Recently, Dr. Laurie T. Johnson of the Natural Resources Defense
Council (NRDC) critiqued The Heritage Foundation's analysis of the
Waxman- Markey bill (H.R. 2454, American Clean Energy and Security
Act of 2009). The egregious errors that she commits in her critique
cry out for correction.
A Quick Response to the Critique
Briefly, Johnson's argument consists of the following criticisms
about The Heritage Foundation's analysis:
Criticism #1: The Heritage Foundation
conceals the fact that the U.S. economy grows under both the
no-action (baseline) scenario and the cap-and-trade scenario.
The second paragraph of the Heritage paper states that
Waxman-Markey would "damage the economy and hobble
Criticism #2: Heritage does not
include the cost of inaction in its analysis.
The Heritage Foundation does not include the "cost of inaction"
because it is a vacuous concept. Taken at face value, it implies
that action avoids the cost. That is, any action eliminates all
projected climate costs. Replacing one incandescent bulb with a
compact florescent bulb is an action, but even the NRDC could not
claim that it would make much difference.
Heritage estimates the costs of a particular action, the
Waxman-Markey bill--trillions of dollars in lost income, 50-90
percent higher energy costs, 2.5 million lost jobs, trillions of
dollars of higher taxes, and trillions more debt all by 2035. These
costs can be compared to the benefits of moderating world
temperature by 0.05 degree Celsius by 2050.
Criticism #3: No cost-containment
measures, such as banking of allowances, were modeled.
Including these measures would increase the legislation's cost
for the period studied in the analysis. Thus, by excluding them, we
made an assumption that is favorable to Waxman-Markey.
Criticism #4: Complementary policies
promoting clean energy and efficiency were not modeled.
In fact, these policies have largely already been enacted and,
therefore, are included in the baseline. The diminishing returns
from these types of subsidy and mandate policies are well
documented, suggesting that the costs would likely outweigh the
benefits of additional provisions and would raise the price tag of
Criticism #5: The allowance value
disappears in the Heritage simulation.
The allowances are fully spent in the Heritage simulation and do
Criticism #6: The Heritage study does
not allow for an increase in renewable fuel sources.
On the contrary, the Heritage study does allow for an increase
in renewable fuel sources.
Criticism #7: Costs to the economy are
much higher in the Heritage study than in the EPA's analysis.
The EPA discounts the cost to the present and makes an
unrealistic assumption regarding the growth of nuclear energy. The
NRDC itself has attacked these assumptions.
Ignoring Elementary Economics
Opportunity cost is a day-one topic in virtually every
principles of economics class. Indeed, one can hardly imagine the
science of economics without it. Johnson, however, appears to
ignore this important concept.
Opportunity cost is what we sacrifice when we choose one action
over its alternative. To economists, an action's cost is its
opportunity cost. For example, if someone chooses to drive to
Florida instead of flying, one opportunity cost would be the
additional travel time required for driving. With or without
Waxman-Markey, economic activity will continue. What matters in
discussing the cost of the legislation are those things that
change--or the goods and services we will forgo--if we choose to
Johnson categorically rules out the only meaningful measure of
cost with her insistence on talking about gross domestic product
(GDP) only with cap and trade, never without it. As long as cap and
trade does not completely eliminate GDP growth, Johnson seems to
claim that there is no cost. In other words, instead of measuring
the opportunity cost in terms of how GDP changes with cap and trade
relative to no cap and trade, Johnson wants to measure GDP over
time only under a cap-and-trade system. Her argument not only
employs a meaningless measure of the economic cost of the
legislation (something compared to nothing), but also ignores other
relevant measures of the cost, such as changes in income,
employment, and prices.
Avoiding the Moral Dimensions of the
There is something more deeply troubling about this argument
than its disregard of fundamental economics. Advocates of
carbon-reduction legislation frequently argue that the economic
concerns expressed by the legislation's critics are unwarranted.
