The US Chamber's Chronic Reliance on Biased Policy Analysis
Posted November 19, 2009 in Solving Global Warming
The US Chamber's recently exposed interest in commissioning a study to put health reform in a bad light isn't the first time the federation has shown its willingness to trumpet questionable analyses about proposals it doesn't like.
Heck, the US Chamber has been peddling bad studies on the economic impacts of climate policy for years.
For instance, they've had David Kreutzer, a Heritage Foundation economist, do three presentations before local Chambers in Michigan, Missouri and Virginia. We've pointed out before (here, here, here and here) that Kreutzer is a co-author of the deeply flawed Heritage Foundation "analyses" of last year's Lieberman-Warner bill and this year's Waxman-Markey bill. Even though the Heritage Foundation presents its results as though they actually modeled the bill in question, they have a funny tendency to leave out significant parts of the proposed legislation. As my colleague Laurie Johnson explained in May, looking at Heritage's "analysis" of Waxman-Markey:
And aside from the cap on emissions, virtually none of the bill is modeled:
1) the allowance value disappears instead of being spent on consumer relief, clean energy, adaptation, and other measures;
2) no cost containment provisions such as banking, the strategic reserve, and offsets are included; and
3) no complementary policies promoting energy efficiency and clean energy are allowed.
Which is pretty similar to what I noted about their modeling of Lieberman-Warner.
By not actually modeling the legislation in question, and leaving out the parts that reduce the costs, Heritage produces the results you might expect. As my colleague Laurie summarizes:
predicted prices are drastically higher than those found in widely-respected and peer-reviewed analyses done by government agencies and universities, forcing extreme differences in results.
But despite such glaring flaws, Kreutzer has presented the results as though they do model the legislation. Here's what the Chamber's official report on the Missouri presentation said:
Dr. David Kreutzer, an economist from the Heritage Foundation, focused on the impact of cap-and-trade legislation on Missouri's economy. He used his analysis of S. 3036, the "Lieberman-Warner Climate Security Act," to highlight how the program could devastate Missouri's economy, a state largely dependent on coal, through job loss, harm to the Gross State Product (GSP), and the increased cost of utilities on Missouri families.
So the US Chamber has been hosting presentations showing scary economic outcomes based on analyses that are not of the legislation the presentation is supposedly about. Way to play it straight, US Chamber!
But wait, there's more.
Sometimes the Chamber uses Margo Thorning instead of David Kreutzer. She is an economist with the American Council for Capital Formation, a polluter-funded group that has been teaming up with the National Association of Manufacturers to produce their own distorted estimates of the costs of climate legislation, which we have debunked again and again.
And well we should. The NAM/ACCF analyses use the same trick as the Heritage Foundation: leave out lots of the bill. Need proof? Look at page 9 of the NAM/ACCF study where it lists the titles of the Waxman-Markey bill, where they admit to leaving out entirely the titles that include consumer protections and cost-containment.
Yet, the Chamber has given the stage to Ms. Thorning six times since 2008 - Ohio, Montana, North Dakota, New Hampshire, Pennsylvania and Virginia.
So the news that the US Chamber was looking to fund a rigged study on health reform is actually just the latest symptom of its chronic reliance upon biased policy analysis.
Comments are closed for this post.
Comments
David Kreutzer — Nov 20 2009 01:53 PM
Your criticism of the Heritage studies couldn't be further off base. As the comment option was closed in Laurie Johnson's original critique, we had to post our response here: http://www.heritage.org/Research/EnergyandEnvironment/upload/CDA_09_03.pdf
Let me respond briefly to your three points.
1. The allowance value does not disappear in our analysis. We recycle 100 percent of the allowance revenue in its most efficient form--unencumbered cash back to the citizens.
2. All the analyses that do include banking and borrowing show net borrowing in the early years for use after the period we analyze. Had we included banking and borrowing it would have been almost entirely banking and that would have made the economic damages even larger. We do include offsets but not at the fantasy-level of two billion tons per year.
