Energy and Related Economic Effects of Global Climate Change Legislation

Wonk Room — Tue, 20 May 2008 10:00:00 -0500

Representatives from CRS, EIA, EPA, and CBO discuss their economic analyses of Lieberman-Warner (S. 2191) and other emissions-controlling climate legislative proposals.

Witnesses

Brent Yacobucci, Congressional Research Service
Dr. Larry Parker, Congressional Research Service
Dr. Howard Gruenspecht, Deputy Administrator, Energy Information Administration
Dr. Brian McLean, U.S. Environmental Protection Agency
Dr. Peter Orszag, Congressional Budget Office

10:03 Domenici: The more of these hearings we can do the better off this country will be. We have five cap-and-trade bills in the Senate. Every single day, 11 out of 11 studies have concluded that these bills will result in higher energy costs, lower economic growth. The analyses of L-W don’t agree on much. Addressing global climate change is one of the greatest challenges of our time. I remain concerned about the dire consequences L-W could have for our nation. The best estimates of our capable minds often prove inaccurate. The EIA projection for oil prices in 2010 was $25. Even the projected environmental impacts of climate change have varied. IPCC’s assessment of sea level rise was reduced from three feet to 27 inches. Very few will have been able to provide input on the manager’s amendment. We’re all working on a bill that will be irrelevant. It is critical to look at what other countries have tried to do.

Assume the president signs L-W. What will we have achieved for the environment? Close to nothing. Without international participation, L-W will have reduced greenhouse gases by 1% by 2050.

China has surpassed us in global warming emissions. Addressing climate change is a great challenge, but not the only challenge we face.

Rather than choosing among cap-and-trade programs, we could look at promoting nuclear power and other tax incentives.

10:16 Bingaman Orzag recently testified before the Finance Committee.

10:17 Yacobucci explains a cap-and-trade system.

10:22 Parker CRS has conducted a review and synthesis of models projecting costs of S. 2191. Long-term cost projections are at best speculative.

10:30 Gruenspecht The projected impacts of L-W are highly sensitive to assumptions about availability of low and no-carbon energy sources and access to international offsets. Costs are roughly three times larger under least favorable assumptions than under most favorable assumptions. 80-90% of emissions reductions are in the electricity production sector. Over 90% of coal, the main emissions source impacted by a cap, goes into electricity production.

10:37 McLean discusses EPA report.

10:43 Orzag Addressing climate change will involve short-term economic costs. Timing is important. An inflexible cap is bad. Giving the permits away is equivalent to auctioning the permits and giving the money to the polluters. Two key factors of a cap-and-trade system include timing flexibility and auction revenue.

10:49 Bingaman A NAM/ACCF study envisions 75% higher allowance costs than the EIA study but economic impact three times higher. Can you explain why?

Gruenspecht The allowance price difference reflect some of the assumptions, like the absence of banking. We were surprised by the size of macroeconomic losses done for NAM. We asked to look at some of their modeling results and met with their contractor. They used EIA’s high-priced oil policy scenario but compared it to the low-price scenario. We think there are some abnormal results in their report.

Bingaman Basically there’s double-counting?

Gruenspecht They’re mixing the impact of two different things.

Bingaman A price ceiling and floor is the best mechanism?

Orzag I don’t want to say best, but yes.

10:55 Barrasso Effect on gas prices?

Gruenspecht If electricity sector can’t reduce emissions, gas price effect can range from $0.40 to $1.00.

Barrasso I want Americans to be aware of the effects on their pocketbook. You talk about uncertainties. The uncertainties are one of magnitude, not direction: how many jobs will be lost. Will a safety valve help?

Parker A safety valve – putting an upper limit on price – is a very effective of limiting economic impact.

Barrasso There’s going to be lower wages and lower returns for retirement plans no matter what you do.

Parker Prices will go up but whether or not bills will go up depends on individual action. We found bills may go down.

Barrasso Nuclear energy.

Gruenspecht Public acceptance is important.

11:07 Sanders What happens if you don’t act?

Orzag I think climate change is among the nation’s and world’s highest long-term risk. There is some danger of catastrophic change. The question is one of timing. It’s like paying an insurance premium.

Sanders We’re paying $10 billion more for Katrina. What will flooding, drought, war cost? That’s really what we’re debating. It’s disaster if we don’t go forward. I believe you’re underestimating efficiency and renewable energy. Of course there going to be economic dislocation.

McLean On the impacts. I think this is an area that concerns us greatly. It’s a very hard area to quantify and monetize. We’re working on that. On energy efficiency and renewables, there’s a lot we can say about that. We show a huge increase in renewable energy.

Corker The bill that came out is not just a cap-and-trade bill. It’s a huge spending bill. It spends every penny in a non-discretionary way. I think the whole issue of allowances because we’re passing out what is like public shares in a public company. I know the romance of this is interesting. There’s a lot underneath this that is going to affect us. Transfering trillions of dollars of wealth. $7.2 trillion, maybe $23 trillion. I think that’s important. I don’t understand why we would be allocating credits out to middlemen.

