Laurie Johnson's Blog: Solving Global Warming

A second look at CBO’s employment study: Climate legislation and a healthy economy can go hand in hand

2010-05-15T15:54:33Z

The Congressional Budget Office (CBO) recently released a study examining the employment effects of putting a cap on carbon emissions. It concluded that climate legislation would have modest, if not negligible, impacts: “[Climate legislation] would probably have only a small [slightly negative] effect on total employment over the next few decades…most laid-off workers would find employment in other industries.” These small impacts would fall mostly on workers in energy-intensive industries and related sectors.

It’s a fairly benign conclusion, but still off the mark: climate change legislation contains many provisions designed to prevent and moderate even these small impacts, as well as speed up the transition to a clean energy economy. To the extent that workers are negatively impacted, the solution is not preventing climate legislation from being enacted. Rather, climate legislation must contain effective safeguards to re-train these workers, provide alternative sources of employment to them, and restore their health care benefits should they lose them. With so few workers affected, only a very small portion of the proceeds from selling pollution allowances would be needed to accomplish this.

The problems with CBO’s analysis

CBO relied upon three studies that make its conclusions problematic. Two of the studies (click here and here), conducted by non-partisan research institutions, Resources for the Future (RFF) and the Brookings Institution (BI), only model a cap on carbon. None of the complementary policies and incentives in climate legislation, designed to allow a smooth transition to a cleaner economy, are taken into account. The third study, conducted by Charles River Associates (CRA) on behalf of industries opposed to climate legislation, relies upon a set of unrealistic and false assumptions that generate large job losses. Partially adjusting for only some of these problems, I estimated that CBO’s economy-wide projections change from negative to positive: from -.25% in 2015 and -.27% in 2025, to +.16% and +.22%, respectively. This analysis is presented further below.

Generally, there are six overarching problems with the studies CBO relies upon.

The RFF and BI studies do not model the allowance allocations in climate and energy legislation to manufacturers to offset their energy price increases; these allocations have been found to fully offset these costs—and in some instances more than offset them (click here for a federal interagency study and here for a study from Stanford University). CRA models these provisions, but constructs their model to make them ineffective.
None of the studies model provisions in climate legislation that direct billions of dollars from the proceeds of selling pollution allowances toward promoting more efficient industrial processes, or assistance to manufacturers to help them retool, retrain workers, and lower their energy use.
As CBO describes, the studies use models that cannot effectively capture employment gains in sectors expected to grow under climate and energy legislation: “[The] industry classifications used in the studies coincide better with industries that would lose employment than with industries that would be expected to gain.” These include production of more fuel-efficient vehicles, and increases in construction “resulting from consumers seeking to improve the energy efficiency of their homes” and from “producers of electric power [building] new wind or solar generation facilities.” Such shifts in production are critical for job creation: shifting expenditures away from energy toward the rest of the economy is a driving force behind job growth projected from climate legislation, as is switching from fossil fuel energy to renewable energy. Every dollar spent on energy efficiency or renewables is estimated to create on average 3 times the number of jobs as every dollar spent on fossil fuel energy (click here and here for more examples of job creation from energy efficiency).
RFF and BI do not model efficiency standards in climate legislation that will save firms and households billions of dollars in energy expenditures (click here, and here). CRA does model them but, contradicting evidence documenting the opposite, starts with an assumption that the economy is fully energy efficient. Perversely, this has the effect of making the economy less efficient, rather than the reverse, artificially increasing CRA’s job loss projections.
None of the studies model break-through innovations in clean energy (note that climate legislation also has incentives promoting innovation in new and emerging technologies), for the simple reason that it is not possible to model technologies that don’t yet exist. But how likely is it that there won’t be any unforeseen cost-reducing innovations in low carbon energy over the course of forty years? Just think about cell phones and the internet over only the last decade. The profit motive is a very powerful thing indeed, and putting a price on carbon creates just that for clean energy.
None of the models account for damages from climate change (click here and here) that could result in job losses from not taking action.

Two other miscellaneous but important points. CBO writes that real wages will decline. However, this is relative to a baseline of increasing income (i.e., incomes are projected to increase in all models, just slightly less so under climate policy). Similarly, most of the job impacts are projections relative to a baseline of increasing jobs. In most instances, no actual workers will be laid off; employment opportunities just shift to different parts of the economy.

In contrast to the CBO report, studies that more completely model provisions in climate legislation (click here, here, and here), demonstrate the numerous employment opportunities a low carbon economy offers. Consistent with the historical relationship between environmental regulation and job growth (click here and here and here) over the last four decades, climate and energy legislation is likely to lead to net job growth rather than the reverse.[1] Given the magnitude of the structural changes that will occur in the transition to a clean energy economy, job growth resulting from climate and energy legislation is likely to be much larger than that created from past environmental regulations. In the last section, I elaborate on how incentives and complementary policies in climate legislation can generate economic growth and significant employment opportunities.

First I’d like to turn to CBO’s actual estimates: see what they look like in the aggregate—i.e., relative to the economy as a whole, and what they might look like if we correct for some of these errors. We will see that adjusting CBO’s estimates for only the first error and partially the third turns CBO’s economy-wide job loss estimates positive. It is not possible to make any adjustments to account for errors 2, 4, 5 and 6 with CBO’s data.

CBO’s estimates in the aggregate: a relative perspective

CBO provides job impact estimates for several sectors, but no economy-wide number aggregating them, nor any metric with which one could compare it relative to other economic shifts. So our first task is to see what the sectoral impacts look like relative to the economy as a whole.

Using data from CBO’s analysis,[2] I estimated that CBO’s combined sectoral impacts sum to roughly a -.25% change in the number of jobs in 2015, and -.27% in 2025. To put this in perspective, from 2000 to 2007, manufacturing sector employment fell 2.9% per year[3]; year-to-year variations in unemployment rate forecasts fluctuate +/- .16% per year on average.[4] Consistent with the tenor of CBO’s overall assessment, their economy-wide employment impacts are statistically insignificant.

What CBO’s estimates look like after making adjustments for some of the errors

As small as CBO’s estimates are, adjusting for some of the errors discussed above turns their economy-wide employment impact from negative to positive. The table below compares CBO’s economy-wide impacts to alternative estimates that sequentially remove losses legislation is designed to prevent, or losses from sectors where actual gains in employment might occur:

Removing just CRA’s service sector losses changes CBO’s economy-wide change to essentially zero: -.03% in 2015 and +.01% in 2025 (from -.25% and -.27%, respectively). If we then also remove losses in non-fossil-fuel sectors, the change is +.13% in 2015 and +.18% in 2025. Finally, if you remove BI’s (small) projected losses in the electricity sector you get +.16% and +.22%, respectively.

The rationale for removing these losses:

CBO notes that the service sector is expected to grow the most under climate legislation: it is less carbon-intensive than the rest of the economy, so production and consumption will shift to it. I therefore removed losses CRA projects in that sector, which CBO notes results from an arbitrary assumption it regards as questionable.
Allowance allocations compensating manufacturers’ for increased energy prices fully offset these costs (per point 1 above); employment in industry and sectors that use industrial products as inputs should not be affected. In fact, increased industrial efficiency and new industries might result in net job increases (see next section).
Should energy efficiency or increased electricity prices reduce electricity consumption and production (and therefore employment in that sector), shifting energy expenditures to other sectors of the economy generates job creation elsewhere. Additionally, some fossil-fuel based electricity will be replaced with low carbon electricity. Both energy efficiency measures and clean energy are more labor-intensive and use more domestic content for inputs than fossil-based energy sources, so these shifts would result in a net increase in jobs (see point 3 above). There is already an extensive domestic supply chain supporting a cleaner economy and clean energy production, which will only grow in size.

Although I did not take out the small projected losses in the fossil-fuel sector (i.e. in coal, oil and gas extraction, and refining), for reasons outlined in the next section concerning enhanced oil recovery (EOR) and carbon capture and sequestration (CCS), these could be smaller than CBO projects.

These revised numbers tell a very different (and more positive) story, but still significantly understate job gains, because industry classification codes in the studies do not effectively capture sectors that will grow under climate legislation (point 3 above, highlighted by CBO), because the studies do not capture energy efficiency savings (points 2 and 4 above) stimulated by climate legislation, and because unforeseen cost-reducing innovations cannot be modeled.

The 21st century clean energy economy

CBO’s analysis is clearly limited when it comes to modeling job creation in the new energy economy. So how might this economy evolve, and what are the possibilities?

There are two important factors. The first is how quickly the cap on emissions shrinks, and the second how fast the economy can reduce emissions.

