Climate 411

The Evidence Continues to Pile Up: Climate Legislation is Affordable. The Time to Cap Carbon is Now.

As the debate on climate legislation gears up in the Senate, evidence continues to accumulate that a climate bill will be affordable and provide a much-needed boost to our economy.

A new analysis released by the Department of Energy’s Energy Information Administration (EIA) of the comprehensive climate and energy legislation introduced by Senators Kerry and Lieberman (the American Power Act or APA), confirmed that under the bill, the American economy would continue to grow robustly, and the cost to households would be minimal.  Here are the facts:

  • Under climate policy, U.S. GDP would grow by a third over the period 2008-2020, and would nearly double by 2035. A “business as usual” scenario with no climate policy would add only a tiny fraction to output — just two-tenths of a percent (0.2%) in total over the next two decades.  To put this in perspective, GDP is projected to reach $27.8 trillion by New Year’s Day 2035 under business as usual; under climate policy, it will get there by the middle of February.
  • Under climate policy, U.S. employment is projected to grow 8% by 2020 and 22% by 2035, relative to 2008.
  • The estimated cost to the average American household is $167 in the year 2020 (in 2009 dollars) – less than six dollars a month per person.  (The EIA also reports an annualized figure of $206 over the entire period.)
  • Estimated electricity prices would be only 4% higher in 2020 under the policy than they would be without it.
  • Allowance prices in 2020 and 2030 are even lower than EIA projected under the House-passed climate legislation (HR2454).

The EIA’s analysis also points out that the vast majority of reductions would come from the electric power sector.  That’s relevant to current debates, as the Senate is currently considering a scaled-down version of the cap included in APA that would only cover the power sector.  Under such a policy, allowance prices would be lower — making household costs and other economic impacts even smaller.

All of EIA’s projections are consistent with an array of estimates from the most credible analyses available, in particular, the Environmental Protection Agency (EPA) and the Congressional Budget Office (CBO).  EPA’s estimates for the cost to the average American household are comparable to EIA’s (amounting to just a few dollars a month for the average individual American).  And just last week, CBO reported that APA would reduce future deficits by approximately $19 billion over the next decade.  It also estimated even lower allowance prices under APA than under HR2454, which CBO also projected would cost the average American just a few dollars a month by the year 2020.

That is a small investment in a clean energy economy that will create jobs, reduce pollution and increase America’s energy security.  And it’s always important to remember that all of these analyses only look at one side of the ledger – they do not take into account the huge costs of inaction on climate change.

Studies like those from EIA, EPA, and CBO confirm that we can readily afford a comprehensive climate and energy bill that would boost our economy, reduce our dependence on imported oil and help avert dangerous climate change.  There is no more time to waste – the Senate needs to pass a cap on carbon now.

Posted in Climate Change Legislation, Economics, News, Policy / Comments are closed

New evidence on the job impacts of climate policy: Why now is the right time to cap carbon

This was originally posted on the Huffington Post.

Opponents of climate legislation often claim that now is the wrong time to put a price on carbon, with the economy just emerging from a recession.  But a must-read study released today by the well-respected, nonpartisan Peterson Institute for International Economics shows that the reverse is actually true: passing climate legislation would provide the economy with a much-needed shot in the arm.

Trevor Houser and his co-authors use a widely respected economic model to analyze the impact on the U.S. economy of the American Power Act, the energy and climate legislation introduced last week by Senators Kerry and Lieberman. The study estimates that the legislation would spur investment in the electric power sector — in turn adding over 200,000 jobs to the economy during the next decade relative to a “business as usual” scenario without policy. The reason is that when labor and capital are underemployed, as they are now, a policy that spurs new investment in the private sector will create jobs rather than simply taking them from other sectors. This lends quantitative support to the argument I’ve been making for over a year, which is that the fragile state of the U.S. economy strengthens the case for a cap on carbon rather than weakening it.

To understand why this is important, it helps to step back and think about what we know about the link between climate legislation and employment. The usual debates about the job impacts of climate legislation tend to follow parallel tracks that never intersect, with opponents focusing on jobs that might be lost, and proponents focusing on jobs that would be gained — but little analysis of what the net impact would be. So what would that net impact be?

There are a couple of ways to think about this issue, depending on what time frame you are looking at. In the long run, the American economy is likely to gain from taking the lead in the clean energy revolution, just as our economy has always benefited from technological leadership. The world is heading onto a low-carbon path, and huge markets await for the firms that are able to develop and produce new technologies that generate renewable energy and promote energy efficiency. That provides a strong economic argument for a market-based cap on carbon, while will give American firms a powerful incentive to figure out new and better ways of cutting emissions.

What about the short run? In general, the U.S. economy — like any market economy — tends to hover at some natural level of “full employment” that is determined by fundamentals like productivity, technological change, and the size of the labor force. This suggests that the main effect of a price on carbon will not be to change the overall level of employment, but to shift labor (and other resources like capital) away from carbon-intensive sectors and into cleaner sectors. Some sectors win, some sectors lose, but the overall level of employment stays the same.

