Contrary to the Heritage Foundation’s “New” Analysis, Climate Legislation Will Not Devastate Farmers or Small Businesses

Recycling their flawed May 13th analysis, the Heritage Foundation just released a new memo criticizing the precedent-setting Waxman-Markey Bill, the American Clean Energy and Security Act (ACES, HR. 2454). Par for the course, the Foundation gets it all wrong: an engine of economic growth, job creation, energy security, and protection from dangerous and costly global warming pollution is turned into a nightmare for farmers and small businesses.

But then, should we expect anything else from an institution that has accepted hundreds of thousands of dollars from Exxon? Can they seriously expect us to believe them?

Just today the USDA Secretary of Agriculture testified that climate legislation is actually likely to bring substantial net gains to farmers, after accounting for income earned from selling offsets, and reduced climate change impacts. The Brookings Institution, a highly respected non-partisan institution, found that even without accounting for reduced climate damages, climate legislation would have a minimal impact on agriculture.

But the Heritage Foundation would like you to believe otherwise: they claim farmers, as well as small business owners, will be ruined. Really? How can that be when their own model predicts robust growth in GDP and household income under climate policy? Try as they might to conceal this from you, they can't deny the result. It is a consistent finding in all major climate economic models — including their analysis last year of the Lieberman-Warner Bill.

Setting this inconvenient fact (for them) aside, why are their cost estimates so much higher than those found in widely-respected and peer-reviewed analyses done by government agencies and universities? The Heritage Foundation estimates that Waxman-Markey will impose a whopping $2,979 cost per year on households, 8.6 times higher than EPA's estimate (not following standard economic procedure, the Heritage Foundation does not put its figures in present value (i.e. "discounted") terms--nor tell you that it doesn't; as such, this ratio compares the $2,979 with EPA's undiscounted estimates**). Increases in electricity and gasoline are 3 to 8 times higher than EPA's, respectively. Based upon last year's analysis of the Lieberman-Warner bill, we can expect similarly low costs from the Energy Information Administration's forthcoming analysis.

So what's going on? It's pretty simple: the Heritage Foundation doesn't model the bill.  Billions of dollars of allowance value going toward consumer relief, clean energy, adaptation, and other measures are ignored. There is little to no discussion of cost containment provisions, such as banking, the strategic reserve, and offsets. There are no complementary policies promoting energy efficiency and renewable energy-and without those, these clean energy sources don't expand (relative to the no-policy case). Consequently, we don't get the declining costs that come from economies of scale and learning. So everything is just more expensive.

These problems with the original analysis, of course, extend to this new spin on farmers and small businesses:

• Energy price increases for farmers and small business are grossly exaggerated. The allocations for consumer relief that are ignored in the original analysis are also ignored for them. Most importantly, emission allowances provided to regulated utilities, required to pass on their value to their customers, also mitigate costs for farmers and small businesses.
• Stemming from the increases in household income and GDP that its own model predicts (but which the Heritage Foundation conceals from the reader), there will be higher demand for farmers' and small businesses' output.
• Missing entirely from the analysis are provisions in the bill that will direct billions of dollars of new income to farmers for, among other things, leasing land for wind turbines, selling biomass waste for bio-energy production, and selling offset credits to help emitting firms comply with the carbon cap.
• And finally, the extensive climate change damages that agriculture will experience with unmitigated global warming pollution are ignored.

Calling their study an analysis of the Waxman Markey bill, while not modeling any of its provisions and ignoring all the benefits of reducing dangerous pollution, may produce results that the Heritage Foundation likes, but it won't change the facts. Billions of dollars in allowances directed toward consumer relief and clean energy will not only keep costs down, it will also bring new economic opportunities and income for farmers and small businesses. For the modest investment costs estimated by the EPA and EIA, climate legislation is not only affordable, but an excellent investment in our future.

**This clarification on discounting was added to this blog on 7/23/2009.