In regards to the first, caps on emissions are phased in very gradually over time. Having the lowest cost of emissions reductions, the electric sector is the first covered sector. Under proposed legislation, it reduces emissions to 4.5% below 2005 levels by 2013, with that percentage increasing gradually over time. In 2008, before the recession began, emissions were already 2% below 2005 levels. If the electric sector reduced emissions 17% below 2005 levels by 2020, the economy-wide target for covered sectors, that would imply a reduction of 1.7% per year between 2013 and 2020, or 1.2% if starting from 2010, very reasonable rates of decline that would not be disruptive. Industrial sources do not have to begin emissions reductions until 2016, with the cap also phased in. There will be plenty of time to adjust.

In regards to the second factor, the economy is already well underway in lowering its carbon emissions. On May 6th, the Energy Information Administration reported that in 2009 total energy consumption fell across all end-use sectors by an unprecedented 4.8%, attributable in part to the recession but also to a dramatic improvement in the rate at which the economy becomes more energy efficient over time.[5] From 2000 to 2008, efficiency improved on average 2% per year. In 2009 this went up to 2.4%, a 20 percent improvement. And there is ample room for more.

According to a 2009 McKinsey & Company report, the manufacturing sector could cut primary energy consumption with a positive payback by 18 percent by 2020 (click here for another study on industrial efficiency). Climate legislation can help industry obtain these improvements. Allowances will go toward promoting more efficient production processes, R&D, low-cost loans, and other assistance to help manufacturers retool, retrain workers, and lower their energy bills. Increased efficiency will improve competitiveness, not only creating jobs in the process, but also keeping the ones we already have.

Indeed, some of the very same sectors needed to run the fossil fuel economy, including glass, steel, cement, chemicals, automobiles, and special minerals (click here, here, here and here for some examples of greening and growing these industries) will be needed to drive the clean energy economy. Retooling and retraining programs will help automakers build cleaner cars (click here for a recent study on net job creation in the auto sector), help glass companies convert to making high-efficiency windows, or help steel manufacturers make components for wind turbines. And transporting these products will require investments in our energy infrastructure, such as high speed rail, cleaner buses and trucks and the roads and bridges that support them, modernization of our grid, and pipelines, also generating employment.

Finally, climate legislation will provide billions of dollars to develop and deploy carbon capture and sequestration (CCS), which could moderate impacts on coal miners. CCS is already a proven technology employed at industrial facilities. If it can be scaled up in the utility sector it would bring a surprising additional benefit: billions of barrels of new oil could be captured from existing stranded oil fields through a process called enhanced oil recovery (EOR), which uses CO2 to increase the amount of oil that can be captured from wells, creating new domestic jobs in this sector.[6] (Click here, here, here, and here to learn more about EOR). EOR is already being used to extract oil, but has been constrained by limited supplies of CO2 (currently it uses CO2 from natural sources). EOR could yield more than ten times the oil the American Petroleum Institute projects is likely to come from new offshore exploration.

Conclusion

Taken together, provisions in climate legislation that are ignored in the CBO study will help American manufacturers become more efficient, cleaner, and more competitive. They will create new markets and demand for American-made advanced materials and products at the core of our 21st century clean energy economy, and they will advance clean energy production. As a result, climate legislation will both preserve jobs and open up numerous new employment opportunities across America.[7]

[1] A net increase in jobs is possible due to the presence of unemployment, i.e. there is a pool of workers available from which to draw labor. Historically, the U.S. economy has never operated at full employment, making clean energy investments a source for net increases in jobs.

[2] Estimated from reading the second graph in Figure 1 of the report and EIA’s employment forecasts (Table 20).

[3] CBO notes that from 1979 to 2007 manufacturing employment fell from 20 million jobs to 14 million jobs, with 3.5 of the 6 million loss occurring between 2000 and 2007. Thus, in 2000 there were roughly 17.5 million jobs (20 million minus the 2.5 million jobs lost between 1979 and 2000). The loss of 3.5 million from 17.5 represents a 20% decline between 2000 and 2007. Averaging over 7 years gives an annual decrease of 2.9%.

[4] Calculated from year-to-year changes in projected unemployment rates from the Energy Information Administration’s Annual Energy Outlook 2010 between 2012 and 2035.

[5] This is measured by “energy intensity,” the amount of energy used per dollar of GDP. Energy intensity declines “naturally” (i.e. without climate policy) over time as older, less efficient appliances and machines get replaced by more efficient models.

[6] Note that even if demand for oil decreases in the U.S., world demand for oil will continue to grow, providing a market for U.S. produced oil.

[7] Though not the focus of this blog, we should also add that climate and energy legislation will increase national security by substantially cutting our addiction to oil (click here, here, and here).

The National Review: Your pocket-change or your life

2010-05-06T22:54:30Z

David Brooks recently wrote an excellent column in the New York Times explaining why it is so important for the Senate to pass comprehensive climate and energy legislation. In passing, however, Brooks asks whether we know that the benefits of carbon mitigation exceed the costs, and he mentions an article in the National Review by Jim Manzi of the Manhattan Institute, entitled “Dunce Cap and Trade.”

But where does the dunce cap belong? A close look at Manzi’s paper shows that it is riddled with factual errors and distortions, and reveals an embarrassing ignorance of the economic models on which it relies.

Manzi’s article is so problematic it is hard to know where to begin. So I will start with a high level critique of his argument, followed by a miscellaneous list of errors and distortions for those of you who crave more details.

His basic argument goes something like this:

Cost-benefit analysis is the right decision-making tool for addressing climate change.
Economists generally agree that the expected costs of Waxman-Markey (and other bills like it) far exceed benefits that are highly uncertain.
By implication, economists would therefore object to passing a bill like Waxman-Markey.
In situations with great uncertainty, the best strategy is to “keep your options open.” Specifically, keep the option open to have a little more GDP to spend on technology and adaptation in the future, rather than spending resources now on mitigation.

Points 2 and 3 are factually incorrect and misleading, and 1 and 4 conceptually problematic:

There is a broad consensus (click here, here, and here) among economists that such legislation needs to be passed, and that the cost of doing so will be modest. Some economists, including two Nobel Prize winners and other prominent economists, even expect that passing legislation will generate economic growth. The consensus? Economic models consistently project that the cost of climate legislation will be insignificant when compared to projected economic growth. These models unanimously predict carbon mitigation will cost roughly 1% to 3.5% of GDP by 2050, but far greater total GDP by 2050: approximately 150% percent higher than today, in fact. Surprisingly, these results are true of both non-partisan studies and studies funded by the opposition.
Manzi’s view of climate mitigation might seem odd to normal people, who tend to think differently about low-probability/high-risk disasters than he does. Manzi believes we should reduce carbon emissions only insofar as the expected benefits of doing so exceed the expected costs. In other words, he is using a simplistic cost-benefit framework that does not account for catastrophic risks. A more sophisticated approach would view climate mitigation as an insurance policy against catastrophic impacts, even of uncertain probability, an insurance package itself a benefit worth buying and accounting for on the benefits side. Manzi derides this perspective: “This concept has been called, somewhat grandiosely, the ‘precautionary principle.’ Once you get past all the table-pounding, this is the crux of the argument for emissions abatement. It is an emotionally appealing political position, as it is easy to argue that we should oppose some consumption now to head off even a low-odds possibility of disaster. ” Yes, that’s exactly the point: a disaster. What kind of catastrophic risks are we looking at with climate change? If we do nothing to mitigate emissions, we are looking at CO2 concentrations as high as eight to fifteen (see Figure 2) times the historical range of CO2 that differentiates an ice age from today. Over the last 600,000 years, CO2 has been 100 ppm higher in warming periods, such as the one in which we are now are, than during ice ages. During this time, the natural historical range is roughly 180 ppm to 280 pmm, and average global temperatures only 12 degrees C apart. Today we are at 380 ppm. If we do nothing, we are looking at 800 to 1,500 ppm by the end of the century. Given that only 12 degrees and 100 ppm separates us from an ice age, you might even wonder if the science is too conservative. Not a wild speculation, given that every report by the IPCC has turned out more dire than the previous.

