The Environmental Protection Agency's (EPA) Advance Notice of
Proposed Rulemaking (ANPR) foreshadows new regulations of
unprecedented scope, magnitude, and detail. This notice is not just
bureaucratic rumination, but could very well become the law of the
land. Jason Grumet, a senior environmental advisor to Barack Obama,
has promised that a President Obama would "initiate those
rulings." These rulings offer the possibility of regulating
everything from lawn-mower efficiency to the cruising speed of
supertankers. Regardless of the chosen regulatory mechanisms, the
overall economic impact of enforced cuts in carbon dioxide
(CO2) emissions as outlined in the ANPR will be equivalent to an
By expanding the scope of the 1990 amendment to the Clean Air
Act (CAA), the EPA will severely restrict CO2 emissions, thereby
severely restricting energy use. Specifically, the EPA
would use the CAA to regulate emissions of greenhouse gases (GHG)
from a vast array of sources, including motor vehicles, boats and
ships, aircraft, and rebuilt heavy-duty highway engines. The
regulations will lead to significant increases in energy costs.
Furthermore, because the economic effect of the proposed
regulations will resemble the economic effect of an energy tax, the
increase in costs creates a correspondingly large loss of
Using the CAA to regulate greenhouse gases will be very costly,
even given the most generous assumptions. To make the best case for
GHG regulation, we assume that all of the problems of meeting
currently enacted federal, state, and local legislation have been
overcome. Even assuming these unlikely goals are met,
restricting CO2 emissions by 70 percent will damage the U.S.
- Cumulative gross domestic product (GDP) losses are nearly $7
trillion by 2029 (in inflation-adjusted 2008 dollars),
according to The Heritage Foundation/Global Insight model
(described in Appendix A).
- Single-year GDP losses exceed $600 billion (in
inflation-adjusted 2008 dollars).
- Annual job losses exceed 800,000 for several years.
- Some industries will see job losses that exceed 50
Due to limitations in macroeconomic models, this analysis
by The Heritage Foundation's Center for Data Analysis (CDA) does
not extend beyond 2029. Further, the ANPR alludes to regulations in
general, but is not as specific as proposed legislation.
Nevertheless, the ANPR's implicit CO2 targets resemble previous
attempts to legislate GHG emissions, such as the 2008
Lieberman-Warner Climate Security Act (S. 2191), which
mandated a 70 percent reduction below the 2005 level by
The new ANPR regulations will force consumers to pay more for
energy as well as for other goods. Furthermore, the increased
regulations and subsequent high energy prices throw a monkey
wrench into the production side of the economy. Contrary to claims
of an economic boost from "green investment" and "green
collar" job creation, more EPA regulation reduces
economic growth, GDP, and employment opportunities.
While there are some initial years in the period of our analysis
during which CAA regulation of GHG could spur additional
investment, this investment was completely undermined by the higher
energy prices. Investment contributes to the economy when it
increases future productivity and income. The greater and more
effective the investment, the greater the increase in future
income. Since income (as measured by GDP) drops as a result of new
regulation, it is clear that more capital is destroyed than
created. The cumulative GDP losses for 2010 to 2029 approach $7
trillion with single-year losses of nearly $650 billion.
The anticipated "green-collar" jobs meet a similar fate. It may
well be that some businesses will experience an increase in
employment. But, overall, companies are saddled with
significantly higher energy costs, as well as increased
administrative costs, that will be reflected in their product
prices. The higher prices make their products less attractive to
consumers and thus less competitive. As a result, total
employment drops along with the drop in sales.
With increased regulation through the CAA, there is a small
initial increase in employment as businesses build and purchase the
newer, more CO2-friendly plants and equipment. However, any
"green-collar" jobs created are more than offset by the hundreds of
thousands of lost jobs in later years. Chart 2 illustrates the
projections of overall employment losses from these restrictions on
ANPR-What it Really Means
In response to the Supreme Court's decision in Massachusetts
v. EPA, the EPA has proposed an unprecedented expansion of
federal GHG regulation through the CAA. While the precise
details of the regulations remain undefined, the ANPR is sure to
generate many of the same economic responses as the
Lieberman-Warner Climate Security Act.
