The U.S House of Representatives passed, by a narrow margin, a
massive energy bill that most notably includes a cap-and-trade
program to reduce carbon dioxide emissions and allegedly curb
global warming. A number of groups, including The Heritage
Foundation, have estimated the costs of the bill introduced by
Representatives Henry Waxman (D-CA) and Ed Markey (D-MA).
The Heritage Foundation, the Brookings Institution and the
National Black Chamber of Commerce all found that the bill will
have devastating economic impacts. All three studies project
significant losses in employment and gross domestic product (GDP),
the chief measure of economic activity. The Congressional Budget
Office (CBO) and the Environmental Protection Agency (EPA) estimate
significantly lower costs; however, these two only partially
analyze microeconomic "cash only" effects, not the full
macroeconomic impacts of cap and trade reported in the other
The Brookings Institution
The Brookings analysis of the Waxman-Markey bill
finds loss in personal consumption of $1-2 trillion in
present value. The more stringent carbon targets in subsequent
years produce even higher costs. Brookings projects that an
additional 8 percent cut in carbon dioxide emissions increases
costs 45 percent. GDP in the United States would be lower by 2.5
percent in 2050, and unemployment would be 0.5 percent higher (1.7
million fewer jobs) in the first decade below the baseline or
without cap and trade. The total allowance revenue (tax revenue)
generated by 2050 would be $9 trillion.
The National Black Chamber of
The National Black Chamber of Commerce found the following
adverse effects from Waxman-Markey: In 2015, GDP would be 1 percent
($170 billon) below the "no cap-and-trade bill" baseline. In 2030,
GDP will be 1.3 percent ($350 billon) below the baseline, and by
2050 the study projects a reduction in GDP of 1.5 percent ($730
billion). The study also projects higher unemployment of 2.3-2.7
million jobs in each year of the policy through 2030--after
accounting for "green job" creation.
The Heritage Foundation
The Heritage Foundation's Center for Data Analysis found that,
for the average year over the 2012-2035 timeline, job loss will be
1.1 million greater than the baseline assumptions. By 2035, there
is a projected 2.5 million fewer jobs than without a cap-and-trade
bill. The average GDP lost is $393 billion, hitting a high of $662
billion in 2035. From 2012 to 2035, the accumulated GDP lost is
$9.4 trillion (in 2009 dollars). The average of the climate tax
revenue--what the government gets to spend or give away--is $236
billion from 2012 through 2035 and adds up to $5.7 trillion in tax
Environmental Protection Agency
The EPA predicts that the bill would cost households only $140 a
year. It predicts that because of new energy efficiency measures,
consumer spending on energy bills would be about 7 percent lower in
2020 because of the bill.
However, the EPA study significantly biases the cost
- It is based on consumption. The EPA's numbers are based
on consumption changes, which are typically less than income
changes, as families respond to income losses by saving less.
- It uses discounting. Discounting is a reasonable
approach for comparing costs and benefits that occur at widely
different times. However, costs of climate change rarely use a
discounted rate this high. For comparison, 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.
- It assumes rebates. The EPA assumes that all the
allowance proceeds--the money generated by charging businesses to
emit CO2--will be rebated directly to consumers. This clearly is
not the case, since most of the allowances have been promised to
- It assumes a doubling of nuclear power. The EPA assumes
a doubling of nuclear energy production in the next 25 years even
though Waxman-Markey has no provisions for changing the regulatory
roadblocks that would allow for a broad expansion of nuclear
A Quick Trip Down Memory Lane
During last year's cap-and-trade debate in the Senate, seven
groups, including the EPA, published studies estimating the
economic effects on the bill spearheaded by Joseph Lieberman (I-CT)
and John Warner (R-VA). Lieberman-Warner (S. 2191) had emission
reduction targets comparable to Waxman-Markey. The EPA's model of
S. 2191 projected GDP to be between 0.9 percent ($238 billion) and
3.8 percent ($983 billion) lower in 2030, a higher range than The
Heritage Foundation's analysis. The table below shows that the
EPA's estimates of last year's cap and trade were similar to other
organizations' models of the Lieberman-Warner bill.
Congressional Budget Office
CBO estimates that cap and trade would cost just $175 per
household in 2020. Low-income households would actually receive an
average net benefit of $40 in 2020, while higher-income households
would incur a cost of $245.
The CBO report, however, has flaws of its own:
- It ignores economic damage. The CBO does not include the
decrease in GDP as a result of the bill. The GDP loss in 2020 would
be $161 billion (in 2009 dollars) according to Heritage Foundation
analysis. For a family of four, that is $1,870 that CBO
- It is an accounting analysis. The CBO analysis is an
accounting analysis of the flow of allowance revenue; it is not an
economic analysis of the true opportunity cost of the bill. The CBO
and Congress seem to assume that energy price increases can be
mitigated by giving allowance revenue back to businesses and
consumers. But this does not tell the whole story. There are
serious economic impacts from the energy price increases that the
CBO ignores. The CBO admittedly ignores economic costs such as the
decrease in GDP as a result of the bill and the fact that consumers
and business will change their behavior as a result of higher
- It does not apply to any real year. The CBO assumes the
smaller economy of 2010 but with the long-run adjustments that
could occur by 2020. This odd, hybrid assumption further shrinks
the estimated costs of the Waxman-Markey energy tax.
Regardless of the cost estimates and regardless of whether
global warming is a significant problem, the benefits of the
Waxman-Markey cap-and-trade bill are almost nonexistent.
Climatologist Chip Knappenberger projected that Waxman-Markey would
moderate temperatures by only hundredths of a degree in 2050 and no
more than two-tenths of a degree Celsius at the end of the
century. Even EPA Administrator Lisa Jackson
confessed that a unilateral approach to reducing greenhouse gas
emissions would have little effect.
A Lot of Pain for Minimal Gain
Three major analyses of the Waxman-Markey climate bill confirm
that cap and trade will produce an economy that will perform well
under its potential. Studies by the CBO and EPA predict manageable
costs estimates, but both studies have a number of problems and
significantly bias the costs downward. Even so, the supposed
affordable costs of carbon capping regulations still outweigh the
negligible benefits Americans would see from cap and trade.
Loris is a Research Assistant in the Thomas A. Roe Institute
for Economic Policy Studies at The Heritage Foundation.
William W. Beach, David Kreutzer, Karen
Campbell, and Ben Lieberman, "Son of Waxman-Markey: More Politics
Makes for a More Costly Bill," Heritage Foundation WebMemo
No. 2450, May 18, 2009, at http://www.
Warwick McKibbin et al., "Consequences of Cap and Trade,"
Brookings Institution, June 8, 2009, at http://www.brookings.edu/~/media/Files/events/2009/0608_climate _change_
economy/20090608_climate _change_economy.pdf (July 9,
2009); David Montgomery et al., "Impact on the Economy of
the American Clean Energy and Security Act of 2009 (H.R.2454),"
prepared for the National Black Chamber of Commerce by CRA
International, May 2009, at http://www.nationalbcc.org/images/stories/documents/CRA_Waxman-
Markey_ percent205-20-09_v8.pdf (July 9, 2009).
Using U.S. Census Population Projections Table
1. Projections of the Population and Components of Change for the
United States: 2010 to 2050 (NP2008-T1) Population Division, U.S.
Census Bureau Release Date: August 14, 2008 (July 16, 2009).