Risk management in the face of potentially low-probability/high-catastrophe outcomes is an approach that is familiar to, and probably preferred by, many of us. Consider, for example, life insurance. While not a perfect analogy (death ultimately cannot be avoided, but we still have a shot at reducing carbon emissions), life insurance is an investment with huge negative expected returns (that’s why insurance companies make so much money). Premiums can range from $10,000 to $20,000 per year for a 70 year old woman, yet many women buy it. My mom, bless her heart, forks over 25% of her annual after-tax income on such premiums, and she is not alone. How does 25% for an outcome we ultimately cannot prevent (death) stack up against 1-3.5% of GDP for one we potentially can? Manzi argues that we should save this premium in order to have more money now and in future years to invest in technology and adaptation. But this closes off the most important option of all: avoiding an irreversible increase in atmospheric concentration levels of 800 to 1,500 parts per million, truly astounding numbers when put into their proper historical perspective.

Hopefully points A and B are sobering enough for you to feel satisfied stopping here. But for those of you who favor a more cost-benefit approach, it is important to understand the errors in Manzi’s article. While he makes some valid points about the difficulty of getting an effective international agreement, his net benefit calculation is fundamentally flawed:

Expected Costs:

Manzi raises the spectre of high consumer costs, but he ignores the measures in pending legislation that protect consumers. He leaves out the fact that most of the valuable pollution allowances will be returned to consumers to protect them from higher energy costs. As the World Resources Institute has found: “The amount of allowance value directed to consumers or for other public benefit totals 76 percent of the cumulative allowance pool from 2012 through 2025 and 83 percent from 2012 through 2050. This is value that is not directly distributed to regulated entities in any way… ”
Manzi asserts that EPA has underestimated household costs – averaging $160 per year out to 2050. But in fact, EPA ran other scenarios with higher cost assumptions, and even EPA’s worse-case scenario for household costs isn’t a show stopper: $417 per year ($1.17 per day per household), against a median household income $6,300 higher on average than today’s levels. (These are discounted numbers; undiscounted, however, does not qualitatively change the story).
Manzi also doesn’t acknowledge that economic models of climate legislation do not account for innovations in the future. How likely is it that there won’t be any cost-reducing innovations in low carbon energy over the course of forty years? Just think about cell phones over only the last decade. The profit motive is a very powerful thing indeed, and putting a price on carbon creates just that for clean energy.

Expected benefits:

Manzi refers to a benefits estimate by Yale’s William Nordhaus. Nordhaus projects a loss of 3% of world GDP by 2100 without emission reductions, mostly in other countries. But Nordhaus’s numbers stand at the low end of the spectrum. A different study, done for the UK government by Nicholas Stern, finds that the cost of inaction would be 5-20% of world GDP. Another finds that only four impacts (hurricane damages, real estate, energy-sector expenditures, water expenditures) could cost the U.S. alone 1.8% of GDP by 2100.
A critical explanation for the difference between the Nordhaus and Stern estimates is the discount rate, a number used to translate (more exactly, “discount”) the value a person assigns to getting a lump sum of money today versus waiting for the same (i.e. inflation-adjusted) amount in some future year. In Nordhaus’s model, future damages are discounted at 4% (p. 10, A Question of Balance), which means that $1,000 worth of damage 100 years from now is valued at $20. I wouldn’t want to be Nordhaus’s grandchild. Stern used a discount rate of 1.4%, putting $1000 at $250 today. Not great either, but certainly not as bad.

How should we evaluate these two very different choices? Economists consider three factors to be relevant in choosing a discount rate: 1) people tend to be myopic, preferring to consume now than wait until later; 2) if there is economic growth, there will be more money available to offset future costs; and 3) there is the possibility, even if remote, that the planet will be destroyed by some other event (e.g. a meteor).

Nordhaus’s discount rate includes a value for 1). The problem with this is that the future person receiving the damages is not the one making the decision today, so this component of the discount rate is not relevant to climate change and should be removed. In regards to 2), there are two issues. First, can we assume there will be economic growth with absolute certainty? Is it possible that climate change damages will result in net negative growth? Second, the justification assumes that money is a perfect substitute for nature and human lives. Can money make up for things like collapsed ecosystems, or deaths cause by climate change? There is a long contentious debate on discount rates in the arcane halls of academia that is beyond the scope of a blog, but many people view Stern’s discount rate as more justified than Nordhaus’s. Perhaps it is no coincidence that Stern’s discount rate falls squarely within the ranges that OMB and EPA suggest (p. 9) might be appropriate for discounting intergenerational costs and benefits (OMB suggests 1-3%, and the Environmental Protection Agency .5%-3%).

Manzi seems to be very uninformed about what models like Nordhaus’s are and are not, capable of, the latter being the operative factor. Such models, called integrated assessment models, or IAMs, do not estimate a very large number of very bad impacts. To name only a few: social and political unrest abroad that affects U.S. national security (e.g., violent conflict, mass migration due to infectious disease or extreme weather events, humanitarian crises), mass species extinction, the loss of coral reefs and other valued ecosystems and ecosystem services.
These models also assume very low costs for adaptation. For example, even in the model used by Stern, in OECD countries 100 percent of the economic damages resulting from the first 2 degree C of warming are eliminated, and 90 percent of those above 2 degree C. For non-economic (e.g. impacts on wilderness areas and animals) and non-catastrophic damages, adaptation is assumed to remove 25 percent of the impact everywhere. No adaptation is assumed for catastrophic damages
Another reason for low damage estimates from these models is that they often include questionable benefits from climate change. For example, Nordhaus assumes (on very thin evidence) that large benefits (i.e. negative damages) will accrue to people who live in areas where average annual temperatures are projected to rise to 70 degrees. Nordhaus monetizes these benefits using estimates of how much money wealthy people from Northern latitudes spend to vacation in places whose temperature is 70 degrees. But does an ideal average year-round temperature of 70 degrees make sense? Perhaps, if you think the temperatures in Houston make it an ideal city to live in.
Finally, Manzi mistakenly asserts that Nordhaus’s model takes into account people’s concerns for high-risk low-probability events. He is wrong both technically and conceptually. Technically, Nordhaus allows for a higher-than-expected temperature increase (and a lower-than-expected one), as do many modelers. But the high end values are lower than the 5% likelihood of 7 degree C (12.6 F) and 1% likelihood of 10 degree C (18 F) implied by IPCC estimates (Weitzman, 2009, Review of Economics and Statistics). Conceptually, by calculating expected, or average, damages, Nordhaus’s approach is a cost-benefit analysis, but people do not value the kinds of risks presented by climate change from this perspective. The problem is more properly framed, as discussed in point B above, as one of minimizing risk, not maximizing returns from climate mitigation.

Alas, If I had more time, I could discuss many more problems with Manzi’s analysis. This list is exhausting, but by no means exhaustive...

Comprehensive Climate and Energy Legislation: More Jobs, Not Less

2010-04-23T20:29:41Z

On Monday, April 26th, Senators Kerry, Graham and Lieberman (KGL) are expected to release their proposed climate legislation. If properly crafted, climate legislation will reduce dangerous global warming pollution, increase national security by reducing oil consumption, help kick start America’s growth engine of the 21st century—clean energy, and keep America at the forefront of clean energy innovation. No doubt, a key factor in the debate will be jobs, so let’s settle up the score from the get-go: we have every reason to expect that climate change legislation will produce a net increase in jobs.

Here’s why:

Since the nation first enacted comprehensive environmental protection, beginning four decades ago, hundreds of pollutants have been regulated. At the same time, tens of thousands of jobs were created every year in the environmental protection industry, and only a handful lost due to regulation—roughly one to three thousand per year, less than the number of weather-related job losses. Several factors explain these outcomes. First, the economy grew. This is good news, since this is exactly what all of the economic models project with or without climate legislation, regardless of whether the model is estimated by groups opposed to climate legislation or by non-partisan government and academic institutions. Second, the environmental protection industry is more labor-intensive than the economy as a whole: on average, a dollar spent on environmental protection employs more workers than does a dollar spent elsewhere in the economy. Third, job losses from environmental regulation constitute a statistically imperceptible number of workers relative to the size of the economy as a whole (though not, of course, to the people who lose them).

The most significant job growth will be in renewable energy and energy efficiency, with estimates in the range of 900,000 to 1.9 million jobs by 2020. Climate legislation could also increase jobs in the automobile sector, putting America back on the map as a leader in the global auto industry. A recent study sponsored by NRDC, the United Auto Workers, and the Center for American Progress shows that with the right incentives to manufacture clean car components in the United States, attaining a fuel economy of 40 mpg by 2020 would create 50,000 to 150,000 new domestic auto sector jobs. Finally, and perhaps most surprising, climate legislation could even drive job creation in the U.S. oil industry from enhanced oil recovery (EOR), a technology that uses CO2 to extract more oil from aging fields. An abundance of existing and abandoned oil fields are available for CO2-EOR, which would not only provide a place to sequester CO2, but also reduce pressure to open up new areas for oil exploration. The result is that by 2020, over 40,000 jobs could be created from CO2-EOR, rising to approximately 350,000 by 2030.