As the EPA does not appear to have the statutory authority
necessary to implement market-based approaches to GHG reduction,
such as a carbon tax, in which case firms and consumers could
economize on taxed goods and promote alternatives or
technology-neutral subsidies, the ANPR relies on a set of
rules and restrictions while ultimately failing to achieve a
meaningful reduction in atmospheric concentrations of GHGs.
The end result of these complex regulations will be a dramatic
increase in energy costs with little environmental gain.
In addition to increasing the costs of energy use, regulating
GHGs through the Clean Air Act will expand the EPA's authority to
unprecedented levels. The ANPR will likely:
- Trigger the Prevention of Significant Deterioration (PSD)
program, which could require permits for large office and
residential buildings, hotels, retail stores, and other
similarly sized projects;
- Regulate the design of manufacturing plants;
- Regulate the design of airplanes;
- Lower speed limits below current levels;
- Impose speed restrictions on ocean-going freighters and
- Export economic activity to less-regulated countries,
thereby compromising the U.S.'s ability to compete in the global
- Transform the EPA into a de facto zoning authority,
granting the agency control over thousands of previously local or
private decisions, affecting the construction of schools,
hospitals, and commercial and residential development.
These regulations are just a small sample of the areas into
which the ANPR would expand the EPA's authority.
Limits of Analysis
Regulating CO2 emissions under the Clean Air Act will burden the
economy with higher energy costs, higher administrative compliance
costs for businesses, higher bureaucratic costs for enforcing the
regulations, and higher legal costs from the inevitable litigation.
This study examines only the economic impact from the higher energy
costs. Further, CDA analysts assume that the EPA can enforce CO2
restrictions with perfect efficiency. In no case does the EPA
cut a pound of CO2 in one area if it could be done more cheaply in
another. Including the
other compliance costs and accounting for the likely
inefficiency in imposing regulation, the costs of regulating CO2
emissions under the Clean Air Act may be significantly higher.
For an example of the extent to which administrative compliance
costs may be burdensome, see Portia M. E. Mills and Mark P. Mills,
"A Regulatory Burden: The Compliance Dimension of Regulating CO2 as
a Pollutant," The U.S. Chamber of Commerce, September 2008,
regulatory_burden0809.pdf (October 23, 2008).
This CDA report discusses the effect the ANPR will have on
energy activity and the cost of using energy. Policymakers and
others who follow the climate change debate should find this
simulation helpful in understanding the economic consequences
of such unprecedented regulatory expansion. This report makes
no attempt, however, to calculate the significant administrative
and legal costs of complying with the new rules.
The report discusses two different policy alternatives
affecting this country's economic future, each shaped by different
policies designed to reduce atmospheric carbon dioxide and,
presumably, to reduce the warming trend in global climate
- The current-law baseline is a highly detailed, 30-year
economic forecast that incorporates the principal elements of
energy and climate change policies signed into law last year.
- The alternative is a scenario in which the EPA
promulgates a broad range of regulations to cut CO2 emissions by 70
percent by 2050.
Key Assumptions. The baseline for the ANPR simulations
builds on the Global Insight (GI) November 2007 long-term-trend
forecast. The GI model assumes that:
[T]he economy suffers no major mishaps between now and 2037. It
grows smoothly, in the sense that actual output follows potential
output relatively closely. This projection is best described as
depicting the mean of all possible paths that the economy could
follow in the absence of major disruptions. Such disruptions
include large oil price shocks, untoward swings in macroeconomic
policy, or excessively rapid increases in demand.
The GI long-term model forecasts the trend of the U.S. economy.
"Trend" means the most likely path that the economy will follow if,
for instance, it is not disturbed by a recession, extremely high
oil prices, or the collapse of major trading partners. One way to
think about the long-term trend is to imagine a pathway through the
cyclical patterns of our economy, as well as the effects of
cyclical patterns in foreign economies on the U.S.
