The policy analysis reported in this paper refers to a
version of Waxman-Markey that was heavily revised in committee
hearings. For analysis that reflects the post-committee version of
Waxman-Markey, readers should refer to Heritage Foundation WebMemo, No. 2450 "Son
of Waxman-Markey: More Politics for a More Costly
Representatives Henry Waxman (D-CA) and Ed Markey (D-MA)
proposed yet another global warming bill following the tradition of
McCain-Lieberman, Lieberman-Warner, Dingell-Boucher, and others.
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
The result is 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 will:
- Reduce aggregate gross domestic product (GDP) by $7.4
- Destroy 844,000 jobs on average, with peak years seeing
unemployment rise by over 1,900,000 jobs,
- Raise electricity rates 90 percent after adjusting for
- Raise inflation-adjusted gasoline prices by 74 percent,
- Raise residential natural gas prices by 55 percent,
- Raise an average family's annual energy bill by $1,500,
- Increase inflation-adjusted federal debt by 29 percent, or
$33,400 additional federal debt per person, again after adjusting
The original draft bill discloses a basic two-pronged approach
to cutting greenhouse gas emissions. The first 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
used 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 assumptions include:
- A near doubling of light-vehicle fuel efficiency by 2030,
- Non-hydro renewable electricity reaching 17 percent by 2030--a
more than five-fold 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. The intent is to
remove CO2 from the effluent before emission. This captured CO2
would be compressed into liquid form or injected into deep saline
aquifers and deep ocean waters or used for enhanced oil
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
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 this legislation assumes that CCS will
not be available in significant quantities for the years
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 a "nuclear renaissance" highly
uncertain. Therefore, the 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 over $150
billion out of the gate and average nearly $300 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 $500 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 74 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. The analysis shows the
results of this strategy. By 2035:
- The typical family of four will see its direct energy costs
rise by over $1,500 per year.
- Pain at the electric meter causes consumers to reduce
electricity consumption by 36 percent. Even with this cutback, the
electric bill for a family of four will be $754 more that year and
$12,933 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 $596
more that year and $8,000 more between 2012 and 2035.
- In total, for the years 2012-2035, a family of four will see
its direct energy costs rise by over $24,000. 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 $24,000 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 takes a big hit. On average, employment is lower
by 844,000 jobs. In some years cap and trade reduces employment by
more than 1.9 million jobs.
- The negative economic impacts accumulate, and the national debt
is no exception. Waxman-Markey drives up the national debt 29
percent by 2035. This is 29 percent above what it would be without
the legislation and represents an additional $33,400 per person, or
more than $133,000 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. The
higher energy prices push unemployment up by 844,000 jobs on
average with peaks over 1,900,000. In aggregate, GDP drops by over
$7 trillion. The next generation will inherit a federal debt pumped
up by $33,000 per person. All of these costs accrue in the first 25
years of a 90-year program that's temperature impact climatologists
have calculated to be 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 thousands of dollars 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. And all for a change in world temperature that
might not be noticeable.
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.