Click here for more details on how climate legislation will bring steady growth in jobs and innovation as we transition to a clean energy economy.

ACELA vs. Comprehensive Climate Legislation: Jobs, Jobs, Jobs

2010-02-07T16:25:54Z

My colleague, Andy Stevenson, recently wrote a nice blog outlining how and why America needs to lead the clean energy revolution by passing comprehensive climate and energy legislation. This blog expands upon a critical flaw with an energy-only bill: next to comprehensive climate legislation, it is a clear loser when it comes to job creation.

In November 2009, Senator Bingaman introduced his energy-only bill, ACELA (the American Clean Energy Leadership Act), and other legislators are likely to introduce their own. Unfortunately, past energy-only legislation, with its narrow and intermittent incentives, has only sparked piecemeal investment in clean energy. Fundamental change that would occur by placing limits on carbon pollution is needed to avoid continued investments in dirty and ultimately more expensive technologies. Only comprehensive climate legislation can provide industry with the long term profit incentives and financing mechanisms needed to achieve our climate and energy goals. Without this, dirty energy over clean will continue to be rewarded; sustained investment in renewable energy and energy efficiency won’t come. And this means far fewer jobs.

It is noteworthy that, when introducing his bill, Bingaman reported it would create 350,000-500,000 new jobs, much lower than estimates for comprehensive legislation. Moreover, this number included 125,000 renewable energy jobs. Analysis by the National Renewable Energy Lab, however, suggests that bills like this won’t increase renewables beyond business-as-usual. That might lower their figure to about 225,000-375,000. Even still, some provisions require appropriations that may not be approved. Climate legislation like the Waxman-Markey bill (American Clean Energy and Security Act, ACESA) passed last June by the House has guaranteed self-funding created by the market value of emission permits.

In contrast to an energy-only bill, comprehensive legislation would give us a much better return. Analyses by the Political Economy Research Institute (PERI) at the University of Massachusetts assessed jobs potential across the main areas of building retrofits, renewables, and advanced vehicles resulting from large-scale investments climate legislation would bring. PERI projects 1.7 million jobs per year for a decade, assuming an ongoing public and private investment of about $150 billion per year. This figure is NET of lost oil and gas employment displaced by clean energy jobs. Carbon-reducing activities in agriculture and forestry, as well as industrial energy efficiency opportunities, were not assessed in this analysis, so it might err on the conservative side. Another analysis of comprehensive climate and energy legislation projects 1.9 million new jobs. Finally, just from energy efficiency alone, the American Council for an Energy Efficient Economy estimates ACESA would create 600,000 jobs, one million with more aggressive efficiency provisions. It would also save households $486 per year by 2030, $832 under their more aggressive scenario. And none of these analyses take into account the benefits of enhanced oil recovery made possible from the capture of CO2—which could prevent trillions of dollars being sent overseas.

Economists Larry Summers (see page 10), Sir Nicholas Stern, and Nobel Prize winner Joseph Stiglitz - and many other respected scholars - know that comprehensive energy and climate policies offer us a real opportunity to get out of this recession, unlocking billions of private sector dollars, and breaking our addiction to foreign oil.

ACELA, and energy-only bills in general, won’t get the job done—they fail to sufficiently reduce oil demand or increase enhanced oil recovery; they fail to significantly reduce the billions of dollars we send overseas to hostile regimes, instead of investing them domestically; they don’t provide sufficient market incentives for clean energy innovation; they fail to unlock billions of dollars tied up in frozen capital markets. The result: only modest job growth, some of which requires approved appropriations. Most important, of course, is that they don’t provide any climate change protection. From every angle, comprehensive climate and energy legislation is a vital investment with an excellent return.

Climate Legislation: Is 20 the new 17?

2009-12-14T19:20:06Z

As the Copenhagen talks reach decision time, the annual emissions forecast by the U.S. Department of Energy (DOE) projects lower CO2 emissions than last year’s report. The Annual Energy Outlook (AEO) is released every year by the Energy Information Administration (EIA), an independent arm of DOE.

As the figure below illustrates, AEO 's annual projections have steadily declined. The reasons? -- A mix of effective clean energy policies, and the current economic downturn. While the recession is certainly nothing to celebrate, there is at least one silver lining: CO2 emissions are projected to remain lower than expected even after the economy has shifted back into solid growth. The lower the forecast of business-as-usual (reference) emissions, the easier it is to meet any target required by climate legislation.

With the new forecast, it’s looking like meeting a 20% target is actually going to be easier than what we expected it would take to meet the target passed last June by the U.S. House of Representatives in the Waxman-Markey BIll (ACES) —17% below 2005 levels by 2020. Under the AEO 2009 March forecast, that would have required a cumulative emissions reduction of 5 billion tons by 2020. Under the new AEO 2010 forecast, we would only have to reduce a cumulative 4.2 billion tons to meet a 20% target.

In short, it will be a lot easier to meet the 17% target the Administration is bringing to the table in Copenhagen. Indeed, these numbers make a good case for a target even higher than 20%. What are we waiting for?

Don't read the headlines, read the story: Climate legislation is more than affordable

2009-10-15T22:59:08Z

In testimony before the Senate Energy and Natural Resources Committee yesterday, director of the Congressional Budget Office (CBO), Douglas W. Elmendorf, testified that climate change legislation passed by the House last June (the American Clean Energy and Security Act (ACES), would cause GDP to decline by 1%–3.5% by 2050 and that, while employment would increase in clean energy sectors, some industries would experience job losses.

The newspaper headlines following the testimony unfortunately hit the panic button, expressing concern that climate change legislation could be costly to the economy. But if one examines the actual CBO study Elmendorf referred to in his testimony, and other government analyses (by the Environmental Protection Agency and the Department of Energy's Energy Information Administration), this is entirely the wrong conclusion to draw.

The real story from the CBO, EPA, and EIA analyses is that climate protection will require a very modest investment on the part of American households. Moreover, this investment cost pales in comparison to projected increases in GDP and household income:

CBO projects an annual investment cost of $160 per household. EPA and EIA projections were even lower: $80-$111 and $83 per year, respectively. All these figures amount to less than a postage stamp a day.
In comparison to these investment costs, EPA and EIA projections show median household incomes being $4,500-$5,500 higher per year on average, relative to 2009 levels. (CBO's analysis does not look at household income).

Results like these speak to the importance of putting Elmendorf's 1%–3.5% "reduction" in GDP in 2050 in context: the change implies a 2.30%–2.38% annual GDP growth rate instead of 2.4%. The difference amounts to delaying GDP from being 2.5 times its current size in 2050 by only a few months. Even studies by industry produce similar results, though they try to hide them in deceptive presentation.

Equally important is what the studies exclude. By reducing carbon emissions, we will get three big economic benefits:

Reduced climate damages (and we can expect these to be quite large)
Increased domestic oil production, using a process called "enhanced oil recovery," saving us billions of dollars in imported oil. For example, in 2030, EOR will recover more than $111 billion worth of oil, based upon NRDC analysis of ACES, and assuming EIA's oil price of $116/barrel in 2030.
Millions of clean energy jobs (click here and here)

Elmendorf's testimony did raise one legitimate concern, however, which we should briefly address: industries that produce or use carbon intensive energy could suffer from a carbon cap. This would undoubtedly be true, if ACES (and likely any other climate legislation that could pass the House and Senate) did not provide transitional assistance to affected sectors. But, in fact, ACES provides generous transitional assistance. Electricity consumers are given 40% of allocated allowances, and energy intensive industries and oil refineries 17%. This transitional assistance eventually phases out, but not for many years, after which energy efficiency and innovations will bring compliance costs down. A recent analysis from Stanford University finds that these sectors might end up being substantially over compensated.

America needs to get off its addiction to the energy panic button. Far from being a drag on the economy, clean energy climate legislation will bring us many benefits at a very modest price tag. By moving forward to pass strong limits on global warming pollution, we will create millions of clean energy jobs, reduce threats to our national security, protect ourselves from oil price volatility and, most importantly, reduce our vulnerability to the most dangerous impacts of climate change.

