Cap and Trade Isn’t That Costly

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Once you get past those who insist climate change is the greatest hoax ever perpetuated on the American people and engage with global warming critics who actually have use of their rational faculties, the main point of debate tends to be the cost of trying to reduce carbon emissions. The conservative writer Jim Manzi over at the New Republic gets at this very well in a recent post, arguing that the cost to the global economy of cutting carbon emissions would almost certainly be higher than the cost warming would exact on the world:

Resources for the Future, a moderately left-of-center, well-respected environmental organization, collated a set of widely-cited projections for the costs of such emission mitigation schemes for the world as a whole. Its list of “least cost” estimates—i.e., the estimates made assuming implementation of the most efficient possible policy that assumes, for example, global coordination around emissions reductions without any more realistic geopolitical complexity—for the cost of policies designed to limit the rise in atmospheric carbon dioxide to 450 parts per million (ppm) average a little over 6 percent of global GDP by 2100 (with a very wide range of estimates). That is, we would start paying a cost today that would rise to about 6 percent of world output by 2100 in order to only partially avoid a problem that would have expected costs of about 3 percent of world output sometime later than 2100.

Now, Manzi is assuming that climate change isn’t likely to have truly catastrophic effects on the world—in a response, TNR‘s Bradford Plumer points out that more recent climate studies have indeed raised the possibility that unchecked warming could render much of the American east or a country like India all but uninhabitable. If carbon regulation is a global insurance policy against climate change, we’d surely be willing to pay more if  warming could result in the end of civilization, versus just trimming a few percentage points off the world’s GDP in 2010. But Plumer also notes that critics like Manzi tend to overstate the costs of reducing carbon emissions:

The other big dispute here is over the costs of averting drastic climate change. Is Manzi right that cutting carbon emissions would “cripple our ability to… lead productive and interesting lives”? This seems awfully outlandish. I’ve noted before that pretty much every environmental regulation that’s ever been enacted has been greeted with predictions of economic doom—yet those dire warnings have never panned out. Pollution restrictions invariably turn out to be much cheaper than expected, in part because they trigger the development of new technologies. (By contrast, nature isn’t nearly so forgiving when we try to muck with it.)

Now there’s evidence from the Congressional Budget Office (CBO) that the main greenhouse gas reduction tool—carbon cap and trade—isn’t that costly for the government. In a preliminary look at the American Power Act—the climate legislation that has been put forward by Senators John Kerry and Joseph Lieberman—the CBO found that the bill would actually reduce the budget deficit by about $19 billion over the 2011 to 2020 period. The CBO estimates that auctions of carbon allowances under the bill—which requires companies to essentially pay for the right to emit carbon dixoide—would raise government revenue by about $751 billion, more than bill would hike government spending through incentives for nuclear power, tax credits for energy efficiency and research and technology for new energy.

Kerry and Lieberman—who haven’t exactly had a lot of good news on their bill recently—hailed the CBO’s announcement:

“Today, the Congressional Budget Office has sent Congress a powerful message:  our comprehensive energy and climate bill will slash America’s deficit by over $19 billion,” said Sens. Kerry and Lieberman.  “There is no more room for excuses – this must be our year to pass comprehensive climate and energy legislation and begin to send a price signal on carbon. Many of our colleagues have said they flatly oppose anything that adds a penny to the deficit, so we hope they look anew at this initiative which reduces it.”

Of course, that’s not terribly likely—the Kerry-Lieberman bill, and practically any attempt to enact an economy-wide carbon cap, has now become politically radioactive in the Senate. (Or at least, radioactive enough that it can’t get 60 votes.) Fred Krupp—the president of the Environmental Defense Fund and a fierce warrior for a carbon cap—told reporters last week that Kerry-Lieberman as it stands now is unlikely to ever reach a vote, and that green groups need to be open to a less ambitious bill, such as one that only caps emissions from power utilities.

How much will that cost? The CBO hasn’t done an analysis—because there’s been no bill written—but on his blog Michael Levi of the Council on Foreign Relations has written that a utility-only cap could have fewer sources of revenue because the carbon market itself would be much smaller than with an economy-wide cap. It’d be ironic if, in trying to craft a climate bill that is less ambitious and costs less, the Senate actually produces one that’s a greater drain on the budget. But maybe we shouldn’t be surprised. It is the Senate, after all.