The Environmental Protection Agency's (EPA) analysis of the
economic impact of the Waxman-Markey climate change bill relies on
a variety of assumptions. These assumptions strongly bias the cost
downward when compared to the results of studies done by the Center
for Data Analysis (CDA) at The Heritage Foundation and by CRA
International for the National Black Chamber of Commerce.
CRA's economic analysis projects that by 2030 Waxman-Markey
would reduce national GDP by roughly $350 billon below the baseline
level, cut net employment by 2.5 million jobs (even after
accounting for new "green " jobs), and reduce an average household's
annual purchasing power by $830. These projections compare
with the devastating consequences found by The Heritage
The EPA's economic impact analysis, however, sharply differs
from CRA's or CDA's. Only by assuming massive increases in
renewable energy, energy efficiency, nuclear power, and carbon
capture and sequestration for clean coal coming online by 2015 can
the EPA project that energy prices would remain low and household
consumption would barely change.
The EPA finds that Waxman-Markey would reduce consumption growth
by only 0.1 and 0.2 percentage points in 2015 and 2020,
respectively. Throughout the duration of the bill, the average
annual cost per household would be merely $98-$140. At most, each
household is paying less than $12 a month to "save the planet."
These differences stem from the unreasonable, faulty, and
fragile assumptions the EPA made to create the mildest possible
economic impact scenario.
The Use of Discounting
First of these assumptions--and superficially least
controversial--is the EPA's use of discounting. A discount rate is
an interest rate used to find present value of an amount to be paid
or received in the future. In other words, present value analysis
answers the question: How much would I have to have today in order
to meet my financial obligations or pay certain costs in the
The EPA takes the net present value of costs using a 5 percent
real discount rate. Discounting is a reasonable approach for
comparing costs and benefits that occur at widely different times.
However, costs of climate change rarely use a discount rate that
high. In fact, the highly publicized Stern Review uses a zero
discount rate. If Stern were to use a rate even half that of the
EPA, its calculated costs of climate change would essentially
disappear, since most of the costs occur after the year 2800.
The EPA looks at the average discounted change in household
consumption over 40 years. It is well known that the costs are
lower in the beginning of the program and will grow as the carbon
caps ratchet down. Many households are not families. The average
household size is 2.7. Therefore, the actual cost to a typical
family of four could be 1.5 times greater than the per-household
cost. Also, the EPA's $140/year number is based on consumption.
Consumption changes are typically less than income changes, as
families respond to income losses by saving less.
Rebating Climate Revenue
Without discounting, the impact per household is $1,288 in
2050. Adjusting household size to reflect a
family of four raises this cost to over $1,900--which is a lot
different than $140. Even this higher number requires a set of very
generous assumptions, including a requirement that all allowance
proceeds be rebated directly to consumers.
This clearly is not going to happen. 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 revenue. The latest version of the
bill has the government distributing allowances to various
businesses in a political reallocation of the bill's near-term
economic damage. These allowances act as subsidies handed out to
But every dollar the government gives to business is one less
dollar the government can rebate back to consumers. Other uses of
the revenue include investments in green technology, a proposal
that serves as further evidence that all the allowance proceeds
will not be rebated back directly to the taxpayers.
As it stands, only 15 percent of the allowance revenue will go
to low-income ratepayers. While this number may increase when the
handouts to businesses phase out, it will certainly not cover the
costs of higher energy prices.
Rebates or not, the higher energy prices would reduce economic
activity by forcing businesses to cut costs elsewhere, possibly by
reducing their workforce and thus doing damage that no check would
While a portion of the allowances given to electric companies is
intended to benefit their customers, it is not clear how
efficiently these savings can be transmitted. The allowance
distribution cannot be used for lower electric rates. Cash
distribution is not specified, which leaves open many options for
inefficient subsidies and other programs whose benefits to
consumers will be less than the amount spent.
