The usual hysteria: a gas tax, a gas tax, the sky is going to fall

Earlier this week, Senators Kay Bailey Hutchison (Committee on Commerce, Science, & Transportation) and Kit Bond (Subcommittee on Transportation, Housing, & Urban Development) issued a report claiming that climate legislation would be little more than a massive gas tax. According to the report, American families and businesses would be crushed by oppressive taxation, with nothing in return. Neither is true.

Here’s why:

1. Climate legislation is not actually modeled. The authors do not model climate legislation; instead they rely upon a simplistic (some might say embarrassing) calculation: the increase in the price of fuels multiplied by total consumption. This is a gross estimate when what matters is the net. It is not surprising that this approach is taken: non-partisan studies show household costs to be quite modest, paling in comparison to projected growth in household income and GDP. This finding of economic growth is robust. If you look closely enough (it is usually buried in an appendix), you will even find it in studies conducted by the opposition. Other important findings are also absent, including savings to households from increased efficiency (in both vehicles and homes), and job growth from clean energy production (see tables below detailing different findings).
2. Inflated and distorted figures for fuel consumption. The authors’ projections of fuel consumption are much higher than official estimates from the Energy Information Administration (EIA) at the Department of Energy. In addition, fuel expenditures are not adjusted for population growth; if one were not careful, one might assume that household costs would increase in proportion to the total increase, when in fact they would increase less. (Parenthetically, the authors cite a few findings from two industry-funded studies (click here and here); these studies rely upon unrealistic assumptions and also do not completely model climate legislation).
3. Benefits from reducing both traditional pollutants and greenhouse gas pollution are not discussed. Two major sources of benefits from reducing transportation emissions are ignored: a) benefits from reducing pollutants other than CO2 that result from burning fossil fuels (often referred to as “co-benefits” to climate mitigation). As an example of how large these are, consider the fact that in 2010 alone, approximately $178 billion dollars (see Table H-5 in Appendix 6 of this report by EPA) worth of health, economic, and environmental damage was avoided by reducing these pollutants (see tables further below) as required under the Clean Air Act; and, of course, b) benefits from reducing greenhouse gas pollution.
4. None of these criticisms should be a surprise; Senators Bond and Hutchison have received generous funding from the oil and gas industry.  

1. Climate legislation is not actually modeled. One of the biggest flaws in this analysis is that it does not model climate legislation, yet claims to have estimated costs to households and businesses. By subtracting off free allowances given to refiners, the authors want the reader to think that they have calculated a net impact. Missing from their equation, however, is the fact that allowance revenues are also returned to households. On day one, the American Power Act returns 2/3 of all revenue to consumers; eventually 100% of all revenue is refunded to the American people after adjustments to maintain deficit neutrality. Also omitted are potential energy efficiency savings and employment gains. Here are some illustrative findings from studies not funded by the opposition (I focus on 2020, as studies all report results then but vary in the other years they present; relative comparisons are similar in other years[i]): 

Household investment costs versus growth in income[ii] 

**Calculated by increasing every income brackets’ income by the average income growth rate (consumption growth rate for EPA), as estimated by the authors.

 GDP Growth

Energy Expenditures

Oil import savings

Jobs

2. Inflated and distorted figures for fuel consumption. The authors’ projections of diesel and jet fuel consumption are much higher than official estimates from the Energy Information Administration (EIA) at the Department of Energy; respectively, EIA projects (gasoline consumption does not differ much):

• Bond-Hutchison’s projected diesel consumption for 2020 is 24% higher than EIA’s estimate under climate legislation.
• Bond-Hutchison’s projected diesel consumption for 2030 is 39% higher than EIA’s estimate under climate legislation.
• Bond-Hutchison’s projected jet fuel consumption for 2020 is 31% higher than EIA’s estimate under climate legislation.
• Bond-Hutchison’s projected jet fuel consumption for 2030 is 38% higher than EIA’s estimate under climate legislation.

In addition, there is no adjustment for population growth, which lowers total costs per household. EPA estimates population will be 30% higher by 2050, the time frame through which the Bond-Hutchison report total fuel costs (see data annex if the Environmental Protection Agency’s (EPA) analysis of the American Power Act).

2. Benefits from reducing both traditional pollutants and greenhouse gas pollution are not discussed. The two tables below summarize some data on traditional pollutants (self explanatory).

