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Seven Questions to Ask of Any Economic Model of Climate Legislation

Laurie Johnson

Posted April 23, 2009 in Solving Global Warming, U.S. Law and Policy

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Despite growing momentum by the new administration and Congress to take bold action that will bring us into a new clean energy future, opponents of comprehensive energy and climate legislation repeatedly predict rising costs, citing studies that appear to provide quantitative backup for exaggerated claims. In reality, their statements grossly distort the economic story told by an array of independent government and academic analyses. They also distort the story their own models tell. For example, Anne Smith from Charles River Associates will be testifying today before the House Energy and Commerce Committee and, based on her previous testimony, we can expect her to paint a bleak picture from her analysis.

 

Following are seven questions you should ask Anne Smith and anyone else presenting economic predictions about the effects of climate policy. Carry them in your back pocket.

 

1.   Top Line Question: How much does this model predict GDP will grow between now and 2030 under a cap on carbon emissions?  (Do not accept "how much less GDP is relative to no policy" answers).

Most results are reported relative to a baseline forecast of healthy economic growth, and find differences in economic growth between the cap and no-cap scenarios that are imperceptible.  For example, the "big three" 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' (done last year to assess the impact of the Lieberman-Warner bill), predict the economy would grow roughly one tenth of one percent slower under a cap.[1] This is 2 to 4 times less than the amount by which government regularly revises its economic growth forecasts. Put another way, the changes in growth rates predicted by these models wash out in the margin of error. Go to the end of this blog to see how much the economy was projected to grow under a cap in the "big three" opposition studies of the Lieberman-Warner bill last year, as well as how they fare on other questions in this blog.

 

2.   Opponents intentionally confuse the value of the carbon market with economic costs in order to exaggerate impacts on households. You should ask: Where does that money go? Does it simply vanish? Or is it given back to households?

The reason economic models show such imperceptible effects on the economy (see question one) is because any money spent on carbon allowances gets re-circulated back into the economy toward other goods and services-the carbon price simply transfers money away from polluting industries toward cleaner ones. Further, the Waxman-Markey (W-M) bill currently being developed in Congress will return some allowance revenues back to households, as well as invest them in energy policies that will make clean energy affordable, such as energy efficiency programs, renewables incentives, and deployment rewards for carbon capture and sequestration (CCS). These investments also return money to households, by creating jobs and income. Finally, W-M requires increased energy efficiency standards for homes and appliances, saving consumers even more money.

As one example, the EPA analysis mentioned above finds that if revenues are returned to households, households' buying power will increase 18-19% between 2010 and 2020, and by 36-40% by 2030. Translating this into a more familiar unit of measurement, this means that median household income will be about $9,000 higher in 2020 than today, and $18,000 higher in 2030. And how much will consumers have to invest of all that extra income to get clean jobs, energy independence, and climate security? Through 2050, only $98-$140 annually per household, which amounts to ten to fifteen cents a day per person.

If the predicted costs to the economy are even close to the value of the permits, you should worry about what assumptions were needed to make that value "go away."

3.   You should always ask how much consumers save in total from energy efficiency improvements between now and 2030.

Most opposition reports do not actually model energy efficiency gains, which is the cheapest, fastest and cleanest energy resource we have. But we know that we will be improving efficiency significantly, and most legislative proposals include specific provisions to enhance these gains. Any credible analysis should project substantial energy efficiency savings. After all, total energy bills are what matter most to consumers, not commodity prices. (Since a significant portion of energy efficiency will come from recently enacted energy efficiency policies you should ask for the total efficiency gains, not the difference between the capped and non-capped scenarios). A recent study by the Union of Concerned Scientists provides a good example of how much households can save.

 

4. Don't accept claims of huge job losses. You should ask: If GDP is growing so robustly, how can you get such drastic job losses?

You cannot have a net job loss with GDP growing robustly. This is a basic economic fact that any economist should know. Economic analyses of past environmental regulations on average show an increase in jobs from environmental regulation. Moreover, spending on energy efficiency and clean energy creates almost 3 times as many jobs as spending on fossil fuels. Internationally recognized economists believe climate legislation will generate a whole new wave of investment that will help us get out of this recession, and put us on a path toward energy security, jobs and economic growth, and climate protection.