A lesson in math, science, and economics for Bjorn Lomborg

2009-09-29T17:57:34Z

Bjorn Lomborg, a long time climate skeptic, published an article yesterday in the Washington Post, asserting that reducing carbon emissions would cost the world 40 times more than any benefits we could expect to get. He claims his argument is based upon data in a forthcoming book by Richard Tol, a leading economist in assessing damages from climate change. More likely than not, he has misused Tol's analysis. Lomborg's favored estimate for the cost of inaction in the face of climate change is 3% of world GDP, a figure arrived at by William Nordhaus based upon the same research Tol uses. But that research forecasts climate damages that are far larger than the $1 trillion claimed by Lomborg. Moreover, Lomborg's previous claims that the cost of inaction would be 3% of world GDP imply a cost of inaction which is far higher than what he asserts is the cost of climate mitigation in 2100, $40 trillion. Of course, Lomborg cherry picked the 3% estimate, it being the lowest estimate available from respected climate economists. Economic analysis from the British government (the Stern Review), following Nordhaus's 3% estimate, pegged climate damages at 5-20% of world GDP. The Stern Review is considered to be the most detailed and authoritative study to date. But never mind.

Let's start with the math:

The "$1 trillion in benefits, $40 trillion in costs" claim:

Had Lomborg done his math, he would have realized that $1 trillion dollars is somewhere on the order of .03% of world GDP in 2100, if world GDP grows by 4.43% per year, the average of CIA's estimates over the last 5 years. (Last year world GDP grew by much more — 5.2% — during a period of global economic recession). Even if we make a very pessimistic assumption of 3% global GDP growth, $1 trillion would be less than 0.11% of world GDP in 2100 — in blatant contradiction with Lomborg's earlier claims that climate damages would cost 3% of world GDP. Oops. This is nowhere near 3%. His $40 trillion cost estimate for climate mitigation in 2100 would amount to 1.2% of world GDP, still much less than his preferred estimate for the cost of inaction, 3% of world GDP.

Science:

In addition to math, Lomborg has to contend with science.

Nordhaus and Sterns' estimates were based upon what we now know is outdated science. More recent studies have revealed that natural sinks for carbon are smaller than previously assumed, emissions are higher than previously assumed, the temperature response to emissions is higher than previously assumed, and observed impacts are happening faster than previously assumed.[1] There is only one direction for damage estimates: up.

Trade (more math):

Let's also address Lomborg's claims of an additional loss of $50 trillion dollars of world GDP, presumably a result from trade protectionism he argues would result from climate legislation. We should reject the premise behind this argument on two grounds:

1) Anyone who knows basic economic theory knows that markets are inefficient in the presence of "externalities," such as pollution. When such externalities exist, we have what economists call market failure — and global warming is arguably one of the biggest market failures the world has ever seen. When markets have externalities, assessing penalties on them actually improves gains from trade.

2) Lomborg seems to be assuming that carbon charges will be assessed on carbon-intensive imports in perpetuity, which implies that he is also assuming that developing countries will never undertake any emissions reductions. Surely he doesn't expect us to believe that. And even if we did, energy technologies of the future will be less carbon-intensive, so poor countries' emissions would decrease even if they made no effort to lower emissions.

Suppose for the sake of argument we take Lomborg's $50 trillion in trade losses at face value. His numbers still don't add up. He doesn't specify whether the $50 trillion is a cumulative number through 2100, or a cost in 2100, but it doesn't matter. If it is cumulative, $50 trillion would represent .07% of cumulative world GDP by 2100. If it's for 2100 alone, we still only get 1.5%. Therefore, even with Lomborg's numbers we find that the cost of addressing climate change, 1.2% of world GDP from direct mitigation (as discussed above) plus 1.5% from trade losses, would still be cheaper than Lomborg's choice of the cost of inaction (Nordhaus's 3%), as outdated as that estimate is.

And if you're concerned about Lomborg's claim that poor countries "would suffer most" from the cost of climate mitigation and border tariffs, keep in mind that Lomborg has turned the equality debate on its head. It is well-known that industrialized countries would foot most of the bill for fighting climate (according to the principle of common but differentiated responsibilities), but that the world's poor would be overwhelmingly affected by the costs of doing nothing. If Lomborg genuinely cared about the world's poor, as he professes in this article, he should be more partial to Stern's higher end estimates. Those estimates weighed damages in poor countries more heavily than those in wealthy countries, to account for developing countries' very limited ability to pay for mitigation and adaptation.

Japan:

If Lomborg wants to make the case that Japan is a good example of how unaffordable a clean energy transition is, he picked a bad country. Japan's choice to set aggressive emission standards is almost certainly due to an assessment of the costs of inaction, which could be enormous for Japan:

Japan imports more than 80% of its energy, making threats to national security from climate change a top concern.
So much of Japan's land is coastal, making it far more vulnerable than other countries to rising sea levels.

Setting Japan aside, what should we make of Lomborg's larger point that clean energy is astronomically unaffordable? Analyses of the costs of climate legislation (done largely in America, whose reluctance to fully acknowledge the dangers of climate change contrast sharply with the rest of the world, and virtually all climate scientists) definitively disagree. Regardless of whether the analysis is done by the opposition or advocates for climate legislation, they all find strong growth in GDP and income under climate policy, growth so high it completely swamps modest investment costs (roughly a postage stamp per day for the average American household).

Conclusion:

Let's stop all the nonsense and scaremongering. Lomborg's arguments are, using one of his favorite terms, nothing but "hot air." His math doesn't add up, he hasn't caught up with the science, and his logic contradicts established economic theory.

We need to get busy leading the world in clean energy technology, and fast. By doing so, we can create millions of clean energy jobs (click here and here), reduce threats to our national security, protect ourselves from oil price volatility and, most importantly, reduce our vulnerability to the most dangerous impacts of climate change.

[1] Solomon, S., et al. (Eds.) (2007) Climate Change 2007: The Scientific Basis, Contribution of Working Group I to the Fourth Assessment Report of the IPCC, Cambridge University Press, Cambridge, England;

Raupach, M. R., et al. (2007) Global and regional drivers of accelerating CO2 emissions, Proceedings of the National Academy of Sciences of the United States of America, 104(24), 10288-10293; Canadell, J. G., et al. (2007) Contributions to accelerating atmospheric CO2 growth from economic activity, carbon intensity, and efficiency of natural sinks, Proceedings of the National Academy of Sciences of the United States of America, 104(47), 18866-18870.

CBO Analysis: Clean Energy for Less

2009-09-21T14:32:29Z

The non-partisan Congressional Budget Office released an analysis on Sept 17. that confirms a modest short-term cost for comprehensive clean energy legislation - around $160 per household per year - or roughly 43 cents per household per day by 2020. That's less than a postage stamp per day.

This new finding by CBO is consistent with previous analysis from the CBO, along with earlier EPA and EIA analyses. (In fact, CBO lowered its own cost estimate from $175/year to $160/year.)

The CBO report included another figure which some have focused on, which suggests that in the long-term - that is in 2050 - GDP would be 1 to 3.5% less with a comprehensive clean energy plan than without it. A few important points about this analysis:

The CBO report concludes that the economy will grow significantly between now and 2050. According to the report, "the real GDP in the United States will grow at an average annual rate of about 2.4 percent between now and 2050 and will be roughly two and a half times as large in 2050 as it is today." Given that, if we consider that a 1 - 3.5% difference in 2050 is the equivalent of a difference in the growth rate of only 0.025 - 0.09% per year, the impact would be almost imperceptible.
This estimate leaves out savings through innovations that are very likely over the next 40 years. In the last 40 years, we invented personal computers, the Internet, iPhones, hybrid cars, and many other innovations that are faster, cheaper and more efficient than what we had 40 years ago. Today's refrigerators are on average 3-5 times more efficient than 40 years ago and cost 60% less. We can't even know what new innovations we will come up with in the next 40 years that will help strengthen our economy. None of the economic models account for innovation, because it is unknown. But it's hard to believe it won't happen in markets as creative, entrepreneurial and innovative as ours.
While the CBO analysis looks at the impact of legislation, it doesn't look at the cost of doing nothing. For instance, what would be the impacts of more hurricanes, more droughts and global population movements? We all remember Hurricane Katrina and the tremendous cost of that disaster. A recent report from NYU found that the costs of climate change would far exceed the cost of reducing global warming pollution. And what about the national security impacts of doing nothing, such as having our troops overseas in places like the Middle East protecting our ongoing dependence on oil? That's why a bi-partisan group of 32 leaders in national security recently called for "a clear, comprehensive, realistic and broadly bipartisan plan" that will allow the U.S. to lead the development of a global strategy to combat climate change.

Of course, long-term economic modeling is somewhat guesswork (which explains why there's a range of 1 - 3.5%). As the Congressional Research Service says, long-term economic models are "at best speculative, and should be viewed with attentive skepticism."