3. With caps in place, mandates on efficiency can only increase the costs of meeting the caps--they cannot lower them. This is well-recognized by economists. Imagine putting somebody on a strict 1,000 calorie per day diet. Mandating that they eat a half head of lettuce every day doesn't make it easier to cut calories as there could be other more satisfying and nutritious options for cutting calories.
What you don't mention is that the low-ball estimates for the cost of cap and trade all require a near doubling of nuclear power generation. Even more, the postage-stamp results require taking the net present value of the costs. Do a search of the NRDC web site. You will find that your organization is dead set against both significant increases in nuclear power and the use of discounting future values.
Our analysis is based on assumptions that are more in line with NRDC policies than are the assumptions of the low-cost studies you trumpet.
I'd be happy to come over and discuss our study with people at NRDC to clear up any other questions you may have.
David Kreutzer
Laurie Johnson — Dec 15 2009 04:00 PM
Here are my comments in response to Charles Kreutzer’s three counter-points:
“1. The allowance value does not disappear in our analysis. We recycle 100 percent of the allowance revenue in its most efficient form--unencumbered cash back to the citizens.”
There are two premises behind this argument (and choice of modeling), and they are incorrect.
First, the Heritage Foundation presumes that energy markets are perfectly efficient and that, even if they were not, nothing can be done to improve them. In that case, returning allowance value directly to consumers would indeed be the most efficient mechanism for recycling allowance revenue. But, as extensively detailed in a study sponsored by the EPA and DOE,
http://www1.eere.energy.gov/office_eere/pdfs/napee_full_report.pdf
and many other studies, these assumptions are wrong: not only do numerous market barriers exist to adopting energy efficiency, many programs have successfully overcome them, saving consumers hundreds of millions of dollars. Such programs could be significantly expanded using the allowance allocations as specified in ACES.
Second, the Heritage Foundation presumes that markets are efficient in renewables and again, even if they were not, nothing can be done to efficiently promote them. Yet, just like energy efficiency, there have been numerous impediments to the development of renewables, not the least of which are massive subsidies to fossil fuels and nuclear power,
http://www.ucsusa.org/clean_energy/technology_and_impacts/energy_technologies/barriers-to-renewable-energy.html
(…some of which the Heritage Foundation has benefited from through the generous support of Exxon and ChevronTexaco),
http://www.exxonsecrets.org/html/orgfactsheet.php?id=42#src12 and http://www.sourcewatch.org/index.php?title=Heritage_Foundation
and a host of market barriers.
http://www.nrel.gov/docs/fy07osti/40116.pdf
Removing these impediments would help put renewables on a more level playing field with fossil fuels. Costs would decline and market share would grow.
By returning all allowance value directly back to citizens, the Heritage Foundation basically does not model the ACES bill. Assuming markets in energy efficiency and renewables are efficient and cannot be improved upon may be true to the Heritage Foundation’s ideology, but simply does not comport with the facts on the ground, or the claim that the Heritage Foundation modeled ACES.
“2. All the analyses that do include banking and borrowing show net borrowing in the early years for use after the period we analyze. Had we included banking and borrowing it would have been almost entirely banking and that would have made the economic damages even larger. We do include offsets but not at the fantasy-level of two billion tons per year.”
Your assertion that allowances would mostly be banked for use in the time period following your model is only correct if three things are simultaneously true.
First, the market would have to be almost completely unresponsive to the carbon price. This is ironic, to say the least, coming from an organization that (rightfully) praises the immense power of markets to innovate in response to price signals. The same profit motive that brings us remarkable new electronic goods, practically every 3 years, can’t bring us low cost clean energy over a course of twenty six years?
Second, the market would also have to be unresponsive to virtually every single incentive in ACES that goes toward promoting existing efficiency and low carbon technologies. Oh but, right, you don’t model those.
