Monthly Archives: June 2009

In Criticizing CBO’s Analysis of Climate Legislation, Heritage Foundation Reveals Its Own Ignorance of Economics

The Congressional Budget Office — the nonpartisan Congressional agency charged with reviewing legislation and budgets — recently completed an analysis of the American Clean Energy and Security Act (ACES). CBO estimated the cost of ACES to American households in the year 2020, and found that the number would be just $175 per year — or just two-tenths of a percent (0.2%) of after-tax income.

Not surprisingly, the well-funded supporters of the status quo are trying to discredit the CBO’s work. A case in point is the recent “Web Memo” and accompanying blog post written by the Heritage Foundation, titled “CBO Grossly Underestimates Costs of Cap and Trade.”

Needless to say, Heritage’s arguments fail to hold up under examination. Their analysis once again shows just how much biased economics, empty rhetoric, and gross exaggeration a pile of right-wing money can buy. But it tells us little about climate legislation.

— Heritage claims that the allowance cost numbers don’t add up. FALSE.

It’s Heritage that gets the math wrong. Too lazy to model the actual legislation, Heritage simply multiplied the number of emission allowances available in the 2020 by the CBO’s estimated allowance price, to get $141 billion. That’s larger than CBO’s estimate of total allowance cost, which is $94.1. But the difference is not hard to understand — in fact, CBO explains it quite clearly.

The beauty of a cap-and-trade program is that it gives firms flexibility: the flexibility to reduce emissions by more than necessary, in order to build up a bank of allowances for later use; and the flexibility to buy high-quality offset credits for verified emissions reductions from sources outside the cap. That’s why CBO also includes in its estimate of gross cost the estimated costs of purchasing those offsets — something Heritage completely ignores. The bottom line is that the flexibility of the market lowers the gross cost of compliance.

— Heritage claims that CBO omits “economic damages from restricting energy use.” FALSE.

Heritage seems to be confused by the fact that CBO does not include an explicit GDP forecast. But that doesn’t mean the CBO’s analysis is not comprehensive. In its analysis of ACES, CBO estimates the full range of gross compliance costs to the economy, including the real economic costs of the program — that is, the resource costs associated with cutting pollution and moving to a clean-energy economy. Those costs are fully taken into account in the $175 figure cited above.

CBO’s analysis focuses on household-level costs. That’s because CBO, by custom, always holds economic output constant when it analyzes legislation. Instead of using a “general equilibrium model,” CBO relies on a survey of other models to estimate an allowance price, and then uses detailed data on production and consumption patterns to model how that allowance price would spread throughout the economy as currently structure.

For macroeconomic GDP impacts, we can look to the analysis of the legislation released by EPA. In 2020, EPA’s modeling of GDP impacts in its core policy scenario ranges from a reduction of 0.6% to an increase of 0.1%.

— Heritage claims that CBO’s analysis is an “accounting analysis, not an economic one.” FALSE.

The argument here is basically the same one as in the point above. While it is true that CBO does not employ a dynamic general equilibrium model, it is completely false to suggest that CBO’s analysis is not an economic one. Rather than using its own model, CBO surveys a wide range of dynamic general equilibrium models and comes up with a parameter that estimates the allowance price needed to achieve a given pollution reduction. As explained above, that allowance price is then fed through detailed data on production and consumption to estimate household impacts.

The Heritage analysts seem have made the elementary mistake of confusing the CBO’s earlier “scoring” estimate of the legislation — which is an accounting exercise — with the estimate of the costs of climate legislation — which is a full-fledged economic analysis.

The key point here is that CBO’s study does estimate the real economic costs of reducing global warming pollution. And it still finds those costs to be tiny — less than 50 cents a day per household.

— Finally, in its ill-founded attack Heritage continuously refers to its own modeling of the economic impacts of ACES. Their analysis is based on unrealistic assumptions, some of which are completely contrary to the actual provisions in the bill, resulting in an ungrounded analysis that does not accurately model what the effects are likely to be.

Let’s take a look at the facts. The CBO concluded that the net annual economy-wide cost of the cap-and-trade program in 2020 would amount to about $175 per household (which includes all the costs of the policy). What’s more, CBO predicts that households in the lowest income quintile will see an average net benefit of about $40 in 2020.

And the CBO isn’t the only one that predicts low costs for ACES. The EPA, which sets the gold standard in terms of peer-reviewed, transparent analysis, concluded that over the entire life of the legislation, the costs of cutting carbon pollution under ACES would only be about $80 to $111 per year for the average American household. That’s about a dime a day per person.

And remember: all of these cost estimates are only looking at one side of the ledger—they don’t incorporate the benefits of addressing the climate crisis.

In a June 24 letter, the Congress on Racial Equality (CORE) claims that the American Clean Energy and Security Act (ACES) would harm poor and working-class families.

CORE, which has reportedly received funding from ExxonMobil, cites no basis for its extreme assertions, and completely ignores the objective analyses of ACES showing that the bill would benefit low-income consumers and populations:

1. Analysis of ACES by the Congressional Budget Office shows that  “households in the lowest income quintile would see an average net benefit of about $40 in 2020″ under ACES.
2. As CBO explicitly notes, that figure “does not include the economic benefits and other benefits of the reduction in GHG [greenhouse gas] emissions and the associated slowing of climate change.” According to the Congressional Black Caucus Foundation, “the African American community will disproportionately benefit from climate policies that slow climate change,” in part because “African Americans are already disproportionately burdened by the health effects of climate change, including deaths during heat waves and from worsened air pollution.”
3. The Center for Budget and Policy Priorities, one of the nation’s premier policy organizations working on public policies that affect low- and moderate-income families and individuals, just released a new report, “New EPA and CBO Estimates Refute Claims That House Climate Bill Would Impose Large Costs on Households and the Economy.”  The name says it all.