After all, nearly everyone will have a job and the economy will
still be growing or at least not shrinking. Indeed, Dr. Johnson
Based upon the Heritage Foundation's analysis last year of
the Lieberman-Warner (LW) Bill, we can expect GDP to increase
significantly in this analysis as well. The LW analysis projected
GDP increasing by almost 70% by 2030 (67.6%) relative to 2008
levels, under a cap on carbon emissions. Healthy GDP growth is a
ubiquitous result in economic climate models, both partisan and
non-partisan, so we should expect the same from this analysis.
By embracing this line of argument, Johnson and others ignore
that the economy will not perform at its full potential when
weighed down with carbon taxes or fees. By ignoring this, they fail
to see the moral problems associated with their stand.
Yes, the economy would continue to grow under Waxman-Markey, but
it would create fewer jobs than it could, would not raise wages and
incomes as much as it could, and would not support as much research
and development or as much capital investment into production as it
should. In short, it would fail to perform up to its potential.
The people who would bear the burden of these failures would
likely be those who are least able to do so, such as poor families,
elderly citizens, young people starting their careers, and
immigrants. While climate scientists and economists may not notice
how much meaner life becomes for those on the bottom rungs of
society, there would likely be tighter budgets and fewer
Johnson's critique points to an NRDC study of the cost of
climate change, which further belies their flawed cost-measurement
methodologies. That paper presents climate damage costs
without showing the economic base upon which these costs occur. In
particular, they claim that the impact costs reach 1.84 percent of
GDP in 2100. They do not report that GDP in 2100 will be 648
percent larger than in 2006. Subtracting their exaggerated climate
costs means the economy in 2100 will be 7.466 times the 2006
economy instead of 7.484 times the size of the 2006 economy--a
difference of 1.86 percent.
While 1.86 percent of the economy is significant, the NRDC "Cost
of Climate Change" implicitly assumes that any climate policy will
eliminate 100 percent of the global-warming costs. In fact, no
proposed or conceivable climate policy would eliminate all the
projected global-warming impacts. The NRDC does not even pretend to
offer a policy designed to eliminate the costs laid out in their
study. Nor do they offer an estimate of the fraction of their costs
that would be avoided by any policy.
On the other hand, the Heritage study shows the economic costs
of the Waxman-Markey bill for 2012-2035 (which is only a fraction
of the total cost of the nearly century-long program). In the
Heritage study, we erred on the side of underestimating the
full opportunity cost while we report the benefit in terms of
moderated global warming--0.05 degree Celsius by 2050 and 0.2
degree Celsius by 2100. The Heritage study found that, compared to
no cap-and-trade, Waxman-Markey reduces GDP by $9.4 trillion,
reduces employment by 2.5 million jobs, increases the national debt
26 percent, and increases household energy prices by 50 percent to
90 percent. In return, Waxman- Markey will moderate world
temperature increases by 0.2 degree by the end of the 21st century
compared to doing nothing.
Johnson says the Heritage analysis contains no provision for
banking allowances. This is true, but her comment is misleading.
Banking pulls allowances off the market for use in later
years--years that come after the period that we analyze. Thus,
banking increases the costs in the earlier years in order to reduce
the costs in later years. Including these banking allowances would
increase the bill's cost for the years we analyze. Yet
again, the Heritage study erred on the side of reducing the
Contrary to Johnson's criticism, we do include offsets. We just
do not include the 2 billion tons of offsets that Johnson thinks we
should. Even the recent EPA analysis points out that only a
fraction of the allowed domestic offsets are even feasible. All of
this is well documented in the Heritage study as are the many
concerns from environmentalists themselves about the usefulness of
Energy Efficiency and Mandates
Johnson says we do not include complementary policies promoting
energy efficiency. Many energy efficiency mandates are already
legislated and those efficiencies are included in the Heritage
analysis. However, their costs are attributed to existing
legislation and, therefore, built into the baseline rather than
added to the costs of Waxman-Markey.