More Misguided Assumptions
The loss that the EPA calculates also does not include the cost
of the energy tax to consumers, since the EPA assumes that all of
the money is rebated. The Heritage Foundation's Center for Data
Analysis found that the cost of the energy tax is $4,600 per family
of four in 2035. Assuming that this cost will not be a factor is
very significant. The EPA analysis says, "A policy that failed to
return revenues from the program to consumers would lead to
substantially larger losses in consumption."
In determining Waxman-Markey's impact on energy prices, the EPA
makes additional generous assumptions, including those made
concerning nuclear power. The EPA assumes that nuclear power
generation under Waxman-Markey will be roughly double the baseline
production in 2035. Because nuclear power is currently very near
maximum production of its current capacity, this increased
generation will require nearly doubling nuclear capacity. The
policy trends are moving in the opposite direction, and significant
regulatory obstacles exist. Despite the Administration's largely
pro-nuclear rhetoric, its policy proposals, such as closing the
Yucca Mountain nuclear materials repository, are making a revival
of nuclear energy more difficult.
In their list of key uncertainties, the EPA questioned whether
such a large amount of new nuclear energy is technically and
politically attainable. Other EPA uncertainties include but
(admittedly) are not limited to:
- The viability of carbon capture and sequestration (CCS);
- The availability and cost of domestic offset projects;
- The stringency of international actions; and
- The pace of economic growth without climate policy, among
Analysis of Son of Waxman-Markey
The EPA, in its two-page, no-citation memo, suggests that the
revisions policymakers made to the bill actually mitigate the
economic pain. This assertion, however, is hardly model-based.
Waxman-Markey revisions lowered the 20 percent emissions reductions
cap scheduled for 2020 to 17 percent while all the longer targets
remained the same. EPA's qualitative assessment of the legislative
changes include cap level reduction, offset provisions, incentives
for CCS, and renewable electricity standards, which the EPA did not
model in the first place.
The EPA assumes, without explanation as to how, that a 3 percent
reduction in allowance carbon cap will reduce allowance prices by 3
percent. The memo discusses static reduced price effects without
recognizing the actual economic cost drivers of businesses that
would affect the overall allowance price. As The Heritage
Foundation and CRA International explain, the long-run targets have
not changed, and therefore the economic fundamentals driving prices
have not changed. The differences are largely timing variations
meant to delay the political and economic pain.
For example, the EPA memo seems to ignore the effects of
increased borrowing. The revisions of the bill give away allowances
to businesses in the near term. In essence, the allowance giveaway
is a windfall profit for the politically influential--and paid with
a tax on energy consumers. This energy tax reduces national income,
which, in turn, reduces government revenues from existing taxes.
Since the energy tax revenue is spent, the net impact on the
federal budget is a bigger deficit. In turn, the bigger deficit
crowds out private sector investment and drives up interest rates,
which, ironically, increases the cost of investing in new energy
efficient technologies that markets have been making for
Appendix C of the Chamber's study gives a detailed, technical
critique of the EPA's economic impact projections. Their basic
conclusion is that the EPA estimated a very short-term effect and
that the EPA analysis does not consider the actual economic affects
of the draft legislation but rather simply the price effect.
Two and a Half Models
The Heritage Foundation's CDA study and the analysis by CRA
International use dynamic economic models that take a fuller
account of the overall economic costs and benefits of this
legislation. The modeling differences imply that technology is one
of the fundamental cost drivers of the allowance price that the EPA
did not seem to consider.
In short, the EPA's conclusion that Americans will be better
shielded from the pain of capping carbon by this draft legislation
is fantasy. Two major independent model analyses of Waxman-Markey
have already confirmed this reality.
Kreutzer, Ph.D., is Senior Policy Analyst for Energy Economics
and Climate Change in the Center for Data Analysis, and Nicolas D.
Loris is a Research Assistant in the Thomas A. Roe Institute
for Economic Policy Studies, at The Heritage Foundation.