In essence this bill transfers out hundreds of billions of dollars to states for no reason.

Orzag It is a key insight that much of this money represents a windfall.

Corker It makes absolutely no sense to give allowances to people not involved in emissions. This bill provides for us to provide international credits. What it does do is transfer out, when we have a trade deficit, hundreds of billions of dollars to projects that are often wracked with fraud.

McLean What would states do with money? I’m not defending the amount of money or the policy decision. A lot of efficiency programs are run at the state level.

Corker I hope this is a dry run.

11:24 Salazar What we’re doing is defining a new energy future for America. There’s a lot of learning yet to be had. On the allocation of the auction revenues. Is this the right allocation?

Orzag It depends what your objective is. Low-income households, minimize macroeconomic costs, spur innovation. A more effective approach to cushion macroeconomic costs would be to auction the permits and use that to reduce payroll taxes.

Salazar A lot of people have talked about a Manhattan-style project. Would it be better to put the money into that pot than to lower costs on low-income consumers?

Orzag It’s big, but there is a given size. You can’t do all things for all people at all times. The price signal will do some things. You can auction revenue and explicitly fund R&D. Or allocate permits to entities that do the work, but that would be more opaque.

Gruenspecht There are issues of economic efficiency and fairness.

Salazar We have these great thoughts and great programs. We talk about hybrids and clean-coal technology. This is an opportunity to marry our work to deal with climate change to make our vision a reality.

11:32 Domenici You’re talking about this as if it is another huge Federal Reserve System. You have made it eminently clear. I think people are going to be very quizzical about what we’re doing. I believe is what we really need to do is develop new technology as rapidly as possible to clean up what we need to clean up, and then clean things up.

Murkowski Is it fair?

Parker None of the models will give you the answer reliably what the cost will be. What the models can do is whether we’ve designed the bill to hold the price down. How can they be modified to bring these reductions at the most economic level.

Murkowski Most useful, but for whose end? If I’m opposed to cap-and-trade, I’ll look at NAM’s model. We can use these models as we use statistics to support our particular situation.

Gruenspecht The different studies start from different baselines. They analyze different provisions. CRA gets a large impact from the low-carbon fuel standard. I already had a long discussion with NAM may have wrapped up two different scenarios. It’s technology and technology acceptance.

12:00 Craig I don’t know if I’m willing to risk Idahoans on the environmental or economic models of climate change. We spent years shaping energy legislation. You’re all over the field, as is the country. I’m not quite sure I can remember, have we as a Congress ever tried to micromanage the market. And I think the answer is no, never before. We’re averaging about 1.9 hurricanes in the United States. An average of $5 billion. The impact of this bill is between three to nine hundred hurricanes. We’ve spread the hurricane hit nationwide. It isn’t just Florida and the Gulf Coast and the East Coast. Now the whole country gets hit, from an economic point of view. Old speak, new speak or green speak, I don’t know where we are. But I suspect no speak is the best way for us to go.

12:08 Bingaman Second-order impacts like employment?

Parker Once you move from first-order to second-order impacts you lose even more certainty. You’re making a whole host of assumptions about a quality of life of a generation that doesn’t even now work. My concerns would be increased when talking about employment numbers.

Orzag The main effect will be on the type of jobs, not the number of jobs.

Bingaman There’s no effort to adjust for dynamic effects.

Orzag I tend not to focus on the job numbers that come out of these assessments.

Gruenspecht I too tend to be very skeptical of job numbers.

Corker Right now 52% of auction proceeds go into technology development. A five-person board, not the Congress, decides how this money is spent. Would this distinguished, mind-numbing panel agree that upstream is a direct tax, pretty much?

Orzag In economics, direct and indirect taxes have a specific meaning. But consumers will bear pretty much all of the cost no matter what.

Corker Upstream is easier to monitor. This is in essence a tax. It is in fact a carbon tax. What’s happened is interest groups have gathered around the table and have made what could have been very simple with a carbon tax very complicated. I’d like you to address the efficacy of a carbon tax that increased over time.

Orzag Economic analysis generally suggest that a carbon tax is more efficient. You can make the cap-and-trade similarly efficient by auctioning all the permits and offering significant flexibility in timing.

Corker And we’re allocating about 70% up front.

Orzag At the very start it’s even greater.

Yacobucci You’d still have to decide where that money goes if it’s a tax.

Corker We’re going to be offering an amendment to return all the revenues to consumers. We’re going to be debating on the floor a tax. Two candidates for president advocated a gas-tax holiday. I think we need to be very transparent about this. Citizens need to know we’re driving up the price of petroleum.

Murkowski Is there something we can do to get the technology in place first?

Orzag Pricing carbon will create a strong incentive for technologies to be developed and diffused throughout the economy.

Murkowski And the impact might be higher in certain areas.

McLean A price signal and investment in R&D both have impact. I think we need to do both.

Hill Heat: Energy and Related Economic Effects of Global Climate Change Legislation

Energy and Related Economic Effects of Global Climate Change Legislation