The whole point of cap and trade is to let markets find the
least costly way of reducing emissions. Conversely, technology>
mandates reduce the market's flexibility to meet those caps while
not changing the carbon dioxide (CO2) caps. Nevertheless,
Waxman-Markey includes additional mandates and subsidies. Trying to
combine these competing policies reduces efficiency and is evidence
that the bill's authors either do not understand cap and trade or
do not believe that it works. Adele Morris, Deputy Director of
Climate and Energy Economics at the Brookings Institution,
Proponents argue that higher fuel economy standards are part of
the climate solution. But once the emissions caps are set and firms
are trading rights to emit, fuel economy and other regulatory
standards produce no incremental climate benefits.... Because
mandating greater automotive fuel efficiency tends to be a more
costly way to reduce emissions than other methods, the California
rules could only end up increasing the cost of achieving the
emission target without providing additional climate benefits.
In short, mandates hinder the country's ability to reach the CO2
targets, as stated in the Heritage study. The Heritage analysis
forgives the Waxman- Markey's mandate-induced inefficiencies by
assuming that the economy meets the CO2 caps as efficiently as is
possible. Once again, we erred on the side of giving the costs of
Waxman-Markey the benefit of the doubt.
Misunderstanding Basic Public
Johnson says, "'Losses' in GDP appear to exceed the value
of the allowances.... Does the allowance value just evaporate?" This
comment exhibits a misunderstanding of public finance. The losses
(scare quotes are unnecessary) in GDP are the excess burden or
deadweight loss of taxation. Depending on the tax rate and
elasticities of supply and demand, excess burden can be greater
than, smaller than, or equal to the tax revenue. With punitive tax
rates the ratio of excess burden (GDP losses in this case) to tax
revenue (allowance value) will be higher. We find the aggregate
allowance value (the value of the cap-and-trade carbon tax) at $5.7
trillion is indeed smaller than the aggregate GDP losses at $9.4
trillion. The allowance value is fully spent. GDP losses exceed the
allowance revenues because Waxman-Markey is an extraordinarily
inefficient way of raising revenue.
Ignoring Basic Economic Analysis
Johnson writes, "How is it that this study finds net job losses,
when it likely...predicts substantial increases in GDP?"
Again, she does not consider opportunity cost. One opportunity cost
of Waxman-Markey in 2035 is that nearly 2.5 million fewer people
will be employed than if the bill were not enacted. Comparing
statistics from 2009 without the bill to 2035 with the bill tells
us nothing about the bill's impact.
She continues, "[E]conomic analyses of past environmental
regulations on average show an increase in jobs from environmental
regulation." Notably, she does not say a net increase
in jobs. Although analysts from across the political spectrum may
argue about magnitude, they agree that cap and trade will
negatively affect the economy.
For example, while the EPA dodges the question of employment in
their analysis, even they find that GDP goes down with
Waxman-Markey. Falling below baseline GDP means that the economy is
not performing as well as it could and that net employment is
likely lower than it could be. This is a perfectly consistent
result, regardless of her criticism. In addition, the legislation
contains numerous provisions to assist displaced workers, which
suggests that its sponsors expect job losses. The problem is not
whether there will be a cost to enacting Waxman-Markey, but as in
Office of Management and Budget Director Peter Orszag's words,
"whether we are willing to pay that cost."
Johnson cites a study from the Political Economy Research
Institute that claims that transferring $100 million from the
petroleum industry to "green " jobs creates more employment than it
destroys. The PERI study strangely considers lower
capital (and the ensuing lower wages) a benefit because $100
million can hire more people at a lower wage than at a higher wage.
Moving toward an economy with higher labor intensity is a move
toward greater poverty. However, the study has an even more basic
flaw because it ignores the value of the energy in $100 million of
petroleum and ignores any other costs of taxing this large amount
away from the petroleum industry. Analyses purporting to show job
gains from subsidizing "green " jobs ignore the costs of the
She is also confused by job losses declining from 2012 to 2020.
Because of the slack provided by offsets (which she erroneously
claimed were not included), the caps in the Heritage model do not
tighten over the first five years. This allows the economy greater
ability to adjust to the shock of introducing cap and trade in
2012. Once the slack is used up and the caps bite progressively
harder, the economy struggles and unemployment grows continuously
for the remainder of period analyzed.