Even with this uncertainty, the bottom-line is clear: For a modest and manageable cost, we can shift to a clean energy economy that makes our planet, our health and our national security stronger than it is today.

More good news for climate protection: Study finds benefits swamp the costs

2009-09-11T15:39:08Z

America has a historic opportunity to lead the world in an energy transformation, create millions of clean energy jobs, and protect itself from dangerous dependence on foreign oil, all while protecting the planet from the most dangerous impacts of global warming pollution. The American Clean Energy and Security Act (ACES), passed last June by the U.S. House of Representatives, will put us on a path of innovation and economic growth. That's the conclusion of some of the world's top economists, including two Nobel prize-winners (click here, here, and here--see page 10).

Yet whenever these opportunities are near, the debate invariably focuses on one thing and one thing only:

What will it cost?

What will it cost, what will it cost, what will it cost?

Economic study after economic study gets released. Millions of dollars get spent on consultants. A dizzying array of numbers splatter the newspapers and airwaves. And regardless of who funds them, they all conclude the same thing: economic growth allows household incomes to grow many times more than the estimated costs of protecting the planet (click here for an industry example, and here for studies by the Energy Information Administration at the Department of Energy, the Environmental Protection Agency and the Congressional Budget Office). It would seem like a no-brainer.

Unfortunately, the economic consensus showing climate legislation is more than affordable doesn't seem to be enough. Critics are demanding estimates of the benefits, measured in dollars.

This is quite a daunting task, since some of the most important benefits of climate protection cannot be expressed in such crude terms. How do we put a price tag on lives lost to extreme weather events, on the lives of our children and grandchildren, on preventing species extinction and losses of entire ecosystems, on destruction of our beautiful coral reefs, on the disappearance of our majestic alpine habitats and other national treasures, to name only a few? We can't.

But fortunately, we don't have to. Measuring only the smidgen of benefits from climate protection that can actually be monetized (e.g. protecting crops from temperature increases, and coastal properties from rising sea levels), the Institute for Policy Integrity at New York University's School of Law took the bold step of adding these benefits up and comparing them to the (much smaller) cost of transforming our energy system. Using the most conservative assumptions at every corner, their study finds that this limited subset of benefits could be as much as 9 times higher than the costs. The authors drew upon damage estimates that have been thoroughly vetted: first, the estimates were peer-reviewed by experts in the field, and second, by a U.S. interagency task force. While the task force considers its estimates preliminary, the Department of Energy feels confident enough in the task force's review process to begin using them in rulemakings.

And it bears repeating: the benefits they measured are only a very small subset of possible climate impacts--those that can be readily expressed in monetary units. They exclude the things we value the most, such as human life, nature, and the well being of future generations.

When considering how small the costs of climate protection are, and how vast the benefits are compared to these costs, history will judge us very harshly if we do nothing. The time to act is now. The opposition has run out of excuses: the moral imperative, the science, and the economics all point to bold and aggressive action. All we need now is the political will.

NAM/ACCF: Distorting their own distorted analysis of climate legislation

2009-09-10T12:15:05Z

The National Association of Manufacturers (NAM) and the American Council for Capital Formation (ACCF) are at it again, this time running full throttle scare ads across the country (click here for an example) against the American Clean Energy and Security Act (ACES). ACES will bring us greater energy independence, more climate protection, and millions of clean energy jobs. But they want you to believe climate protection will bring nothing but hardship and economic ruin to America.

Of all their little "facts" and figures, here's one NAM/ACCF actually don't want you to know: By 2030, their own model predicts the average American household's income going up by at least 100 times the increase in household energy expenditures from curbing global warming. In other words, your energy expenditures will go up by less than 1% of the increase in your income to protect the planet from the most dangerous impacts of global warming.

NAM/ACCF have boiled their flawed analysis (the summary of which was released last month), down to 30 seconds and three scary statistics: gasoline price increases, electricity price increases, and dire job losses.

Don't let these industry numbers fool you. NAM/ACCF's cost estimates are much higher than those from authoritative studies by the Environmental Protection Agency (EPA), the Energy Information Administration (EIA), and the Congressional Budget Office (CBO). They are taken out of context. And, most critically, they hide the basic finding (from their own analysis) that wholly undermines their argument: household incomes grow orders of magnitude faster than their cost estimates! Shame on them for not sharing.

The tables speak for themselves:

Exaggerated costs
Gasoline price increase	2.8 to 4.6 times higher than EPA and DOE (year 2030; 2007$)
Electricity price increase	2.9 to 3.7 times higher than EPA and DOE (year 2030; 2007$)

Out of context costs

Electricity bills, not prices, are what matters:*

Average annual change in household electricity bills (2012-2030, 2007$):

* NAM/ACCF doesn't provide these numbers

* EIA/DOE does: $33 more per year ($2.75/month, 9 cents per day)

* EPA (Environmental Protection Agency) does: $6 lower per year, thanks to modeling ACES's energy efficiency provisions the most thoroughly

Gasoline: Even by NAM/ACCF's own analysis, their projected increases in gasoline prices amount to an average increase of only 4.8 cents/gallon per year by 2030 (EPA and EIA projections are even lower: 1 cent/yr and 1.7 cents/yr, respectively).

2030 Projected Energy Expenditures vs. 2030 Projected Increases in Average Household Income: $313 to $454 ($0.85 to $1.24 per day) relative to $27,000 to $28,000 (2007$)** more in household income over 2009 levels. Even despite exaggerated costs, income gains dwarf them.

* CBO does not provide estimates for the items in this table.

NAM/ACCF's misinformation campaign against ACES is no surprise. Almost verbatim, it's a repeat of their analysis last year against the Lieberman-Warner Climate Security Act. Last year, using the same model, NAM/ACCF projected GDP would grow 75% by 2030, which meant healthy increases in household income relative to today's levels, and many other economic gains. These gains far exceeded projected costs. And these gains were also shared widely across states. Once again, they're hiding the good news from us.

Finally, NAM/ACCF's job loss predictions completely contradict 40 years of overwhelming historical evidence of positive job creation, economic growth, and the affordability of environmental protection.

Rather than being an economic liability, climate legislation will give us the economic growth, jobs, climate protection, and energy independence Americans deserve. At a very affordable price. Don't take it from me, NAM/ACCF thinks so too -- they just make you work hard to find their dirty little secret.

** This blog was updated 1/15/2009, to make a correction to NAM/ACCF's projected increase in average household income, as well as provide the range between the "low cost" case and the "high cost" case.

EIA Study Confirms Climate Protection is More Than Affordable

2009-08-05T14:12:17Z

The Energy Information Administration (EIA) released today an analysis of the economic impact of the American Clean Energy and Security Act (ACESA). Once again, the news is good, confirming what we've learned from recent studies by the Environmental Protection Agency (EPA) and the Congressional Budget Office (CBO): America can easily afford energy and climate legislation that will create millions of clean energy jobs, reduce our dangerous dependence on oil, and help protect the planet.

EIA finds that American households would spend on average 23 cents per day ($83 per year) for a clean energy future and climate protection. This finding is consistent with estimates from both the EPA and CBO: EPA pegged the cost between 22 and 30 cents per day ($80-$111 per year), and the CBO at 48 cents per day ($175 per year).

Like EPA and CBO, EIA found that while households incur a modest cost, their incomes will grow sharply:

EIA projects over the same time period that, on average, American households' incomes will be more than $11,000 higher relative to today's levels.

Even if we look at EIA's "most pessimistic" case (extremely limited availability of international offsets, and no technological improvements in key low carbon technologies over the reference case), average costs over 2012-2030 (correction: original blog said in 2020) would be nowhere near those projected by industry-backed studies. Under the most extreme assumptions, the average household cost will be 66 cents per day ($242 per year). And income growth is still nearly $11,000 on average.

Today you'll hear again from the drumbeat of the industry-backed naysayers: the National Association of Manufacturers is releasing yet another report predicting exaggerated, dire economic consequences of climate legislation. Honestly, they are starting to sound like the birthers. Saying something scary over and over again doesn't make it true. The facts just ain't there to back them up.

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

2009-07-22T21:11:34Z

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.

Another Incomplete Story by Climate Obstructionists: Waxman-Markey’s Climate Protection Bill, ACESA, Will Supposedly Devastate Missouri Farmers

2009-07-16T17:19:58Z

ACESA will provide billions of dollars to American farmers who, among other things, can lease land for wind turbines, sell biomass waste for bio-energy production, and sell offset credits to help emitting firms comply with the carbon cap. But in a July 14th hearing of the Senate Environment and Public Works (EPW) Committee, the opposition painted a very different picture for Missouri. By incorrectly calculating increased energy costs for the average MO farm, and excluding all of these benefits, their story is scary, but fictitious.