Claim:

“The new federal report on climate change gets a withering critique from Roger Pielke Jr., who says that it misrepresents his own research and that it wrongly concludes that climate change is already responsible for an increase in damages from natural disasters.”

— New York Times Blogger John Tierney skips over the detailed findings of the Global Change Research Program (GCRP) report, entitled Global Climate Change Impacts in the United States [pdf], and focuses on a blog post by Roger Pielke Jr.  Dr. Pielke, a Colorado professor who strongly opposes limits on carbon emissions, attacks the report for relying on “non-peer reviewed, unsupportable studies rather than the relevant peer-reviewed literature”

Truth:

Talk about missing the forest for the one lonely tree.

There is in fact very strong evidence that global warming is already contributing to extreme events such as heat waves, intense precipitation, and forest fires. Indeed, the GCRP report, which was prepared over many months in collaboration with 13 federal agencies and dozens of scientists, presents a wealth of scientific data demonstrating a close linkage between climate change and extreme events.

However, Roger Pielke, and by extension John Tierney paint a very misleading picture. Tierney completely ignores these alarming links, and instead focuses on Pielke’s nit-picking complaint about a few sentences in the 196-page scientific report regarding monetary damages due to natural disasters/hurricanes.

While the monetary figures associated with these extreme events have not been thoroughly quantified, scientists agree that the intensity and frequency of these extreme events is on the rise.

An example of the link between global warming and extreme events is when the climate warms the global water cycle is inevitably altered, including the ability of the atmosphere to hold more moisture. This leads to more intense rainfall events.

To better understand this, consider the analogy of the atmosphere as a sponge. As the atmosphere warms the sponge gets larger, can hold more water, and wringing it out creates a vast amount of rainfall, which is significantly more intense.

As the GCRP report indicates on page 32, over the past 100 years “precipitation events characterized as heavy downpours have increased by 20%, and climate models forecast that these heavy downpours that presently have a 1 in 20 year occurrence will occur every 4-15 years by the end of this century.”

The increased prevalence of forest fires is also propelled in part by increasing temperatures caused by climate change. While some regions of the US are experiencing downpours and flooding, other areas are afflicted with severe droughts.

Summer dry seasons have gotten longer, and vegetation is much drier, establishing ideal conditions for forest fires. According to the 2007 Intergovernmental Panel on Climate Change (IPCC) report, within the last 30 years the length of the wildfire season in the Western U.S. has increased by 78 days.

Tierney also fails to address the climate change impacts that might not be categorized as “natural disasters”.

• Research has established that climate change is contributing to sea level rise. According to the GCRP report, rising sea level is threatening 7 of the 10 largest ports in the Gulf Coast region where over 2/3 of all US oil imports are transported (pg 62).
• Warmer waters are reducing the efficiency of thermal power plants.  Even a 1% reduction in electricity generation by the country’s power plants will require two million Americans to find an alternate source of power, as reported on the GCRP. (pg 56)
• According to the GCRP report, spring snowpack is projected to decline by at least 40% in the Cascades by the 2040’s with unrestrained global warming, placing severe strain on water supply for the Northwest, which relies heavily on snowpack to meet water demands (pg 135)
• The GCRP report states that by the middle of the century the number of Red Ozone Alert days is likely to increase by 68 percent in 50 of the largest Eastern U.S. cities, solely due to global warming. (pg94)

Clearly, climate change is not just about damage from natural disasters narrowly defined, and we cannot afford to ignore these other impending outcomes.

Finally, despite what Tierny states in his post, the GCRP report is rooted in a wealth of peer-reviewed literature. The report itself went through several drafts, and was extensively reviewed and revised by numerous scientists and other experts before publication.

The foundation of this report is a set of 21 Synthesis and Assessment Products (SAPs), which were designed to address key policy-relevant issues in climate science (see page 161)

To date, the GCRP report serves as a paramount synthesis of scientific literature available.

No Change to Consumer Assistance in Revised American Clean Energy & Security Act, H.R. 2454

On June 24, Republican members of the House Ways & Means Committee circulated yet another false claim about the pending clean energy bill, H.R. 2454. In an inflammatory email today, they claim that a new version of H.R. 2454 supposedly “yanks middle class tax relief” from the bill.

That’s completely false. Here are the facts:

1.    The bill was – and still is – loaded with relief for consumers.

2.    For starters, H.R. 2454 protects everyone who uses electricity by providing free allowances – worth hundreds of billions of dollars – that must be used to protect ratepayers.

3.    To further benefit American consumers, the bill provides $250 billion (in present value) of tax refunds for every taxpayer in the country, starting in 2020.

4.    Finally, to address the special needs of low-income families, the bill goes even further and provides extra relief for these households.

5.    It’s only this third type of consumer relief, directed at low-income households, that has changed at all in the new version of the bill. Even there, the amount of assistance hasn’t changed one cent. The only difference is a technical change in how that assistance would be delivered — from a tax credit to a refund.

In short, clean energy opponents’ attack machine has misfired again.