 

5.   How do the model's allowance prices compare to non-partisan best estimates? 

When citing the academic and government studies, obstructionists often give projections from "worse-case" scenarios that have the most extreme assumptions (often done in response to demands from climate deniers in Congress), rather than what the agency considers its best estimate (referred to as the "core" scenario). Another common distortion is assuming much higher technology costs or much more limited ability to expand clean energy capacity than assumed by independent studies. And opposition studies often don't model the actual legislation they claim to be analyzing (e.g. not modeling factors that substantially reduce costs, such as offsets, banking, dividends to households, energy efficiency provisions, and reductions in greenhouse gases other than CO2-legislation covers these gases as well, some of which are less costly to reduce than CO2).

We can get some guidance from the non-partisan draft analysis of the W-M bill by the EPA, which projects the following allowance prices:

2015 Allowance Price: $13-$17/tCO2e

2020 Allowance Price: $17-$22/tCO2e

2030 Allowance Price: $28-$36/tCO2e

 

6.   How much will renewable energy grow between now and 2030 under the policy?

The EPA draft W-M analysis shows renewable energy penetration accelerating by 150% over the next two decades, and this is without modeling the bill's renewable electricity standard (due to time constraints, EPA was not able to model these provisions for the draft release; they expect this figure to increase once they model the full bill).

 

7.   Did the study model the costs of inaction?

Global warming will cause serious economic harm , such as property lost to sea level rise, more intense hurricanes, forest fires, water shortages, national security threats (e.g. from millions of people migrating due to losing fresh water supplies as glaciers evaporate and droughts intensify), increasing world food prices due to water shortages, and lost ecosystems and species. These costs are estimated to reach trillions of dollars by the end of the century, yet they are assumed to be zero in most economic models, with or without climate policy. If these were included, we would likely have more economic growth in the capped scenarios than the no-policy scenarios, since damages are surely going to be worse if we do nothing.

 

8.   And finally, a special question just for the ACCF/NAM study of the Lieberman-Warner (LW) bill last year: Is it true that that study assumed a starting gas price in the capped scenario that was double the price assumed in the no-policy scenario?

Much of the predicted economic losses were due to assuming higher world oil prices in the policy case than in the no-policy case, rather than a result of the policy itself. The model they used is from the Department of Energy's Energy Information Administration, whose Administrator discredited the study for this error before the Senate Environment and Public Works Committee on May 20, 2008.

 


 

[1] As small as this is, it is still three times larger than differences found in non-partisan studies.

 

 

American Council on Capital Formation/National Association of Manufacturers

Lieberman-Warner Bill

GDP 72% higher in 2030

No allowance recycling to energy efficiency specified

No allowance recycling to renewables specified

No direct dividends to households specified

No allowance recycling to CCS incentives specified

No energy efficiency savings reported

No banking

Limited offsets

No energy efficiency savings reported

Projected 2030 allowance price: $228-$271 (2007$)

EPA Core LW Case 2030: $64-$87

EIA Core LW Case 2030: $74

Base gas price assumption:

$2 vs $4 in no-cap vs. cap scenario

 

Charles River Associates*

L-W Bill

GDP 94% higher in 2030**

Unclear whether only auctioned allowances are recycled, or also the free allowances in Title 3

(e.g. to LDC customers, natural gas customers, and states; free allowances are much larger than

the number of auctioned allowances, making this a material difference) (non-auctioned allowances comprise 74% of  the total allowance pool in 2012, decreasing steadily to 50% by 2022)

Allowance recycling to renewables: see above

Allowance recycling directly to households: see above

Allowance recycling to CCS: see above

Allowance recycling to energy efficiency: see above

One case with banking, one without

Limited offsets

(No low cost international offsets available: restricted to countries with comparable caps)

$ of energy efficiency savings not reported, but claimed subtracted out from HH costs

*    Revised release April 2008.

 ** This is estimated from CRA's December 3, 2007documentation provided to the Senate EPW        Committee (Table V-8, Figure VIII-3, with all numbers adjusted to 2007$), as their revised  2008 power point presentation does not give sufficient detail to calculate this value. Scenario E, which has results in the middle of all the estimated  scenarios, was used for the calculations.

 

Heritage Foundation

L-W Bill

GDP 68% higher in 2030 (corrected from 70%; 5/28/2009)

No allowance recycling to renewables specified

No direct dividends to households specified

No allowance recycling to CCS incentives specified

No energy efficiency savings reported

No banking

Not clear what % of allowed offsets not specified

No energy efficiency savings reported

 

This blog may be updated as more data becomes available.

 

 

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