What will the climate change bill cost Texans (and Americans?)

by Robert Nagle on 5/18/2010

in global warming,Texas/Regional

Recently Texas governor Rick Perry gave the estimate that climate change bill will cost  the average Texas family  $1200 per year.

A Perry spokesman said that the source for the number was the Tax Foundation, a conservative thinktank/lobbying group. They are the ones behind the hilariously wrong Tax Freedom canard.  In fact, a major oil company and polluter Koch Industries gave the Tax Foundation $325,000 to produce this report and they are known for financing reports with funny numbers.

Let’s look at more neutral estimates.  Keep in mind that many of these estimates are based on American Clean Energy and Security Act of 2009 (ACESA) (the House Waxman-Markey bill). I haven’t seen a comparison with the Senate bill, and surely the final law will look different. But I think these estimates are indicative of the general cost-benefit analysis. (Update: I added some links below to recent  CBO scoring of the Kerry-Liebermann bill;  the cost estimates seem comparable ).

Economic Costs of Climate Change Legislation

Congressional Budget Office says the cost will be about $175. In summer 2009 the Washington Post reported:

Climate-change legislation would cost the average household $175 a year by 2020, according to the Congressional Budget Office, far below the figure commonly used by GOP critics of the House bill.

The CBO said yesterday that the poorest 20 percent of American households would actually receive a $40 benefit in 2020 from the legislation, which would establish a cap-and-trade system to limit greenhouse gas emissions, while the richest 20 percent of households would see a net cost of $245 a year. The costs would result from higher prices for carbon-based fuels, offset by a complex series of tax breaks and free allowances, new technologies and behavioral changes, and impacts on corporations and their profits.

Energy Information Agency Report says the cost per household will be $134 (2009).  Timothy Gardner of Reuters reports:

Under the climate legislation passed by the House of Representatives in June, electricity, heating oil and other bills for average families will rise $134 in 2020 and $339 in 2030, according to the Energy Information Administration, the country’s top energy forecaster.

The bill requires energy companies to help consumers lower costs during the early years of the program which would “mute the impact of higher energy prices for households until at least 2025,” said Kay Smith, an EIA economist.

For the sake merely of completeness, I am including an industry estimate by the  conservative Texas Public Policy Foundation as reported by Chronicle reporter Tom Fowler—also here).  They estimate:

Proposed U.S. climate change laws could cut Texas’ manufacturing output by more than 5 percent and increase electric prices by as much as 52 percent by 2030.

In gross terms, these estimates may not be wrong (I don’t know). But CBO disputes whether these jobs will be actually lost, and as the University of Massachusetts study suggests (see below), investments in clean energy industries  generate roughly 3x more jobs than investments in fossil fuel industries.

Economic Benefits of Climate Change Legislation

A key thing to remember about these estimates is  that they usually don’t take into account the potential benefits from conservation and switching to greener industries. Below are some attempts to do so.

American Council for an Energy Efficient Economy says the economic benefits should amount to $170 per household. (ACEEE would be considered an industry/lobbying group). Joe Romm summarizes:

The American Council for an Energy Efficient Economy estimates that the efficiency provisions alone could save businesses and consumers $22 billion annually by 2020.  The savings would be $170 per household in 2020 roughly equal to CBO’s cost per household estimate for ACES in 2020. The Alliance to Save Energy estimates that energy efficiency measures alone can create over 100,000 jobs over the next two years and reduce U.S. carbon dioxide emissions by nearly 200 million metro tons.

ACEE has broken down the potential benefit specifically for Texas.

aceee-texas

(Source: ACEE Texas analysis).

analysis by University of Massachusetts supports the claim that climate change legislation will bring net benefits even to a state like Texas. From their policy brief on Texas (PDF):

Investments in a clean-energy economy will generate major employment benefits for Texas and the rest of the U.S. economy. Our research finds that Texas could see a net increase of about $12.7 billion in investment revenue and 153,000 jobs based on its share of a total of $150 billion in clean-energy investments annually across the country. This is even after assuming a reduction in fossil fuel spending equivalent to the increase in clean energy investments.

Clean-energy investments create 16.7 jobs for every $1 million in spending. Spending on fossil fuels, by contrast, generates 5.3 jobs per $1 million in spending.

Relative to spending on fossil fuels, clean-energy investments create 2.6 times more jobs for people with college degrees or above, 3 times more jobs for people with some college, and 3.6 times more jobs for people with high school degrees or less.

The study summarizes :

Our detailed analysis, based on robust economic-modeling methodologies that are explained in detail in the paper and in Appendix 1, beginning on page 48, calculates that roughly 2.5 million new jobs will be created overall by spending $150 billion on clean-energy investments, while close to 800,000 jobs would be lost if conventional fossil fuel spending were to decline by an equivalent amount. It is not likely that all $150 billion in new clean-energy investment spending would come at the expense of reductions in the fossil fuel industry. However, we present this scenario to establish a high-end estimate for reductions in conventional fossil fuel spending, and the net gains in employment that will still result through spending $150 billion per year on clean-energy investments.