During the hearing, Senator Kit Bond cited an $11,000 cost for the average Missouri farmer in 2020 that would result from higher energy prices. The estimate was from a study by the Food and Agricultural Policy Research Institute at the University of Missouri-Columbia (FAPRI-MU), commissioned by the Senator himself and released for the hearing.

Setting aside a far lower estimate by Bruce Babcock of Iowa State University's Center for Agricultural and Rural Development, FAPRI's math is simply wrong. Rather than being 1,900 acres in size, as assumed by FAPRI, the average MO farm is only 269 acres. This means that instead of costing a typical farm over $11,000, the number is closer to $1,650. Per acre, that's $6.13.

Moreover, from this cost figure one needs to add the benefits Missouri farmers are well-positioned to see from ACESA. Notably, Senator Bond left out a critical caveat from the FAPRI-MU study he relies upon to make his case:

This report is not a full analysis of the impact of H.R. 2454 on Missouri crop producers... [It] does not incorporate likely responses by producers to...changes in production costs...such as [adjusting] input usage and the mix of crops produced, with implications for crop yields, production, and prices...[It does not] consider biofuel production...or the value of any carbon credits that producers might be able to sell."

FAPRI-MU, study cited by Senator Kip Bond

How much do the benefits to farmers of H.R. 2454 add up to? A lot more than $6.13/acre. From the biomass waste on corn farms alone, MO could earn $8.5 million in revenues, amounting to approximately $5.21 per acre in net profit.[1] Adding to that the money farmers would earn from other activities, such as leasing land for wind turbines, selling offsets, or replacing some of the energy they purchase with on-farm renewable energy production, farmers could easily bring in more than the supposed $6.13/acre in increased energy costs.

What's more, the state will get thousands of new clean energy jobs and additional government revenues. Replacing 20 percent of Missouri's coal usage with locally grown biomass and the operation of 25 moderate-scale wind farms will create over 11,000 jobs. These wind farms would increase property tax revenue by $15 million dollars, helping balance government budgets. For a complete analysis of how Missouri is in a prime position to become a national leader in homegrown renewable energy development, see NRDC's Missouri Report.

Conveniently ignoring the positive effects of H.R. 2454 on farmers won't change the facts: opportunities in clean energy under climate legislation create large benefits for farmers, lots of new jobs, and more resources for government to help agricultural states balance their strained budgets. Don't listen to messengers telling only part of the story.

[1] This estimate was derived by the following calculation: MO has about 3% of U.S. farmland. Assuming it would get this percent of a national biomass market of 75 million dry tons of biomass waste (as estimated by the US Departments of Agriculture and Energy), MO's share would be 2.25 million tons. Estimates in the literature suggest that the energy waste could bring $50-$80 per ton in gross revenue for a farmer. Taking the conservative end of $50, and subtracting off approximately $12/ton in baling costs, net profit would be about $38/ton. 2.25 million tons x $38/ton gives MO farmers a total of $85.5 million in biomass profits, about $5.21/acre of cropland (MO has 16,405,595 acres of cropland). Since this is averaged over all farm acres, the amount of money earned per year by a farmer growing corn would be much higher. One way to calculate this number would be to multiply the number of tons of biomass waste per corn acre, .824, by the average 269 acre farm and $38/ton, which equals $8,423/yr from growing 269 acres of corn.

Eight Questions to Ask About CRA’s May 2009 Economic Analysis of the Waxman-Markey Cap and Trade Program

2009-07-16T13:48:16Z

This blog is structured from: http://switchboard.nrdc.org/blogs/ljohnson/seven_questions_to_ask_of_any.html

1. Top Line Question: How much larger (than 2008) does this model predict GDP will be in 2030 under an emissions cap (do not accept "how much less GDP is relative to no policy" answers)?

CRA does not provide absolute levels of GDP (and refused to make their complete set of results publicly available when I requested them). However, the appendix reports using for its baseline GDP EIA's Annual Energy Outlook levels which, when combined with the changes in GDP given in the report, allows one to calculate GDP levels under Waxman-Markey. Under the legislation, by 2030 GDP will be almost 70% higher than today (compared to approximately 72.3% without climate legislation), hardly the picture of economic collapse the report tries to convey.

2. CRA claims households will lose on average $830 dollars per year if we put a cap on carbon. How do they arrive at this conclusion?

Despite predicting decreasing household utility bills for the early years (during which regulated utilities are allocated free allowances whose value must be passed on to their customers), CRA still reports significantly larger overall costs for consumers than EPA or CBO (almost 3 times CBO's 2020 estimate of $175, and more than 8 times higher than EPA's average estimate through 2050). How? Energy efficient technologies are assumed to be expensive, due to no underutilized cost-effective efficiency opportunities being available in the reference case (see 3. below). In addition, renewables do not become cost competitive over time as their market share grows (see 6. below). These assumptions cause much more significant decreases in productivity (i.e. output per worker), wages, and employment relative to the no policy case (see 4. below) than the EPA analysis, which uses a similar model as CRA. As with any opposition-funded study, unrealistic assumptions generate unrealistic costs.

3. You should always ask how much consumers save in total from energy efficiency improvements, and at what cost.

CRA exaggerates costs by forcing reductions in fossil fuel energy use while simultaneously assuming that no alternative low cost sources of energy are available, such as energy efficiency, or cost competitive renewable energy (see 6. below).

Without seeing the full set of results and assumptions (which CRA refused to make public), it is impossible to infer how much energy efficiency is adopted and at what cost. It is also not possible to determine what assumptions are being made about how GDP responds to increased energy costs, other than to say that it declines relative to the reference case. Remarkably, CRA notes that assumptions behind GDP responses are critical inputs to the model, yet doesn't provide them (in technical jargon, we need to know assumptions about "elasticities of substitution" between different inputs to production; these determine how much flexibility producers have in changing their mix of inputs in response to energy price increases-the more flexibility, the less costly it is to adjust and the less GDP will decrease). Lacking any of these pieces of information, we have no way to compare CRA's results against other estimates, or against the assumptions contained in other studies. (Note: CRA does assume increasing energy efficiency over time based upon historical trends, but assumes it is the same for the policy case as for the reference case. Energy efficiency in response to a carbon price also does occur, but none of it is a result of energy inefficiency being present in the reference case. I elaborate on this below).

Just enough (barely) information is given to suggest that GDP declines more sharply in response to the carbon price than historical experience warrants: CRA tells us that consumers begin with an "optimal consumption bundle" prior to the imposed carbon cap. Translation: prior to imposing carbon restrictions, no unused energy efficiency opportunities exist at net savings. In contrast, EPA assumes that some energy efficiency is available at 3 cents per kWh (on average, it costs 7 to 8 cents per kWh to produce new electricity, so that these efficiency gains yield a net saving of 4 to 5 cents per kWh). As a result, in EPA's model, energy consumption levels that would be reached by 2015 without policy are not reached until 2040 under the cap. In contrast, CRA's total electricity generation increases under the policy case. However, CRA does not provide us with the exact amount of energy consumption (just bar graphs for electricity), so we cannot calculate how much energy is needed per unit of GDP. As with elasticities, the amount of energy needed per unit of GDP gives us an indication of the economy's ability to adapt to higher energy prices. With this basic output data, we could at least compare this ratio (GDP/unit of energy) against historically observed values.

Assuming away unutilized efficiency opportunities in the reference contradicts much of what we know about the economy's use of energy. Numerous studies have found an abundance of such opportunities. From better lighting, to more efficient appliances, new building shell efficiency, and better mileage automobiles, energy efficiency gains under a cap and trade program can create net economic gains. And energy savings will increase (as opposed to decrease) the amount of money available to spend on other goods and services, supporting new jobs to produce these goods and services. What's more, needing less energy per unit of GDP raises worker productivity, wages, and output, exactly the opposite results CRA's clients (see 8. below) are paying for.

4. A good follow up to any of the first three questions: How is it that this study finds net job losses, when it predicts substantial increases in GDP, when economic analyses of past environmental regulations on average show an increase in jobs from environmental regulation (http://epi.3cdn.net/83dfae8d6d0c6151e1_55m6id8x6.pdf) and when energy efficiency and clean energy create 3 times as many jobs as fossil fuel energy (http://www.peri.umass.edu/green_recovery and http://switchboard.nrdc.org/blogs/paltman/clean_energy_just_the_stimulat.html)?

