This post is by Nat Keohane, Ph.D., Director of Economic Policy and Analysis at Environmental Defense Fund.
We just released a new report on how climate change legislation will impact the economy [PDF]. There have been many recent cost estimates, but ours provides something unique. To put the numbers in perspective, we looked at model projections in the context of government data on jobs, consumer expenditures, electricity consumption, and so on.
The models – all from highly respected, independent sources – don't agree on much. But they do agree on one thing: the overall impact on the economy will be very small. All the models project that, over the next twenty years, the cost of climate policy will be just a few months of economic growth.
The good news coming out of this study is that we can afford ambitious cuts in global warming pollution.
The Models We Analyzed
We looked at five models: one run by Massachusetts Institute of Technology (MIT), two by Department of Energy (DOE), and two contracted by Environmental Protection Agency (EPA). These represent all the models we could find that:
- Looked at impacts on the U.S. economy,
- Considered policies along the lines of the Lieberman-Warner Climate Security Act, and
- Came from highly respected, independent sources willing to make their results and assumptions completely transparent.
Note that these models look only at the costs of reducing emissions. They don't consider the costs of inaction – that is, the damages that will result from unchecked global warming.
What We Found
The cost to the U.S. economy will be miniscule. The median estimate is that ambitious climate policy will reduce annual economic growth by only three-hundredths of a percent (0.03 percent). Over the period 2010 to 2030, the models estimate a reduction of just one-half of one percent of Gross Domestic Product (GDP). Compare this to projected economic growth over the same twenty year period of 70 percent.
Why do other reports say the costs will be high? Two reasons:
- Our opponents tend to cherry-pick the numbers, choosing the highest ones they can find.
- They present the numbers out of context. The U.S. economy is so huge that even a tiny estimate in terms of percentage is enormous in terms of dollars.
Here's another way to put the cost in perspective. The models differ by as much as 10 percent in their predictions of business-as-usual output in the year 2030 because the drivers of economic growth are themselves uncertain. This difference in estimates is 17 times the projected cost of a cap on greenhouse gas emissions. In a real sense, the impact of climate policy is in the margin of error of these models!
We can afford an ambitious cap-and-trade program.
- The number of manufacturing jobs created and destroyed every three months is substantially higher than the number projected to be lost over 20 years due to an emissions cap.
- The impact on household consumption will be minimal – less than a penny per dollar of income for the average American family.
- The largest impact will be on household energy bills, but even that will be modest – just a few dollars a month higher.
The cost of inaction is higher than the cost of an ambitious cap-and-trade program. Delay risks irreversible climate change. The longer we wait, the steeper emissions cuts must be to keep warming less than 2°C above preindustrial times – the threshold scientists tell us risks catastrophic consequences.
As the graph below shows, the cost of waiting increases quickly:
- Waiting until 2030 would require annual cuts of over 6 percent per year – more than the contribution of the entire U.S. electric power sector. Cuts of this magnitude would be extremely expensive, and may not even be feasible.
- Waiting until 2040 would require annual cuts of nearly 17 percent per year to avoid catastrophic climate change – almost surely impossible.
A wise climate policy provides the foundation for long-term economic prosperity. A look back at America's economy over the past century shows that we have led the way in each major economic revolution, from mass production to semiconductors to the internet. Technological leadership drives our economy. A cap on carbon will spark innovation and allow American entrepreneurs to lead the world in the coming low-carbon economy.
For all the numbers and details on our methology, take a look at the full report [PDF].