The key problem with this logic is that we are clearly not in a period of “full employment.” Even though the economy seems to be slowly emerging from the recession, unemployment is still very high. And there is capital sitting on the sidelines as well, held back not only by the recent crisis but also by uncertainty over the strength of the recovery and over the regulatory environment.

When the economy is not in full employment, the picture changes fundamentally. Instead of reallocating resources from one sector to another, a price on carbon could have a positive impact by spurring demand for investment — leading to net job creation, even in the short run.

This is precisely what the Peterson Institute’s study forecasts would happen under the American Power Act. A cap on carbon would create powerful demand for new investment in clean energy, especially in the electricity sector. The Peterson Institute study projects that annual investment in the sector in the next ten years would rise by 50% as a result of the legislation — an increase of nearly $11 billion a year. Precisely because our economy is operating below full employment, the result would be a net job increase of 203,000 jobs over the next decade, relative to the no-policy “business as usual” scenario — even taking into account the effect of higher prices on fossil fuels.  This is a small number in percentage terms, but it underscores an important point about the direction of the job impact in the short run — and contradicts claims that climate policy will slow our economic recovery.

This isn’t just theoretical. In a column in the New York Times last month, David Brooks reported that if climate legislation passed, the major electric power company FPL Group would likely invest roughly $3 billion more per year in wind and solar power. Similarly, NRG Energy would triple its new clean generation capacity. That’s the kind of investment that can produce real jobs in the short run.

I’ll have more to say about other conclusions of the Peterson Institute study in coming blog posts. In the meantime, Dave Roberts at Grist has a great take on it along with a summary of the key findings.

UPDATE

I revised this post on 5/27/2010 to correct some potentially confusing language on my part (and to make a few other edits for style and exposition in the process). The Peterson study estimates that the American Power Act would increase average annual employment by 203,000 jobs over the next decade (2011-2020). In other words, according to their analysis, there will be about 200,000 more jobs in each year. My original post said “203,000 jobs per year,” which could be read to suggest that there would be an additional 203,000 jobs added to the economy each year, for a total of 2 million jobs over ten years; that is not what the study finds, and I have revised the post to clarify that point. Meanwhile, for consistency, I also revised the post to cite estimates of investment for the same period (2011-2020) rather than over the whole duration of the study (2011-2030).

Posted in Climate Change Legislation, Economics, Science / Comments are closed

Why the American Power Act is Not a Corporate Give-Away

In his insightful post, Rob Stavins makes two key points regarding the allocation of emission allowances under climate legislation like that introduced last week by Senators Kerry and Lieberman.

First, Stavins addresses head-on the concerns that some progressives have toward the allocation provisions in the bill, asking in the title of his post: “Is the Kerry-Lieberman Allowance Allocation a Corporate Give-Away?”  To answer this question, Stavins carries out a careful breakdown of the allowance allocation in the Kerry-Lieberman bill.  He shows that the vast majority of emission allowances (more than 80% over the duration of the bill) — goes to energy consumers and public purposes (including deficit reduction).  That hardly sounds like a windfall to big corporations!  Indeed, if you add it up, the largest fraction of allowance value (43% in total, according to my calculations) goes to households, through an energy refund to low-income consumers, a tax credit to working families, a universal trust fund for all Americans, and allowances that are allocated to local electricity and gas utilities for the benefit of their customers.

As Stavins’s calculations illustrate, what matters most in terms of allocation is not whether the allowances are auctioned or given away for free, but who receives the value.  (For example, of the allowance value that is directed to households, about four-fifths comes as auction revenue, while the remainder is from the allowances allocated for free to local utilities.)

Even so, some progressives worry that free allocation is at odds with cutting emissions.  After all, if you give emitters something for free, doesn’t that eliminate the “price on carbon” that creates an economic incentive to cut carbon emissions?  The answer, actually, is “no.”

Here’s where Stavins’s second point comes in.  As he explains, it is a basic result of economics that even when allowances are distributed for free, they will still have a value (since they can be sold on a market). In economic terms, each time a company uses an allowance, there is an “opportunity cost” involved — the foregone profit they could have gotten from selling the allowance instead.  As a result, companies will still have a strong economic incentive to find cost-effective ways to reduce their carbon emissions — so that the economic performance of the bill is basically unaffected.  (It’s also worth pointing out that the environmental performance of the bill is also unaffected, since that is determined by the cap — not by how allowances are allocated.)

To put the same point a bit differently, the value of allowances doesn’t depend on how they are allocated.  Rather, allowances have value because they are in scarce supply — thanks to the cap on emissions.  The tighter is the cap, the greater is the scarcity, and the higher is the value of allowances, all else equal.