Given the fiscal and economic challenges facing the United
States (particularly the mounting federal deficits stemming from
the long-expected crisis in Social Security, Medicare, and Medicaid
outlays), the long term already has significant risks. The
baseline assumes that the economy successfully avoids any
sharp drops. At the same time, there is no inclusion of
similarly large, potentially positive, shocks to the economy.
Energy prices, patterns of use, and supply change continuously
in response to legislation and market conditions. To evaluate the
economic impact of ANPR regulations, we must establish what the
expected levels of emissions and available technology would be
over the bill's proposed lifetime in the absence of its passage.
Only with a determined baseline situation can the costs of meeting
the goals and constraints of these regulations be estimated.
Two fundamental trends establish the baseline path of CO2
emissions. First, aggregate income growth leads to greater demand
for power across all sectors of the economy. Most of this power is
generated by burning fossil fuels.
Partially offsetting the associated increase in CO2 emissions is
the second trend of increasing carbon efficiency in the energy
sector. The improved efficiency comes from a variety of
changes in both production and consumption, including
power-generating technology that increases the yield of useable
power for each ton of CO2 emitted; continual improvements in
the energy efficiency of appliances, new homes, and light
vehicles; increased use of renewable fuels; and greater generation
and use of nuclear power.
Government mandates-federal, state, and local-continue to
enforce additional energy efficiency and limit CO2 emissions,
which helps to meet the ultimate target of the ANPR regulations.
These mandates may work in parallel with the ANPR, and they create
compliance costs, but since these compliance costs are already in
force without the additional regulation under the CAA, they are not
attributable to the ANPR.
Examples of the baseline costs necessary for meeting the ANPR
goals that are attributable to other legislation include:
- Manufacturing cars and trucks that satisfy the much higher
fuel-economy standards mandated for the next 20 years;
- Producing 36 billion gallons of biofuels including 16
billion gallons of cellulosic ethanol;
- Complying with expensive new building codes; and
- Producing ever more energy-efficient household appliances.
Aggregate Energy Use. Continued gains in energy
efficiency will restrain the growth of energy demand below the
rates of economic growth and below the rates experienced in the
past half-century-approximately 1.5 percent per year. These
efficiencies are driven by both markets and mandates. We
project baseline primary energy demand to grow at 0.5 percent each
year through 2029.
Petroleum. According to baseline assumptions, petroleum
prices will settle around $70 a barrel in nominal terms and decline
to $46 a barrel (in 2006 dollars) by 2030. Even in the absence of
Corporate Average Fuel Economy (CAFE) limit changes, higher prices
induce consumers to move to more efficient vehicles.
On the mandates side, the Energy Independence and Security Act
of 2007 (EISA) raises the bar for vehicle fuel efficiency. The CAFE
standard rises to 35 miles per gallon by 2020 for all light
vehicles. For subsequent years, the EISA mandate reads:
For model years 2021 through 2029, the average fuel economy
required to be attained by each fleet of passenger and
non-passenger automobiles manufactured for sale in the United
States shall be the maximum feasible average fuel economy standard
for each fleet for that model year.
The expected CAFE standards are 47.5 miles per gallon for new
passenger cars and 32 miles per gallon for new trucks by 2029,
and the average for all light vehicles, whether new or old, will be
33 miles per gallon.
Overall, petroleum consumption will grow by 0.6 percent per year
between 2005 and 2029.
Natural Gas. In the baseline scenario, gas prices settle
just below $7 per million British thermal units. This is less than
the current price but well above 1990s levels. Alaskan pipeline
deliveries will not begin until 2025, at which point they will help
to offset supply reductions in the Lower 48 as well as imports from
Nearly 100 gigawatts of old natural-gas-steam are retired, and
50 gigawatts of the more efficient "natural gas combined
cycle" (NGCC) plants are built. Total natural gas consumption grows
by 0.4 percent per year through 2029.
Coal. In the baseline case, coal use is restrained by
slower growth of energy demand and increasing generation of nuclear
and renewable power. Demand will grow by an average of 0.2 percent
each year through 2029.