Benefits from reducing criteria pollutants:

2010 Emissions of criteria pollutants from transportation fuels (click here for EPA report)

Estimated benefits from reduction in criteria pollutants in 2010 from the Clean Air Act

(Click here and look at Table H-5; dollars converted from 1990 to 2009 purchasing power)

$178.3 billion per year 2010-2050 equals $7.1 trillion: reduction in non-greenhouse gas emissions just from the Clean Air Act alone will give at least two times Bond-Hutchison's supposed "gas tax" (I say "at least" because it would actually be much more, due to population and economic growth). With more reductions in fossil fuel emissions, Americans will reap more of these benefits.

Climate mitigation benefits:

Unfortunately, none of the studies account for the most important variable of all in this discussion, benefits from reducing global warming pollution. Were these included, the discussion of “costs” of climate legislation would likely turn on its head, and instead be about benefits and savings from the American Power Act. Without action to reduce emissions, EPA finds that there is a 99% probability that global warming will exceed 2 degrees Celsius (3.6 degrees Fahrenheit), a threshold above which scientists project that the risk of catastrophe increases rapidly. With the APA anchoring a global effort to curb emissions consistent with commitments made by G8 countries last year, the risk of global warming exceeding 2 deg. C is reduced to 25% and the risk of temperatures rising more than 4 degrees becomes negligible. How important are the potential climate benefits? Measuring only a very small fraction 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) abatement cost of mitigation. 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. Notably, these benefits exclude the potentially catastrophic outcomes scientists worry about the most (e.g. a complete melting of the West Antarctic ice shelf or Greenland’s ice sheets, either of which would by itself result in a 20 foot rise in sea level), and many environmental assets that are difficult if not impossible to monetize, such as the loss of species and ecosystems—some of which are already underway (click here, here, and here for examples).

4. None of these criticisms are surprising; both Senators have received generous funding from the oil and gas industry. Sen. Hutchinson has taken $2.13 million from the oil and gas industry over her career, including $437,000 from oil and gas executives and PACs this election cycle through March 2010. (Opensecrets.org, 6/23/1010 and 6/23/2010). Sen. Bond has taken $446,000 from the oil and gas industry over his career, including $13,750 from oil and gas executives and one PAC this election cycle through March 2010. [Opensecrets.org, 6/23/2010 and 6/23/10].

[i] In later years, allocations to utilities for consumer relief are phased out so that utility bills will increase. However, direct rebates to households increase, offsetting these increases.

[ii] Following EPA’s presentation, all figures in this blog are given in 2005$, and discounted by 5% unless otherwise stated. Discounting is a standard tool used by economists to put future dollar amounts into one common unit of measurement. Some figures differ from results reported in the original studies due to these conversions.

[iii] An important difference between the ADAGE and IGEM models is their treatment of capital movement.  ADAGE assumes a lower ability for the capital stock to turn over toward cleaner energy, and therefore estimates higher abatement costs than those in IGEM. In addition, allowances devoted to both consumer and producer protection peak from roughly 2016-2026.  This protection aims at lowering the policy cost. Given the normal amount variance in any model, the IGEM results could be interpreted as there being little if any change in consumption from 2015-2020 (communication with EPA).

[iv] Employment and national security benefits from enhanced oil recovery (EOR). New oil production from a process called enhanced oil recovery (EOR) would drive additional job creation and further reduce oil imports. EOR is a technology that has been used for decades to produce additional oil from fields by injecting CO2 (or steam) to free oil that is ordinarily left trapped in the underground formation (click here, here, here, and here to learn more about EOR). Currently, most of the CO2 used for EOR is extracted from natural sources which are limited in supply. With climate legislation, the supply of CO2 could increase dramatically from CO2 waste captured at power plants and industrial facilities using carbon capture and storage (CCS). In addition to providing a place to sequester CO2, an abundance of existing and abandoned oil fields are available for CO2-EOR. These could yield an estimated 3 million barrels of oil per day (mbd) by 2030, and displace 2.25 mbd in oil imports. By 2020, over 40,000 jobs could be created in the oil industry, rising to approximately 350,000 by 2030. CO2-EOR would also reduce pressure to open up new areas for oil exploration. 

[Projected EOR production is taken from “U.S. oil production potential from accelerated deployment of carbon capture and storage,” Advanced Resources International, March 2010. We conservatively assume that each incremental barrel of oil produced relative to EIA’s Annual Energy Outlook displaces 0.75 barrels of imports and 0.25 barrels of domestic oil from other sources. Jobs are calculated by applying the multiplier for oil and gas extraction from PERI (2009) to the amount of additional oil produced from CO2-EOR].