Our key finding is that clean-energy investments generate roughly three times more jobs than an equivalent amount of money spent on carbon-based fuels.

Our key finding: All of the models, without exception, forecast that a carbon cap, such as that proposed in ACESA, would have, at worst, a minimally negative impact on the U.S. economy’s long-term growth path. Moreover, these models generate this basic finding without considering some of the major ways in which clean-energy policies can stimulate economic growth. These include the expansion of employment opportunities itself, a reduction in the trade deficit, promoting technological improvements and thus falling prices in renewable energy sources, and reducing the negative impacts on economic activity of greenhouse gas emissions and unmitigated global warming.

Update: On May 5,2010  the CBO released a briefing, How Policies to Reduce Greenhouse Gas Emissions Could Affect Employment. (Download PDF). From the summary:

… job losses in the industries that shrink would lower employment more than job gains in other industries would increase employment, thereby raising the overall unemployment rate. Eventually, however, most workers who lost jobs would find new ones. In the absence of policies to reduce emissions of greenhouse gases, changes to the climate also might affect employment; however, this brief does not address such changes because that effect would probably arise after the next few decades, and it has not been studied as carefully by researchers.

Employment in oil and gas extraction and natural gas utilities would also be expected to decline as those fuels became more expensive and the demand for them declined. In percentage terms, the decline would be smaller than that in coal mining, though. Because oil is widely traded on international markets, continued demand for it in other countries that did not implement emission-reduction policies would lessen some of the effects of the decline in domestic demand. Because the use of natural gas to generate electricity produces smaller quantities of greenhouse gases than does the use of coal, demand would probably shift from coal to natural gas in some instances, offsetting some or all of the reduction in demand for natural gas that would otherwise occur.

See also: Alan Durning’s analysis suggests that CBO’s recent briefing  may understate the benefits of jobs produced. David Roberts points out some limitation of using models for economic forecasts for climate change legislation.

June 15 Update. David Roberts summarizes the CBO’s scoring of the Senate climate change bill (with editorial comment):

  • the impact on U.S. consumers will be “modest.” Says the report: “Average household consumption is reduced, relative to the no-policy case, by 0.0-0.1% in 2015, by between 0.0-0.2% in 2020, by 0.2-0.5% in 2030, and by 0.9-1.1% in 2050.” Averaged over 2010-2050, households will pay an extra $79 to $146 a year. Not exactly a steep price to pay to avoid catastrophe. (Incidentally, overall household consumption will continue to rise, even with the mild constraints of the bill.)
  • EPA’s analysis only measures costs; it does not measure benefits. Specifically, it does not include the benefits of avoiding climate change. If you think that’s absurd, well, you’re right. As Michael Livermore wrote last week, the “all costs no benefits” method of analysis utterly distorts lawmakers’ perspectives. Obviously if the costs of unrestrained climate change were included, the bill would look like a screaming bargain.
  • Energy-intensive and trade-expose industries are held harmless. To quote: “the allowance allocations in H.R. 2454 [which are roughly the same as APA’s] can essentially eliminate any adverse effect that a cap-and-trade program would otherwise have on energy-intensive trade-exposed industries’ international competitiveness, and can thereby prevent emissions leakage that might otherwise arise if such a program were to reduce the competitiveness of U.S. industry.”
  • Offsets hold the cost of compliance down, but the limits on offset use are never reached. Overall, domestic offsets would account for about 18 percent of total reductions, and international offsets would account for another 18-29 percent, depending on how many are used.
  • Several key provisions are not included in the EPA model. These include, for example, “lighting standards, new regulation for offshore oil and gas extraction, powering vehicles with natural gas provisions, and GHG tailpipe standards.” For these and many other reasons, “uncertainties remain that could significantly affect the results” of the analysis. (What EPA won’t say: this kind of modeling is worth about as much as throwing darts at a dartboard.)

June 15 Update #2. NYU’s Institute for Policy Integrity  did a policy briefing about the economic models for doing a cost-benefit analysis of climate change legislation. (The complete report is a PDF  on the hyperlinked page). This report is difficult is summarize and it’s more focused on devising a plausible way to model the social costs of carbon.  See additional publications here. Michael Livermore summarizes: “Policy Integrity conducted a benefits analysis and found that the Waxman-Markey bill would generate between $750 billion and $1 trillion in benefits between 2012 and 2050, dwarfing the costs of the bill.”

August 25 Update. Another cost which needs to be factored in is the approximately 3 or 4 billion dollars in annual tax subsidies to oil companies.

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