Thursday, October 15, 2009

Cap And Trade Calamities

CBO Director: There are Costs Involved with Cap and Trade
Congressional Budget Office Director Douglas Elmendorf testified on October 14 before the Senate Committee on Energy and Natural Resources to discuss the economic effects of reducing greenhouse gas emissions and the effects – most notably the effects of the Waxman-Markey cap and trade legislation. Although Elmendorf felt that Waxman-Markey could greatly reduce the long-term risks of climate change, he acknowledged that “such legislation would also reduce economic activity through a number of different channels.”

Note: Director Elmendorf’s expertise is budgets and economics, not climate science.

Some of the channels mentioned the CBO director’s testimony include: shifting production, investment, and employment away from lower cost carbon-based energy industries and carbon energy-intensive goods and services towards higher cost alternatives; reducing productivity of existing capital and labor, reducing household income, discouraging investment both domestically and from international sources, and reducing employment and workers’ real wages.

Elmendorf made a commonly held assertion that because the economy in 2050 will be twice the size it is today, foregoing 3% of our potential GDP is modest. This ignores the fact that part of the reason the economy continues to grow is because the population continues to grow. For example, better health and medical techniques allows both birth rates to be higher and older adults to live longer. Thus the economy may be twice the size it is today but it also must support a much larger population of people. Second, foregoing potential GDP means lost income opportunities. Income builds wealth because it can be invested in profitable activities. The foregone income could have been re-invested in new technology that could have found a low cost way to reduce emissions rather than higher cost alternative fuel use.

Our economy is enormous and vastly complex and this is one bill. Table 1 on page 13 of Elmendorf’s testimony shows the reduction ranges in lost economic activity because of cap and trade for select years based on the CBO’s review of other studies. In 2030, gross domestic product loss will be between .4 and 1.1 percent. For the year 2040, the range is .7 to 2.0 percent lost and for 2050 GDP loss would be between 1.1 and 3.4 percent.

The numbers that the CBO director attests to are in line with estimates done by The Heritage Foundation. Our economic analysis of the Waxman-Markey, which covered the years 2012-2035, found a GDP loss range of .78 percent ($148 billion) for the year 2019 to a high of 2.79 percent ($712 billion) for the year 2031. Single-year GDP losses reach $400 billion by 2025 and will ultimately exceed $700 billion.

Cumulative GDP losses are $9.4 trillion between 2012 and 2035. And since the emission reduction targets become more stringent – reaching 83 percent below 2005 levels by 2050, the news is only likely to get worse. All because of one very bad bill. Director Elmendorf is right in that the economy will continue to grow, but it will be growing well under its potential.

CBO’s acknowledgement that Waxman-Markey could reduce economic activity is a warning and something Members of Congress should heed. Mitigating the costs, protecting households and protecting those who lose their jobs will be close to impossible as just about everything we do and use relies on fossil-fuel based energy. A 1 to 3.5 percent drop in GDP compared to a baseline may seem insignificant, but when it happens year after year to such a large economy, it adds up quickly.

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