The productivity losses CRA engineers (see 3. above and 6. below) are used to create the job losses they report. Without energy efficiency and cost competitive alternative energies, reduced energy use (relative to the reference case) and higher priced goods translate into less output per worker (i.e. lower productivity), a decrease in demand for workers, and lower wages. In fact, in order to generate the employment losses, CRA does a short run calculation that contradicts the long run structure of their model, which actually does not produce employment losses. The mechanism behind this is somewhat complicated; readers who are interested in more detail should feel free to call me. Suffice to say here that the most important output determining employment effects are the productivity losses CRA engineers.

5. How do CRA's household costs compare to estimates by the EPA and CBO?

CRA projects costs that are approximately 3 to more than 8 times higher than CBO and EPA. A large part of these costs are due to the productivity losses CRA generates through its unrealistic assumptions about energy efficiency (see 3. above) and the cost of renewables (see 6. below).

Nevertheless, even if we accept CRA's household cost estimates, they should be put in perspective: along with healthy GDP growth is an unavoidable increase in household income and purchasing power, usually more than an order of magnitude higher than estimated household costs or changes in wages relative to the reference case. Thus, while climate protection isn't going to be free, it will still be much less than increases in household income, making climate protection very affordable. For example, for 2020 EPA projects a cost of about .10-.11% of household purchasing power, but a 15-19% increase in purchasing power overall from economic growth. The ratio of increased purchasing power to the estimated cost is at least 136 (15/.11)! Of course, we don't know how much purchasing power grows in CRA's analysis, because they don't report it and refuse to make it publicly available. Most likely, it is well above their cost estimates. If it is not, they need to explain why it is so different from analyses that are not paid for by someone whose financial interests conflict with climate legislation; see 8. below).

6. How much do the cost of renewables and advanced coal w/ CCS decline as their market share grows in response to the carbon price, and does the model permit a plausible amount of capacity growth?

CRA presents a graph showing how much new capacity there is for each of the technologies for a low and high cost case, but not its core case. The graphs themselves don't have numbers in them for each category, so you cannot get an exact amount, and CRA won't provide it.

More important, however, are the assumptions CRA makes about technology costs, and the obliqueness with which they pretend to transparently reveal them.

To begin, CRA appears to assume the same technology costs under policy as they do in their reference case, benchmarked to the Energy Information Administration's 2009 Annual Energy Outlook projections (except for nuclear and geothermal). This may sound honest and non-partial, but it is not.

EIA's model has costs declining as a function of how much is produced, to reflect the fact that as more is built of a given technology, economies of scale (i.e. mass production) and learning reduce costs. Because more renewables are produced under a carbon cap, relative to the no policy case, their costs will decline more than they do in the reference case. CRA does not seem to allow this.

Next, CRA artificially limits how much renewable energy can be built, justifying the limits based upon a "variety" of sources and models, including its own. CRA doesn't even provide its capacity limits for solar thermal or photovoltaic, arguing that only regional capacity limits are imposed instead of national. But it doesn't tell you what these regional limits are or what they imply in terms of national limits. For solar thermal costs, CRA says it uses an assumption from a 2006 EPA study. This may sound honest, but again it is questionable: CRA does not reveal the cost, nor indicate whether it chose a particular scenario within the study (for example, a "high cost" scenario) and, if so, what kind of assumptions were associated with the chosen scenario. For photovoltaic, CRA states that it made its own assumptions (which they don't provide).

Next, after 20 years, CRA assumes no more cost reductions will take place.

Then, after 2030, the amount of additional renewables that can be produced are capped, while non-renewable energy is allowed to expand.

Combined, this collection of assumptions prevent renewables from ever achieving real cost reductions. It's no surprise, then, that CRA is able to generate the productivity losses it needs to create exaggerated costs.

In terms of CCS, there is no CCS in the reference case, so costs cannot decline more in the policy case. CRA does say that the CCS subsidy it models brings down costs, but not how much relative to a case in which there is no subsidy.

7. Did the study model the costs of inaction, such as property lost to sea level rise, more intense hurricanes, forest fires, water shortages, national security threats (from millions of people losing fresh water supplies as glaciers evaporate and droughts intensify), increasing world food prices due to water shortages, and lost ecosystems and species?

No.

8. Was the study paid for by someone whose financial interests conflict with climate legislation?

Yes. The study was paid for by the National Black Chamber of Commerce. Since 1998, the Chamber has received $275,000 from Exxon Mobil, and includes members from Chevron and Exxon. When Greenpeace identified climate change "denial" groups that ExxonMobil was still funding, even after the oil giant claimed that it had ceased doing so, the NBCC figured very prominently on the list.

Interstate Differences in Greenhouse Gas Emissions: Much Less Than Meets the Eye

2009-06-18T21:25:01Z

U.S. per capita greenhouse emissions show tremendous differences between states, prompting concern that some states would bear much heavier burdens from a cap on global warming emissions than others. For example, while national per capita emissions are 20.6 metric tons CO2 (mT CO2), Washington D.C. averages less than 7 mT CO2, while Wyoming is over 128 mT CO2, a more than 18 fold difference.[1]

The differential impacts citizens would experience between states, however, is much lower than these simple averages suggest. Two factors have to be taken into consideration. First, some states, such as Wyoming, do not actually consume all of the electricity they produce-some of the carbon price attached to Wyoming's emissions will be felt by citizens in other states consuming Wyoming's electricity generation. Similarly, any price increases resulting from caps on industrial emissions will be felt nationwide by consumers of the products associated with those emissions.

This brief entry demonstrates the effect these two factors have on differences between state emission levels, showing that once they are taken into account, disparities are much smaller than first meets the eye.

Interstate electricity sales

A substantial amount of electricity production crosses state lines: some states export electricity generation they don't use, while others import it. To assess impacts on a state's citizens resulting from a cap on carbon, emissions must therefore be adjusted to reflect where they are consumed and paid for, not where they are generated.

Figures 1a and 1b compare per capita emissions based upon where electricity is generated versus where it is used.[2]

Source: Greenhouse Gases and the American Lifestyle: Understanding the Interstate Differences in Emissions, Ackerman, F., Sheeran, K., and Stanton, E. April 2009.

Without any adjustment for interstate electricity transmissions, the per capita average emissions of the top 5 emitting states, Wyoming, North Dakota, Alaska, West Virginia, and Louisiana, is 7.6 times higher than that of the 5 lowest emitting states, Washington D.C, Rhode Island, Vermont, California, and New York. After accounting for interstate electricity sales, the ratio drops down to 4.4, and the ordering changes somewhat. As would be expected, emissions from Wyoming, West Virginia, and North Dakota, which account for 26 percent of all electricity sales crossing state lines, are significantly affected by this adjustment.

Industrial emissions

In addition to adjusting for interstate electricity sales, a second adjustment is needed to exclude industrial emissions. Emissions from industrial production help create goods that are sold around the entire country, or even outside the United States altogether. The majority of carbon costs will be passed on to the final consumers and will therefore be felt outside the state in which the associated goods are produced. For this reason, industrial emissions that vary by state do not imply any specific burden per se to the state in which they occur.[3]

Figures 2a and 2b show per capita emissions with and without including the industrial sector. The change further brings down the ratio of the top 5 to the bottom 5 from 4.4 to 2.8.

Source: Greenhouse Gases and the American Lifestyle: Understanding the Interstate Differences in Emissions, Ackerman, F., Sheeran, K., and Stanton, E. April 2009.

Conclusion

Interstate emissions appear to vary sharply when comparing them based upon a state's generation mix of electricity. Upon closer examination, however, differences are much smaller than one would expect, due to interstate consumption of electricity, and the fact that consumption of industrial products occurs nationwide, rather than the state in which they are produced (and in which the emissions occur). Once emissions are adjusted for these factors, state differences are a small fraction of total emissions (Figure 1a versus Figure 2b).

[1] All calculations in this brief are based upon 2004 data, the year in which sources for all data were available. More recent numbers will have similar proportions between states, and therefore would provide similar results to those presented here.

[2] The methodology used to adjust for interstate electricity sales can be found in Appendix D, of Greenhouse Gases and the American Lifestyle, by Ackerman, F., Sheeran, K., and Stanton, E.A., April 2009.

[3] While consumers are impacted across the nation, workers in these industries are specific to where the production takes place. The Waxman-Markey bill, however, includes a provision to dedicate up to 15% of allowances to energy-intensive manufacturers selling in competitive international markets on an output basis. EPA's analysis of the Waxman-Markey bill shows that this allocation prevents job losses from the bill in these industries (http://www.epa.gov/climatechange/economics/economicanalyses.html#wax).