One hundred gigawatts of old inefficient power-generating
capacity are retired. Sixty-five gigawatts of new and replacement
coal-fired power-generation plants will be added using the
"integrated gas combined cycle" (IGCC) or advanced pulverized-coal
technologies. These more efficient technologies use less coal and
emit less CO2 per unit of electricity generated and are ready
to be fitted for carbon capture and sequestration (CSS). Because of
the additional cost, there is no use of CCS technology in the
Better and more widely adapted scrubbing technology allows
broader use of high-sulfur coal. This will open up more sourcing
options and lower the average cost of coal.
In real dollars, coal prices will settle near the levels
observed in the 1990s.
Nuclear Energy. Though there are no significant CO2
emissions from nuclear power generation, it is not considered
"renewable" for the purpose of meeting existing state-imposed
targets. Nevertheless, federal incentives are already in place
for building 12 gigawatts of new capacity and 3 gigawatts of
uprated added capacity at existing plants.
Resolving the problems with waste disposal is a major hurdle in
expanding nuclear power generation. The baseline assumption is
that nuclear power plants will continue to store the waste on site.
Given the already high use of available capacity, electricity
generated by nuclear power is projected to grow by only 0.5
percent per year through 2029.
Renewable Energy Sources. Federal and state initiatives
already in place seek to increase the use of renewable energy
sources. The definition of "renewable" varies from state to
state but generally includes biomass, wind, and solar power.
Higher fuel prices along with state and federal mandates cause
renewable fuel use to grow at 5.5 percent per year through 2029. We
assume that producers will be able to meet the ethanol (corn-based
and cellulose-based) targets set by the EISA, though experience
thus far suggests otherwise.
Key Assumptions. The ANPR contains no explicit overall
targets for emissions reductions on an annual basis; most likely
the reductions will be phased in. Using previous emission levels as
yardsticks, we assume that the 2012 emissions will match the
2005 emission level and drop by roughly 2 percent per year. The
allowed emissions drop to 15 percent below the 2005 emissions level
by 2020, and to 31 percent below the 2005 levels by 2029. Though we
do not model the impact of regulations beyond 2029, the typical
target would be a 70 percent reduction by 2050.
There are other gases that have much higher greenhouse effects
per ton of emissions than CO2. However, these gases are emitted in
much smaller volumes by human activity. CO2 is responsible for
about 85 percent of the man-made GHG warming; therefore, this study
examines only the economic impact of constraints on CO2
Coal Technology. Due to its abundance, coal is the least
expensive source of energy, and it fuels about half of America's
electricity supply. CCS is a promising, but not yet commercialized,
technology for dramatically reducing CO2 emissions from
Of course, CCS technology has additional costs, which are higher
when retrofitting existing plants than when building the technology
into new plants. Though there are pilot projects in operation,
full-scale commercialization would require sequestering more than
40 million barrels of CO2 each day. Environmental concerns and
the logistical hurdles of handling such large quantities are likely
to delay full implementation of CCS until after 2029, so we assume
no CCS during the 2010-2029 period examined here.
Nuclear Energy. The projection is for no additional
nuclear power beyond the additional 15 gigawatts in the base
Renewable Energy Sources. Current state and federal
legislation calls for more than tripling the amount of renewable
energy in power generation and increasing the amount of biofuels
used in transportation by more than 1,000 percent. This
includes 16 billion gallons per year of corn-based ethanol and
biodiesel and 20 billion gallons per year of cellulosic ethanol and
biodiesel. Again, our assumption is that cellulosic biofuels become
commercially feasible in time to meet the mandates that are
already planned. Progress on cellulosic ethanol has been
frustratingly slow to this point.
While the ANPR may have no additional mandates for
biofuels, restricting CO2 emissions from fossil fuel use will lead
to greater use of biofuels. At this time, there is no commercially
feasible cellulosic ethanol production. If this technology
fails to deliver as projected, energy prices will be forced to
increase enough to reduce the quantity of energy demanded by the
amount of missing cellulosic ethanol.