents of climate legislation, ACCF/NAM (American Council for Capital Formation and National Association of Manufacturers), Heritage Foundation, and Charles River Associates'. These groups claim that the cost per household would be over 30 times higher than the EPA's estimate, and that a climate bill would be disastrous for the economy in general.
Why do these two sets of analysis differ so dramatically? My colleague Laurie Johnson has recently written about the seven deadly economist sins of these organizations in calculating these costs. This blog expands upon one of her key points, that the reason the Heritage Foundation costs are so high is due to the fact that they basically assume that the trillions of dollars of revenue from the program is not spent on reducing carbon emissions. Further, while the Heritage Foundation makes some passing mention of revenue recycling in a paragraph near the end of their analysis, a simple look at the numbers reveals that their version of revenue recycling actually INCREASES the costs of the program.
For example, in the year 2030, the "reasonable" costs of the carbon program calculated by the Heritage Foundation would be $338bln. While their high cost projection of $88/ton for the cost of carbon doesn't include offsets or other provisions that would lower the carbon price, the real trick here is estimating that our GDP growth would actually decline by $436bln for that year. This truly remarkable bit of hocus pocus implies that not only do the revenues evaporate into thin air with respect to our energy productivity, but that they are able to convince an additional hundred billion dollars to disappear from the economy with them.
It is this kind of magic that allows the Heritage Foundation and their brethren to conclude that "the impact on the overall economy reflected in cumulative gross domestic product (GDP) losses are estimated at $4.8 trillion (with more realistic assumptions) by 2030." This is of course in complete contrast with the government's own findings that the total program costs through 2030 would be closer to $200bln.
Naturally, you could argue that this is not a fair fight. That the EPA is cheating, first by actually bothering to model the bill (as opposed to the Heritage Foundation who just dusted off their analysis from last year) and then by going to the trouble of calculating how investment in low carbon technologies, energy efficiency, and cleaner transportation will help drive down the costs of the program over time. Any way you look at it, however, it is very hard to believe the cost assumptions of the Heritage Foundation, given that the government numbers come in under 3% of their costs projections.
Indeed, the Heritage Foundation's analysis is so dishonest that is makes me wonder if they actually had some other use in mind for all those carbon dollars. I mean, can you really just delete trillions of dollars from an economic analysis? Surely it has to go somewhere. Maybe the Heritage Foundation is going to write big checks to the American consumer in 2031, the year after their analysis concludes. Maybe they are planning to give it all to the 3 million people they forecast would lose their jobs (which works out to about $1.6mln per person). Job loss figures, which by the way, are completely unsupported by the higher GDP forecasted in their reports.
Maybe they are going to pay off the national deficit. Well, with $4.6trln (the difference between the EPA's $200bln cost estimate through 2030 and the Heritage Foundation's $4.8trln cost estimate through 2030) they could pay off over one-third of our debt, effectively rebating all of the money to the American consumer through lower debt financing costs. However, I doubt they were considering any of these options as it would invalidate their claim that the costs are additional.
I could be way off base on this, but I have a theory about what the Heritage Foundation plans to do. Maybe the Heritage Foundation plans to convert all of these trillions of dollars into one dollar bills and then stack one bill on top of another, until they reach the moon! Yes that's right, another moon landing! It's big, it's bold, it has never been done before and it is the only project I can think of that could sideline this much money from the economy without creating any kind of economic benefit.
For those interested in how many dollars it would take, using some basic assumptions about the thickness of a dollar bill, it looks like they would be able to get the job done with $2.8trln, leaving plenty of the carbon revenue dollars to spare.
Now, some may argue that stacking dollar bills to the moon is not a particularly worthy goal for the American people-that growing jobs in new industries, lowering the risks of climate change, and achieving our energy independence are far more important-and yet, the Heritage Foundation carries on, claiming that the costs of climate legislation are 30 times higher than the government's own analysis, and is willing to testify to this in front of Congress.
Indeed, even if the Heritage Foundation isn't planning to stack dollar bills to the moon (which I am hoping they aren't), by not including the economic benefits of low carbon investment in their analysis they are painting a dishonest and indefensible picture of the costs of climate change. A picture of the costs that imply the money is being used for a completely non-economic purpose and should therefore be ignored by anyone interested in understanding the true costs of climate change legislation.
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