Revised and updated June 16, 2009
Representatives Henry Waxman (D-CA) and Ed Markey (D-MA)
modified their global warming proposal from the draft version
published on March 31. For the most part, the changes focused on
the distribution of the allowance revenue--the equivalent of tax
There was also a slight easing of targeted emissions reductions
for 2020, which resulted in a marginally lower economic impact.
However, the new distribution of allowances created a less
efficient pattern of government expenditures and more than offset
the gain from the lower cap for 2020.
The economic impact of the new draft varies from that of the
original draft in several major ways:
- Compared to no cap and trade, real GDP losses increase an
additional $2 trillion, from $7.4 trillion under the original draft
to $9.4 trillion under the new draft;
- Compared to no cap and trade, average unemployment increases an
additional 261,000 jobs, from 844,000 lost jobs under the original
draft to 1,145,000 lost jobs under the new draft; and
- Peak-year unemployment losses rise by 500,000 jobs, from 2
million under the original draft to 2.5 million under the new
Though the proposed legislation would have little impact on
world temperatures, it is a massive energy tax in disguise that
promises job losses, income cuts, and a sharp left turn toward big
Ultimately, this bill would result in government-set caps on
energy use that damage the economy and hobble growth--the very
growth that supports investment and innovation. Analysis of the
economic impact of Waxman-Markey projects that by 2035 the bill
- Reduce aggregate gross domestic product (GDP) by $9.4
- Destroy 1,145,000 jobs on average, with peak years seeing
unemployment rise by over 2,479,000 jobs;
- Raise electricity rates 90 percent after adjusting for
- Raise inflation-adjusted gasoline prices by 58
- Raise residential natural gas prices by 55 percent;
- Raise an average family's annual energy bill by $1,241;
- Result in an increase of $28,728 in additional federal debt per
person, again after adjusting for inflation
The bill discloses a basic two-pronged approach to cutting
greenhouse gas emissions. The first prong is a set of mandates
forcing efficiencies independent of any cost-benefit calculations
on the part of industry or consumers. These mandates include a
requirement for low-carbon motor fuels and a tenfold increase in
the production of electricity from renewable sources.
The second prong is cap and trade. With cap and trade, absolute
limits on total emissions of greenhouse gases are established.
Before those in a covered sector can emit a greenhouse gas, they
need to have the ration coupons (also known as pollution permits or
allowances) for each ton emitted. Because the ration coupons will
have a value, and therefore a cost, cap and trade becomes a tax on
fossil fuels and the energy they generate.
The intent of cap and trade is to impose a cost on CO2 and allow
businesses and consumers to adapt as well as they can to this new
cost. The mandates of the first parts of Waxman-Markey are
counterproductive because they force choices on the economy that
might not be the most efficient and inexpensive ways to cut CO2.
That said, this paper's analysis looks at only the cost of a simple
cap-and-trade approach. Consequently, the economic impact estimates
reported here will likely be lower than the economic cost of cap
and trade hobbled further by mandates.
To establish a benchmark against which to measure the impact of
Waxman-Markey, this paper assumes an economic recovery from the
current recession and the subsequent smooth type of economic growth
that all major economic forecasts must make. A more rapid economic
recovery would make the costs of meeting the CO2 restrictions even
What Is in the Baseline? The baseline energy projections
come from IHS Global Insight's latest U.S. Energy Outlook. The
highly respected and widely used Global Insight U.S. Macroeconomic
model was used to prepare the estimates employed in this paper as
well as data from Global Insight's November 2008 long-term model,
which makes economic forecasts through 2038. Use of the November
2008 macroeconomic model aligned this paper's economic forecasting
with Global Insight's October 2008 energy baseline. The baseline
- A near doubling of light-vehicle fuel efficiency by 2030;
- Non-hydro renewable electricity reaching 17 percent by 2030--a
more than fivefold increase; and
- 36 billion gallons per year of ethanol production, with 20
billion gallons of cellulosic ethanol.
Though these goals and mandates will be costly to meet (if even
they can be met), the costs will occur with or without
Waxman-Markey. Therefore, these costs are not counted in this
paper's economic impacts of the Waxman-Markey bill.
Addressing Offsets. Waxman-Markey provides emitters with
an option to substitute some allowances with certified CO2
reductions by other emitters that are not covered by emissions
caps. These offsets can be purchased from domestic or international
sources. On the surface, Waxman-Markey's treatment of offsets is
generous to the point of eliminating constraints on fossil-fuel CO2
for decades. However, closer examination reveals multiple catches,
costs, and impossibilities.
For instance, the Environmental Protection Agency (EPA)
determined that domestic offsets simply do not exist anywhere near
the magnitude nominally allowed by Waxman-Markey. Driven, perhaps, by
the concern that existing offset programs suffer from fraud,
Waxman-Markey includes significant hurdles for those wishing to use
offsets. The EPA administrator "may at any time, by
rule, remove a project type from the list." Further, the
administrator shall establish "policies to assign liability and
responsibility for mitigating and fully compensating for
reversals." That is, using an offset may leave a firm with an
open-ended liability. Finally, offsets require 1.25 tons of CO2
reduction for each ton of offset credit.
This analysis assumes that allowances will increase the
effective CO2 caps by 15 percent. Recent prices of offsets for the
Kyoto program have been between 10 and 15 euros per ton. Given the
exchange rate, discount (the 1.25 ton reduction per ton of credit),
and likely increase in demand, the initial price of $20 per ton is
conservative. After the first five years, this price increases by
the expected rate of inflation.
Carbon Capture and Storage. One hope for those who want
to see continued access to U.S. coal reserves is carbon capture and
storage (CCS) technology. CCS attempts to remove CO2 from the
effluent before emission. This captured CO2 would be compressed
into liquid form and injected into deep saline aquifers and deep
ocean waters or used for enhanced oil recovery.
