Jun 20 2009, 9:07AM
How Much Will Waxman-Markey Cost You?
Joy of joys, I woke up this morning to find that the Congressional Budget Office answered this question. From the CBO's new per-household cost estimate (pdf):
[T]he Congressional Budget Office (CBO) estimates that the net annual economywide cost of the cap-and-trade program in 2020 would be $22 billion -- or about $175 per household.
This does not include the potential economic benefits of slowing climate change. Still, I think it's worth noting that the net cost here is about one tenth of what Martin Feldstein thought it would be:
The Congressional Budget Office estimates that reducing the level of CO2 to 15 percent less than the total level of U.S. emissions in 2005 would require permit prices that would increase the cost of living of a typical household by $1,600 a year ... The Waxman-Markey bill that recently passed the House Energy and Commerce Committee would cause an even greater initial rise in the cost of living by its requirement to cut CO2 emissions to 17 percent less than the 2005 level of emissions rather than the 15 percent reduction assumed in the CBO estimates.Update: CBO link is fixed. (Happily, It no longer goes to my gmail account.)
I think you accidentally included the wrong link for the CBO study: it's a google mail page (blank), and the direct link is here instead.
On the topic itself, I agree that Feldstein exaggerated the costs of the bill, and I think climate change is important enough that I'm willing to live with whatever flawed first step Congress can muster, but the last page of the CBO report reveals just how terrible the allowance handouts to businesses are. Note that while the bill starts out progressive for the lowest-income households, it becomes regressive later on:
Net costs to households in each quintile:
Lowest quintile: -$40
Second quintile: $40
Middle quintile: $235
Fourth quintile: $340
Highest quintile: $245
This is entirely due to the "Allocation to Businesses and Net Income to Domestic Offset Producers" category. Basically, giving free allocations to businesses is equivalent to handing over bales of cash to their shareholders, and the highest quintile benefits most:
Lowest quintile: $65
Second quintile: $90
Middle quintile: $140
Fourth quintile: $230
Highest quintile: $885
Crumbs, sometimes gmail does that and I don't understand why. (IE, I get the CBO email with a link to the report and I click on it, but it routes me to the PDF through a gmail URL and not a CBO URL.) Anyway, thanks -- I fixed it.
And yes -- I agree that the bill starts progressive and becomes regressive. One thing I'd like to make is a graph of how this compares to progressivity of effective federal taxation. (Fortunately, the CBO has data on this by quintile too.) My intuition is that the two would look pretty similar: The effective rate starts low (or even negative), gets higher, and then gets slightly lower again at the top. (Where more people get benefits from capital gains and dividends taxation.)
We'll see. THe progressivity of cap and trade is an interesting subject and I'd like to write something on it for monday.
Conor
Was this scored before or after the bill was gutted?
You mean before Collin Peterson got his hands on it?
I assume before, but why would any of Peterson's additions raise the immediate the cost per family? I hadn't really thought about it, but I don't know off the top of my head why they would...
Conor
But the climate is cooling and growing seasons are getting shorter. And in the last two years the cooling has accelerated.
What if we are doing the wrong thing?
The analysis wisely does not count on any benefits from reducing the amount of tree food injected into the atmosphere. There may be none. In fact there may be more losses.
And suppose by some miracle the Polywell Fusion guys get their reactor working.
The logic of cap and trade is that we'll jack up the price of gas (and electricity) to levels so high that you turn down the thermostat and sell your SUV. That will have a huge impact on the economy, but the government will balance it by taking all the money from selling permits and rebating it back to taxpayers.
...Who, somehow, will not spend that rebate on gas and electricity to maintain their previous lifestyles.
yup, they won't spend that money to retain their previous lifestyles, even if you rebate all of the cap and trade revenue to the same households. what happens in each individual household will depend on the marginal rate of substitution and the elasticity of demand, but as long as demand for carbon is perfectly inelastic then the overall rate of carbon consumption will be lower.
in your example, say you have a household with a given level of income ($100) that consumes a bunch of goods: A, B, C, D, E, whatever. Now say I increase the price of C by $15 and also increase your income by $15. Why would you necessarily spend that entire $15 on C? Some of it, maybe, but you have a whole bunch of goods at your fingertips that are looking comparatively cheaper..
I think that's only true in the pure world of economic models. Consider the real situation. You have an SUV, and are still making payments on it. Gas goes to $6/gallon. You can't sell the SUV for the loan amount, and you can't afford to buy a Prius. You can cut all the luxury driving, sure, but you still have to get to work. You have no choice other than to use this SUV and pay whatever gas costs. If the government turns around and gives you a check, that's where it will be spent.
The same is true if your heating oil bill goes up. You can't afford the up front costs of adding more insulation to your house. You can't move (selling any house is bad enough -- try selling an uninsulated one in a cold climate with high heating bills.) So you have a sunk cost. Again, the government check just goes right out the door again, with little change in habits.
In economic fantasy land, there are no costs associated with changing your mix of purchases, and your statement would be true. In the real world, not so much.
I also have a problem in general with cap and trade. Not only is it an invitation to government micromanagement of the economy, and a full-employment bill for lobbyists, but it makes little sense as a response to global warming.
If you think we're coming to a "tipping point" where warming becomes catastrophic, then cap and trade is too little too late. We need it to 1) raise energy prices, 2) encourage alternative energy, including some breakthroughs in batteries and power production 3) have those new technologies become so cheap that they are accepted by China and other big CO2 sources, and 4) lead to worldwide use of the new technologies, reducing CO2 output. This all takes decades. Not fast enough if we're doomed inside of 10 years like the alarmists think.
On the other hand, if the IPCC consensus is right, then cap and trade is more expensive than just coping with climate change. That's definitely true in the U.S., where the change is no big deal, and probably true worldwide. Cap and trade would be deadly to third world industrialization, if it were ever implemented. They would much rather have the jobs and cope with minor sea level rises.
And finally, if the skeptics are right, cap and trade is completely worthless and very expensive. And since it will not be adopted worldwide, just pushes more industrial production out of the U.S. and Europe. That is, if politicians would ever let it drive up energy prices much. They haven't in Europe (gave out too many permits) and I doubt they will in the U.S. either.
What a disingenuous argument. Do you really think the whole thing boils down to the gasoline expenditures of a person upside-down on their SUV loan? Believe it or not, direct and indirect energy consumption of average citizens comes from a lot of places, and even if a group of people have difficulty adjusting in the short term it's not as if the revenue isn't rebated, plus those who can change, will, plus people's lives aren't static. Someday the SUV will be paid off. Maybe they'll get a different job, or move, or find a carpool partner, or decent public transit will become available.
And you've nicely set yourself up - if the threat is not real, there's no point! And if it was real, well it's too late, take that, tree-huggers!
"Someday" we'll all be dead. So why worry about increased taxes at all?
It's not just your SUV that's the problem, it's your whole lifestyle. Increased energy prices affect housing, commutes, economics of factories, office buildings, etc. None of that is going to change overnight.
It's also "disingenuous" to assume they can change. If you are a landscaping contractor in the central valley of California, and drive an hour each way to work (because you can't afford housing closer), you have no fix. You can't do your job out of a Prius, and you can't move closer. All you can do is charge more (and get less business) or just eat the cost and be poorer.
And as I pointed out in Conor's post today, the rebates are funded by selling the initial set of permits. If they give them away instead of selling them, there's no revenue to kick back. And after the initial period, they aren't supposed to issue more anyway.
As for warming, given the timetable, it's either geo-engineering to cool the planet on an emergency basis, coping with sea-level rises, or hope it's nothing after all. Cap and Trade just isn't effective.