Dan Lashof's Blog
Cheap at Twice the Price (but chances are it will cost half as much)
July 24, 2007
Posted by Dan Lashof in Solving Global Warming
The debate on global warming in Washington has turned decisively from "Is it a problem?" to "What are we going to do about it and how much is it going to cost?"
The EPA weighed into that debate today with an economic analysis of one of the leading Senate proposals, the "Climate Stewardship and Innovation Act of 2007" (S.280), introduced by Senators Joe Lieberman (I-CT) and John McCain (R-AZ). (To see NRDC's comparison of this bill to others introduced in this Congress click here). While I take issue with important aspects of EPA's analysis, it doesn't show obvious signs of the political tampering we have come to expect from the Bush administration.
The bottom line from the EPA: Solving global warming is affordable.
EPA finds that reducing global warming pollution will have an imperceptible affect on economic output overall. If S.280 were enacted, consumption of goods and services by U.S. households would increase 103% between 2005 and 2030, according to the ADAGE model used by EPA, which is virtually indistinguishable from the 105% increase projected without the legislation. Of course, household consumption is not the same as welfare. It does not include the value we place on reducing the risk of catastrophic storms, preserving our favorite beaches and alpine meadows, and preventing polar bears and countless other species from being driven to extinction.
In fact, we can't afford not to solve global warming. EPA's analysis does not attempt to tally the benefits of preventing global warming, but other studies, most notably the Stern Review, make it clear that the costs of inaction are far higher than the costs of reducing emissions.
What about energy prices? Changes would be far smaller and less disruptive than those consumers have experienced in recent years. According to EPA's analysis S.280 would have modest impacts on electricity and gasoline prices, and natural gas prices would not be significantly affected. The ADAGE model projects that the price of CO2 allowances will be $27/ton in 2030, which would add 23 cents per gallon to the price of gasoline. But unlike recent, much larger, price increases, if Congress designs this program right, the money won't go to OPEC or Exxon. A well-designed program will use the value of allowances for public benefits, such as paying for rebates on more fuel-efficient vehicles, homes, and appliances and increasing the earned income tax credit.
EPA projects that S.280 would increase electricity prices somewhat (less than 1 cent per kilowatt-hour), but prices are not the same as social costs. The total cost of generating electricity would decrease 7 percent in 2025 because energy efficiency measures will reduce total electricity consumption according to EPA, and this doesn't include the benefits from lower particulate and mercury emissions from power plants.
In reality, the opportunities to cost-effectively reduce fossil fuel demand are far greater than acknowledged by this analysis. Stronger building and appliance efficiency standards, a national Renewable Electricity Standard, and higher vehicle fuel economy standards are all part of a sound energy policy designed to increase energy security and lower consumer costs by overcoming market barriers that are slowing the adoption of these technologies. These policies would also help achieve the global warming pollution reductions required by S.280, reducing compliance costs. EPA's analysis of S.280 does not consider these complementary energy policies. As a result it understates the role that renewable energy, biofuels and vehicle efficiency improvements can play in achieving the emission reductions required by the bill, and overstates the role of other low-emission electricity generating technologies, offsets, and international credits. In addition to an overall cap on global warming pollution Congress needs to adopt targeted energy efficiency and renewable energy policies to achieve low-cost emission reductions.
Finally, no economic model can fully anticipate the advances in technology likely to be spurred by a policy to cap and reduce emissions. For example, prior to enactment of the cap on SO2 emissions in the 1990 Clean Air Act amendments, EPA projected that the price of SO2 allowances would be $500-$1000 per ton. In fact, prices have been far lower, generally in the range of $100 to $200 per ton until it became clear that emission limits would be tightened further than originally enacted by Congress.
When all is said and done, solving global warming is not only affordable, it is likely to be beneficial to the economy as well as our environment and public health. But even if it costs twice as much EPA's conservative estimate, it is the best deal ever.
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- Dan Lashof
- Director, NRDC Climate Center
- Washington, D.C.
- I am the director of NRDC's climate center. My main focus is solutions to global...
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