Third, you have to assume that none of the generous allowance allocation toward R&D would bear fruit. Every single technology invented would not succeed in the market. Yet, by 2035, ACES will have allocated over $47 billion toward R&D in clean technology and advanced vehicles. Under the Heritage Foundation’s permit price projections, that amount would be double or triple (the same percentage of allocations would apply to a larger dollar value of allowances)…
Because non-partisan objective models don’t assume every single thing goes wrong, holding positive amounts of banked allowances at the end of a model’s time frame (which is commonly done) doesn’t “break the bank.” In fact, banking between periods occurs within the models’ time frames as well, and this lowers overall compliance costs. (Allowances are banked for future years, as the emissions cap tightens, making future reductions less expensive. Short run allowance prices go up, but by less than the savings obtained in later periods).
To conclude on this point, the Heritage Foundation’s assertion that banking would only increase its cost estimates relies upon the heroic assumption that everything fails.
“3. With caps in place, mandates on efficiency can only increase the costs of meeting the caps--they cannot lower them. This is well-recognized by economists. Imagine putting somebody on a strict 1,000 calorie per day diet. Mandating that they eat a half head of lettuce every day doesn't make it easier to cut calories as there could be other more satisfying and nutritious options for cutting calories.”
We address this assertion in 1) above. Your claim is not “well recognized” by many well known and well respected economists. Actually, I take that back—it is recognized, as bad economics.
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After these three points, you add some more text, which I will also respond to:
a. “What you don't mention is that the low-ball estimates for the cost of cap and trade all require a near doubling of nuclear power generation.”
Sorry. Both EIA and EPA run a case with hardly any/no (respectively) increase in nuclear. The damage? EIA’s average projected per household annual cost (for the “high cost” case) over 2012-2030 increases from $83 to $124 (we should also note that this case also constrains CCS and biomass, which further increases costs beyond the effect of the nuclear restriction alone). EPA has a scenario that restricts nuclear to its current levels (Scenario 5); it projects an average (2010 to 2050) per household cost of $151 per year, compared to $111 for its core case.
b. “Even more, the postage-stamp results require taking the net present value of the costs. Do a search of the NRDC web site. You will find that your organization is dead set against both significant increases in nuclear power and the use of discounting future values.”
This comment on discounting is a fair point—almost. Your report states that the only reason to calculate present values is to make benefits and costs that accrue in different time periods comparable. But you’ve left out something critical: a prime justification for discounting is that future individuals will have more income, something you seem to have forgotten from your Economics 101 course. Thus, if you want to present undiscounted costs, then an honest presentation would also present undiscounted projected gains in income, which swamp costs in every model I’ve seen, regardless of its sponsor. For that matter, you could even report discounted increases in income, and I bet they would still be significantly larger than your undiscounted costs.
By way of illustration, consider EIA’s high-cost nuclear/CCS/biomass case. It projects an average undiscounted annual household cost of $190 between 2012-2030, and an average undiscounted annual increase in median income relative to 2009 levels over $10,000. Discounted (at 4%), these figures are $124 and $5,838 respectively. Either way, the costs are orders of magnitude larger than projected increases in income. Not only do you exaggerate the effects of discounting, you fail to put discounting costs in its proper perspective.
Having lost this argument, you would probably counter (as you have in the past) that $124 is a real opportunity cost and that I don’t understand that fundamental economic concept. But that is a straw man: by doing nothing to mitigate emissions, you lose the opportunity to reduce the threat of costly, and potentially catastrophic, climate change, as well as the benefits discussed in the next paragraph.
Then to this you would undoubtedly respond with another favorite argument of yours: U.S. reductions wouldn’t make a dent in the problem, since developing countries won’t make meaningful reductions. That assumption is highly debatable: not only is much of the world waiting for the U.S. to take leadership before they commit themselves to comparable reductions, developing countries have already started to take steps to reduce emissions. But let’s give you the benefit of the doubt, and assume that no climate benefits are forthcoming. There are still many other benefits to taking action. Increasing our energy independence, reducing threats to national security, and unlocking billions of dollars investors are sitting during these bad times are nothing to sneeze at. Keeping more of our income in the U.S. rather than sending it abroad for oil, and unlocking those investment dollars, would bring millions of new jobs.