Johnson asserts that the Heritage study allows no increase in
renewables. In fact, the Heritage study assumes renewable
electricity generation (not counting conventional hydroelectric)
and biofuels grow by a factor of four from 2010 to 2035. The
Heritage analysis includes significant increases in wind energy,
solar power, ethanol, biodiesel, and biomass-derived energy in the
The EPA's Analysis
Johnson wonders why the Heritage costs are so much higher than
those of the EPA. First, the EPA discounts all costs using a 5
percent real discount rate. Discounting can be a reasonable tool if
used for both the costs and the benefits of environmental
regulations. In any event, the NRDC has come out strongly against
discounting. For example, the NRDC criticizes a CRA International
report that used discounting when measuring the impact of an
earlier energy bill:
It is also possible to make the benefits of avoided climate
damages "disappear" through the use of the mathematically
convenient, but ethically questionable, practice of discounting
future benefits. The CRA analysis uses a 5% annual discount rate.
At this rate, a dollar of income fifty years from now is worth only
The NRDC needs to decide whether it is for or against
discounting and then argue for consistency in its application.
Further, the EPA assumes a doubling of nuclear power by 2035,
yet the NRDC has already pointed out the absurdity of this
New nuclear power plants are unlikely to provide a significant
fraction of future U.S. needs for low-carbon energy.
...[E]xpanding nuclear power is not a sound strategy for
diversifying America's energy portfolio and reducing global warming
Eliminating discounting and nuclear power from the EPA analysis
significantly raises their cost estimates and brings them much
closer to the cost estimates of the Heritage study.
Far from turning all that is positive into "all that is bad,"
the Heritage study presents a fair and increasingly corroborated
analysis of the likely costs and benefits. It is up to policymakers
and the public to decide if the benefits are worth the costs.
Kreutzer, Ph.D., is Senior Policy Analyst for Energy Economics
and Climate Change and Karen A. Campbell, Ph.D., is Policy Analyst in
Macroeconomics in the Center for Data Analysis at The Heritage
Foundation. William W. Beach is Director of the Center for
Data Analysis. 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.
Ibid., p. 1 (emphasis added).
David Hawkins, testimony before the Committee
on Environment and Public Works, U.S. Senate, November 13, 2007, p.
23, at /static/reportimages/B34A0F5005C22BE7C839BDA087CC810C.pdf
(May 29, 2009), and Natural Resources Defense Council, "Nuclear
Facts," at /static/reportimages/D9C922943B192BFBAE0D3A4A300F3F5E.pdf
(May 29, 2009).
Johnson, "The Heritage Foundation's
Waxman-Markey Analysis," p. 1 (original emphasis, but shown with
italics instead of a red font). See William W. Beach, David
Kreutzer, Ben Lieberman, and Nicolas Loris, "The Economic Costs of
the Lieberman-Warner Climate Change Legislation," Heritage
Foundation Center for Data Analysis Report No. CDA08-02, May
12, 2008, at http://www.heritage.org/Research/EnergyandEnvironment/cda08-02.cfm.
Environmental Protection Agency, Office of Atmospheric Programs,
"EPA Preliminary Analysis of the Waxman-Markey Discussion Draft:
The American Clean Energy and Security Act of 2009 in the 111th
Congress," April 20, 2009, at /static/reportimages/96CB707165DBE35947E9D3FBC60D5750.pdf
(June 5, 2009).
Johnson, "The Heritage Foundation's
Waxman-Markey Analysis," p. 2 (original emphasis).
Peter R. Orszag, "Issues in Designing a
Cap-and-Trade Program for Carbon Dioxide Emissions," testimony
before the Committee on Ways and Means, U.S. House of
Representatives, September 18, 2008, at /static/reportimages/4BEBFD2DD821D6E442E85652F37BCDCA.pdf
(June 4, 2009). He was director of the Congressional Budget Office
at the time.
Hawkins, testimony before Committee on
Environment and Public Works.
Natural Resources Defense Council, "Nuclear