Jun 26 2009, 9:30AM
Daily Chart: What Waxman-Markey Will Do To The Economy
[Update: Jim Manzi responds here and I respond to him here.]
As you might know, the House is voting later today
on the Waxman-Markey climate change bill, The American Clean Energy and Security Act. Feelings are mixed. For one, there were a lot of mischievous compromises. For another, the bill doesn't have any immediate, selfish
economic benefits for the country, and there's no point pretending otherwise. I think
Jim Manzi and others are right to say
-- if you believe the IPCC and CBO estimates -- that the U.S. won't experience a
climate-induced decline in GDP until 2080 or 2100. (And that decline in
GDP is not something Waxman-Markey will stop, at least without global
coordination. The big question is whether this bill will increase or decrease
the chance of such coordination.)
Nonetheless, I think
there's a fair amount of scaremongering going on about the costs of cap
and trade. I get off the Jim Manzi train when he says that
Waxman-Markey will be "a terrible deal for American taxpayers" because
"it is projected to impose annual costs of about $1,100 per household
(a little less than 1% of total consumption) by 2050." (That's from the
EPA estimate.)
That $1,100 looks like a lot, but of course the country is projected be
almost three times richer in 2050 than it is now. Average household
consumption in 2050 will be $164,348.
Here's an easy way of
visualizing the costs of Waxman-Markey. The chart below shows projected U.S.
GDP with and without Waxman-Markey (drawn from the data annex of the EPA's big estimate). Projected U.S. GDP without the bill is in orange; it's sitting behind projected GDP with the bill, which is in grey. The visible orange stripe is the difference between the two scenarios: 
In 2050, GDP without Waxman-Markey is projected to be $35,377,000,000,000. GDP with Waxman-Markey is projected to be $34,918,000,000,000.
This is a stupid argument, i.e., that it won't cost so much in 2050 according to estimates from the EPA (which I would assume will want to give as conservative estimate as it possibly can since it will benefit immensely if cap & trade passes). I don't know how much the car bailouts cost us - probably less than $1,100 per family. But I'm still pissed about it.
Why not try this: put a new graph starting at $0 (how much cap & trade costs me now) and have it go up to $1,100 per year. And use a scare color - maybe red.
That is assuming that pollution has no costs. Lets say your child develops asthma from increased pollution (unlike CO2, many of the other greenhouse gasses are harmful), thats well over 1100 a year. Lets say you own property anywhere near the ocean or a hurricane zone, increased weather volatility and rising sea levels will cost you far more then 1100 a year. It is also quite possible delaying use of green tech until oil is far more scarce will cost us more then 1100 too (as we scramble at the last minute to switch at great expense). 50 years out there are hundreds of way global warming could cost us dearly.
Alternately lets say you buy solar panels or some other green tech and sell power back into the system, you actually make MORE money from higher energy prices then so you have a net gain. We also will have increased jobs from emission reduction projects and quite possibly a strong renewables industry we can use to export as other nations follow suit (as Germany now does).
This is similar to other arguments about things like insurance, underestimating the costs of doing nothing and overemphasizing the costs of action to ensure no action.
I think I used a pretty scary color already. Isn't orange a scary color? Kind of?
The point of the graph is that we will be a far wealthier and more prosperous nation in 2050 than we are now, even with cap and trade. (The average present value of those future costs is only $170.) What part of that do you dispute?
Conor
Interesting post Conor. There are a number of challenges to Manzi's argument which I go into here, related specifically to the inaccurate $1100, and the lack of consideration of specific benefits in ACES. http://switchboard.nrdc.org/blogs/csteger/distorting_waxmanmarkeys_costs.html
The problem with his theory is that he is using that old saw about dividing the total cost by the number of taxpayers. This is a tax on heavy energy users such as factories. This is going to make our products even less competetive, and increase unemployement, with consequent home forecloseurs. We do not need to add to the downward spiral. Also this is just one more thing where we replace producing an actual product with a virtual product. Try to sell these in Sweden. People have become all too comfortable eliminating "other" peoples jobs.
Dear Hickory--seems to me you're the one advocating eliminating "other" peoples jobs. If you can produce labor intensive heavy industry elsewhere in the world for a fraction of the cost, that ends up benefiting not only those foreign workers, but also American consumers on the whole--freeing up resources for any of a number of things--e.g. jobs in other industries. But perhaps your conception of 'other' people and their jobs doesn't include non-americans? Maybe US policies should favor exclusively american interests (although I would argue that 'the greatest good' should transcend national boundaries), but even within a national framework--please don't confuse the interests of a narrow subset of american society with those of the whole.
The country's been discussing energy independence since the 1970s and has been completely cowed by big oil, automakers, and their eager puppets in congress. Perhaps these interests will learn that their money is better spent innovating and competing with the prius than buying up politicians.
True, this is a carbon tax, but it's smarter than a tax, it rewards new efficiencies rather than punishing volume. Also bear in mind that all the cost estimates being bandied about in the media do not take into consideration the economic benefits of transitioning away from foreign oil (massive), and of heading off the increasingly frightening and better understood effects of climate change.
http://money.cnn.com/2009/05/21/news/economy/midwest_renewables/
- a prediction that far off, FUNNY
- ANNUAL cost
- cost getting compounded
- IPCC & EPA? funny. Even CBO has been shown to be corrupted on this issue
To borrow from Bob Murphy, be funny if Dick Cheney had used similar things to justify War on Terror.
Conor,
I completely support the spirit of this post, and I enjoy the effort you've put into making charts that illustrate the core tradeoffs at work. (I need to be less lazy on my own blog!)
I want to caution, though, that that aggregate GDP is not a very good way to examine the economic costs of policy. Very expensive, wasteful projects can have a positive effect on GDP: I think that if we launched a war that cost $1 trillion a year and accomplished nothing of value, we might increase aggregate GDP, but any economist would count this as an economic loss. In fact, it's not clear to me that cap-and-trade will lower GDP at all; under certain modeling assumptions (like the EPA's) it will, but under slightly different consumer preferences and growth dynamics it could just as easily add to GDP. I'm a little mystified, in fact, that modelers of climate policy ever treat the overall level of GDP as an important statistic. It's natural to use something like "costs as a percentage of GDP," but that's very different from "change in the level of GDP."
I'm sure you already know this, and again I completely agree with both the spirit of this post and your general message about the costs of climate change. I just get a little leery whenever I see the aggregate level of GDP used to measure the economic cost of a policy.
(I wrote a slightly flippant post on this topic back in the day.)
There is an interesting dissenting report from within the EPA that Obama suppressed: http://cei.org/cei_files/fm/active/0/DOC062509-004.pdf
The executive summary is short and well worth reading but here are some interesting points from the EPA dissenters' report:
The EPA has paid too little attention to the science of global warming, instead relying on the statements of the IPCC and the CCSP. The IPCC report is 3 years old and certain key conclusions of the IPCC report have been contradicted by more recent research (5 such new scientific conclusions are listed (including the fact that global temperatures have been declining for the past 11 years)). The dissenters also say that, by far, the best single explanation for global temperature fluctuations are the PDO (Pacific Decadal Oscillation) and ENSO (aka El Nino).
The EPA dissenters state that the EPA should do its own global warming research and that the science should be much clearer before we take action to fight global warming.
End of paraphrase of EPA dissenters' comments.
Given that man plays at most a small role in modifying the climate of mother earth, it is hilarious to think that the CBO can predict the economic consequences of global warming 90 years from now (nobody knows). The CBO has no direct knowledge about global warming.