Serious obstacles to large-scale commercial deployment of CCS
have yet to be overcome. CCS requires roughly one-third more energy
to generate electricity than processes without CCS. Viable
commercial CCS does not yet exist, though the bill does provide
funding for three commercial-scale pilot projects. Along with the
technological challenges, a massive pipeline system must be created
virtually from scratch. But it is the political and environmental
obstacles that may prove most daunting. CCS must be proven to be
effective in preventing moderate leaks over long periods of time.
In addition, community concern with the possibility of catastrophic
local release of large quantities of CO2 could provide the
ubiquitous not-in-my-backyard opposition that bedevils many waste
This paper's analysis of Waxman-Markey assumes that CCS will not
be available in significant quantities for the years analyzed.
Renewable Energy Goals. The renewable energy targets
already established by current laws will be challenging to meet.
This paper assumes no additional renewable energy beyond these
significant baseline increases of 36 billion gallons of renewable
motor fuels and the existing state-level renewable electricity
requirements. The current baseline projects 18.3 gigawatts of
increased nuclear power capacity. The history of nuclear
construction in the 1960s through the 1980s shows that a much more
aggressive nuclear build-out is technologically possible, but
political and other factors make the likelihood of a "nuclear
renaissance" highly uncertain. Therefore, this study assumes no
additional nuclear capacity beyond the baseline increase.
Results of The Heritage Foundation's
It is no surprise that the economy responds to cap and trade as
it would to an energy crisis. The price on carbon emissions forces
energy cuts across the economy, since non-carbon energy sources
cannot replace fossil fuels quickly enough. Energy prices rise;
income and employment drop.
The current recession diminishes near-term projections for
aggregate economic activity. As this activity drops, so does energy
use. Though a recession is bad news, it has the effect of moving
the economy closer to the energy cuts needed to meet the emissions
targets. Nevertheless, the income (GDP) losses are nearly $200
billion out of the gate and average over $380 billion per year. As
the economy recovers and the caps tighten, the detrimental effect
of cap and trade gets more and more severe. In the worst years, GDP
losses exceed $700 billion per year.
Waxman-Markey will cause higher energy costs to spread
throughout the economy as producers everywhere try to cover their
higher production costs by raising their product prices. Consumers
will be most directly affected by rising energy bills. Even after
adjusting for inflation, gasoline prices will rise 58 percent
over the 2035 baseline price. Compared to the baseline, residential
natural gas consumers will see their inflation-adjusted price rise
by 55 percent. Because of its reliance on coal, the cost of
electricity will rise by 90 percent--again after adjusting for
inflation and in addition to what the price would have been anyway
As President Obama pointed out, cap and trade can work only when
energy prices "skyrocket." To force consumer-energy cutbacks, the
prices need to rise to painful levels. This paper's analysis shows
the results of this strategy. By 2035:
- The typical family of four will see its direct energy costs
rise by $1,241 per year.
- Pain at the electric meter will cause consumers to reduce
electricity consumption by 36 percent. Even with this cutback, the
electric bill for a family of four will be $468 more that year and
$9,410 more in total from 2012 to 2035.
- The higher gasoline prices will have forced households to cut
consumption by 15 percent, but a family of four will still pay $565
more that year and $7,254 more between 2012 and 2035.
- In total, for the years 2012-2035, a family of four will see
its direct energy costs rise by $19,897. These inflation-adjusted
numbers do not include the indirect energy costs consumers will pay
as producers are forced to raise the price of their products to
reflect the higher costs of production. Nor does the $19,897
include the higher expenditure for such things as more
energy-efficient cars and appliances or the disutility of driving
smaller, less safe vehicles or the discomfort of using less heating
- As the economy adjusts to shrinking GDP and rising energy
prices, employment will take a big hit. On average, employment is
lower by 1,145,000 jobs. In some years cap and trade reduces
employment by nearly 2.5 million jobs.
- The negative economic impacts accumulate, and the national debt
is no exception: By 2035 Waxman-Markey will have driven the
national debt 26 percent above what it would be without the
legislation and that represents an additional $28,728 per person,
or $114,915 for a family of four. To reiterate, these burdens come
after adjusting for inflation and are in addition to the $450,000
per family of federal debt that will accrue over this period even
without cap and trade.
Is It Worth It?
Is all of this economic pain justified by gains against global
warming? Waxman-Markey raises energy prices by 55-90 percent. These
higher energy prices push unemployment up by 1,145,000 jobs on
average, with peaks over 2,479,000. In aggregate, GDP drops by over
$9.4 trillion. The next generation will inherit a federal debt
pumped up by $28,728 per person. All of these costs accrue in the
first 25 years of a 90-year program that, as calculated by
climatologists, will lower temperatures by only hundredths of a
degree in 2050 and no more than two-tenths of a degree at the end
of the century.
The impact of Waxman-Markey on the next generation of families
is $1,241 per year in higher energy costs, over $100,000 of
additional federal debt (above and beyond the unconscionable
increases already scheduled), a weaker economy, and more
unemployment. Furthermore, the recently proposed modifications to
Waxman-Markey only make these problems worse: By devising a
less-efficient pattern of government expenditures, this new draft
would more than offset the gains from the proposed slight easing of
targeted emissions reductions for 2020.
And all for a change in world temperature that might not be
Beach is Director of, David W. Kreutzer, Ph.D., is Senior Policy
Analyst for Energy Economics and Climate Change in, and Karen A.
Campbell, Ph.D., is Policy Analyst in Macroeconomics in the
Center for Data Analysis, and Ben
Lieberman is Senior Policy Analyst in Energy and the
Environment in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.