Of course, there are a few nuances worth noting.  First, from a strictly economic point of view, the best use of allowance value would be to use it to lower distortionary taxes on labor and capital, giving the overall economy an added boost.  However, getting such a “double dividend” requires not just auctioning the allowances, but using the revenue in a specific way to cut other taxes — something that has yet to generate significant political momentum.  In other words, acknowledging the possibility of a double dividend doesn’t undermine the main point that what matters is how the value of allowances is allocated, not simply whether allowances are auctioned or freely allocated.

Second, some ways of allocating allowances can affect incentives.  This can cut both ways.  In theory, using allowance value to reduce electricity rates can undermine incentives to conserve energy; this suggests that it would be preferable to compensate households for higher energy costs by sending them a lump-sum rebate rather than cutting their marginal price.  In other contexts, allowance allocation is deliberately designed to affect incentives.  For example, energy-intensive, trade-exposed manufacturers are given allocations that are tied to their output and to the average emissions intensity of their sector.  As research by Carolyn Fischer at Resources for the Future and others has shown, such “output-based rebates” manage to preserve the incentive to reduce emissions, while helping to keep manufacturing in this country and prevent “emissions leakage” to countries without a carbon price.

The bottom line is that the distinction between free allocation and auction makes little difference for the environmental or economic performance of the bill.  That’s a key point well worth keeping in mind in the coming debates over climate legislation.

Posted in Climate Change Legislation, Economics / Read 1 Response

Video: The Facts of Cap and Trade, From an Economist

EDF is known for unconventional tactics. We often experiment with new ideas to find the ways that work. However, this time I had a chance to do something truly off-the-wall.

I was asked to make a video with the coalition Clean Energy Works that explains cap and trade in a way that non-economists could understand, i.e., in English.  (And with clever animation.)

What were they thinking?

Maybe the idea was just crazy enough to work. Here are a couple of reactions so far:

Check it out, let us know what you think, and spread the word.

Posted in Economics / Read 4 Responses

Four Reasons to Use Cap and Trade to Fight Global Warming

Michael Oppenheimer and I have a post up on Huffington Post that explains why cap and trade is more effective than a tax at slowing and eventually halting global warming.

Here are just the highlights:

  1. Environmental certainty. Let’s keep our eyes on the prize: avoiding dangerous climate change. A legally binding cap is the only way to assure that this objective will actually be attained.
  2. International opportunity. The atmosphere is indifferent to where carbon dioxide, the main greenhouse gas, is emitted. The ultimate goal, once countries like China and Brazil have adequate systems for monitoring their emissions, is a global carbon market — benefiting both the developing countries and the industrialized countries.
  3. The market, not the government, sets the price. Cap and trade is a smart division of labor: Congress sets the cap, and the market sets the price on carbon needed to achieve it.
  4. Political viability. In our view, cap and trade is the best policy on the merits. But it is also the politically viable path. A recent survey shows that of all regulatory approaches, the public likes taxes least.

Each of these reasons are explained in more detail on Huffington Post. Take a look and add to the comments!

Posted in Economics, Policy / Read 1 Response

Climate Bill Passes Five Tests on Allocating Allowances

I was invited to testify yesterday in front of the House Energy and Commerce Committee on how allowances are allocated under HR2454, the American Energy and Security Act of 2009 (ACES). You can see my full testimony here.

I started with the broad economic arguments for passing climate legislation now: by doing so, we can harness American innovation, ensure leadership in making the next generation of clean-energy technologies, and unleash investment that will help pull our economy out of the recession.

Then I turned to the allocation provisions of the bill.  The allocation plan will preserve the environmental and economic effectiveness of the legislation, helping move us forward in solving the climate crisis in a way that is affordable, equitable and efficient.

Specifically, I outlined five major principles that any set of allocations should reflect, and illustrated how HR2454 fulfills each.

  • First, the bill protects consumers, particularly low-income consumers.  It does this through three channels: allowance value allocated to local distribution companies, who are required to pass that value on to customers in the form of lower utility bill; direct funding for rebates and energy credits directed specifically at low- and moderate-income households; and broader tax refunds, especially in the later years of the program. In total, nearly half (44 percent) of the total allowance value goes directly to households – amounting to an estimated $700 billion in present value.
  • Second, HR2454 includes provisions that preserve and strengthen the international competitiveness of U.S. businesses and workers during the transition to a clean energy economy, by directing about 12 percent of total allowance value (over the life of the bill) to energy-intensive and trade-exposed industries.
  • Third, the allocation plan respects differences across states and regions by allocating half of the allowances for electricity consumers on the basis of CO2 emissions and half on the basis of electricity generation.
  • Fourth, the integrity and credibility of the program is preserved since the bill ensures that consumers receive the allowance value intended for their benefit due to provisions specifically requiring utility companies to pass on the allowance value they receive.
  • Finally, HR2454 directs some value (26 percent over the life of the bill) to public purposes that are the objectives of the legislation, including clean energy innovation, carbon capture and storage, investments in renewables and energy efficiency, and climate change adaptation.

Overall, HR2454 passes these tests with flying colors.

Posted in Climate Change Legislation, Economics / Read 1 Response