On June 26, the House of Representatives narrowly passed climate
change legislation designed by Henry Waxman (D-CA) and Edward
Markey (D-MA). The 1,427-page bill would restrict greenhouse gas
emissions from industry, mainly carbon dioxide from the combustion
of coal, oil, and natural gas.
If passed by the Senate, the bill would burden families with
thousands of dollars per year in direct and indirect energy costs.
Additional thousands of dollars of income would be lost, and the
national debt would jump by tens of thousands of dollars per
family. Job losses due to Waxman-Markey's energy restrictions would
be in the millions.
How Cap and Trade Works
Waxman-Markey is an energy tax of historic proportions. Called
"cap and trade" by its supporters, the bill would limit man-made
greenhouse gas emissions by instituting a declining cap on
allowable emissions. Electricity producers, petroleum refiners, and
natural gas distributors would have to obtain permits, called
"allowances," from the federal government for every ton of CO2
emissions they produce.
Since the government issues fewer allowances in each subsequent
year, the allowance price has to rise to meet demand. That is, the
cost of an allowance is a tax, and the tax rises each year. As with
any tax, it will ultimately be passed on to consumers in the form
of higher energy and product prices. The total value of the
allowances (the tax revenue) would be hundreds of billions of
dollars per year and will have an aggregate value of $5.7 trillion
by 2035. This makes Waxman-Markey one of the largest new taxes in
history, if not the largest.
In particular, the Heritage analysis projects that by 2035 the
economic impacts (in constant 2009 dollars) of this bill are:
- Gasoline prices will rise 58 percent (or $1.38);
- Natural gas prices will rise 55 percent;
- Heating oil prices will rise 56 percent;
- Electricity prices will rise 90 percent;
- A family of four can expect its per-year energy costs to rise
- Including taxes, a family of four will pay an additional $4,609
- A family of four will reduce its consumption of goods and
services by up to $3,000 per year, as its income and savings
- Aggregate GDP losses will be $9.4 trillion;
- Aggregate cap-and-trade energy taxes will be $5.7
- Job losses will be nearly 2.5 million; and
- The national debt will rise an additional $12,803 per person
($51,212 per family of four).
(All of these price and cost increases are above and beyond
those expected to occur without the legislation.)
As President Obama said about his cap-and-trade program during
the presidential election campaign, "electricity prices would
necessarily skyrocket." The same applies to many other products as
the Waxman-Markey energy tax spreads through the economy as
businesses and consumers adapt to higher energy prices.
People would spend more for less energy; build smaller houses
and buildings; drive smaller, less safe vehicles; turn their
thermostats up in the summer and down in the winter; and divert
income to more expensive energy-saving appliances. But savings from
these activities and more would not be enough to offset the higher
energy costs. The net effect is lower income, higher prices, and
What Makes the Heritage Study
An oft-cited study from the Congressional Budget Office (CBO)
claims that the cost of Waxman-Markey would be less than $200 per
year per family, or "a postage stamp per day." However, the CBO
report does not even attempt to measure the impact on national
income--an impact estimated to be in the thousands.
Another frequently cited study comes from the Environmental
Protection Agency (EPA). The EPA makes some very questionable
assumptions about how CO2 caps would be met, especially concerning
the growth of nuclear power and the ability to forego industrial
CO2 cuts by paying farmers to grow trees and foreigners to cut
their CO2 emissions (known as offsets). The magnitude of offsets in
the EPA's latest report is much larger than in their preliminary
analysis of Waxman-Markey.
But the factor least understood is the EPA's use of discounting,
a financial tool for comparing costs and benefits that occur at
different times. Discounting is a legitimate tool for cost-benefit
analysis, but it can give a distorted picture of the magnitude of
costs for the period in which they occur.
For instance, the EPA projects that the real cost (adjusted for
inflation) to a household of 2.6 people will be $1,287 lost
consumption in 2050. However, after discounting, this figure is
reduced to $140. Here, discounting tells us that $140 invested at a
riskless 5 percent per year will be worth $1,287 in 41 years. It in
no way says that 41 years from now the lost consumption will be
Since consumption comes after taxes and savings, the $1,287 is
much less than the lost income in the first place. So the EPA cost,
with all of its questionable assumptions, is over $2,700 in 2050
when converted to lost income for a family of four--even after
adjusting for inflation.
In short, the EPA and the CBO studies are not comprehensive
measures of the economic impact of Waxman-Markey in simple,
In contrast, analyses by The Heritage Foundation and the
Brookings Institution--two organizations often portrayed as
ideological opposites--study the overall impact of Waxman-Markey on
the economy, including the effects of higher production costs and
lower economic output. These studies show that Waxman-Markey would
lead to significant economic losses--on the order of thousands of
dollars per family per year. Analysis done by CRA International for
the National Black Chamber of Commerce comes to a similar
Taxing and Spending
The Heritage Foundation analysis exposes Waxman-Markey as a new
tax of a historic magnitude. As could be expected, such a large
revenue stream has attracted an army of lobbyists seeking a share.
(The Center for Public Integrity estimates that over 2,300
lobbyists are involved.)
Congress has obliged--and then some. For the first 15 years
(2012-2026) of the Waxman-Markey regime, over 88 percent of the
revenue is given to various special interest groups. In fact, more
than 100 percent has been promised for the years 2016 and 2017. So
this historic tax increase has been matched by a historic spending
Another Burden on Future
The income losses, the job losses, the tax increases, and the
mounting debt all get worse over the coming decades. The
Waxman-Markey bill forces a bad deal on a generation that does not
have the option to turn it down.
The $9.4 trillion of lost income, the 2.5 million lost jobs, the
$5.0 trillion of additional national debt, and the $5.7 trillion in
new taxes will buy no more than a 0.2 degree (Celsius) moderation
in world temperature increases by 2100 and no more than a 0.05
degree reduction by 2050.
Kreutzer, Ph.D., is Senior Policy Analyst for Energy Economics
and Climate Change in the Center for Data Analysis at The Heritage
David W. Kreutzer, Karen A. Campbell, William W. Beach, Ben
Lieberman, and Nicolas D. Loris, "The Economic Consequences of
Waxman-Markey: An Analysis of the American Clean Energy and
Security Act of 2009," Heritage Foundation Center for Data
Analysis Report No. 09-04, August 6, 2009, at http://www.heritage.org/Research/EnergyandEnvironment/cda0904.cfm.
For analysis of other cap-and-trade legislation, see William W.
Beach, David W. Kreutzer, Ben Lieberman, and Nicolas D. Loris, "The
Economic Costs of the Lieberman-Warner Climate Change Legislation,"
Heritage Foundation Center for Data Analysis Report No.
08-02, May 12, 2008, at http://www.heritage.org/Research/EnergyandEnvironment/cda08-02.cfm.
Congressional Budget Office, "The Estimated
Costs to Households from the Cap-and-Trade Provisions of H.R.
2454," June 19, 2009, at /static/reportimages/8A2CEFCBECFD1C3C5ED3AB9EAC9FB1DB.pdf
(July 25, 2009); David Montgomery et al., "Impact on the economy of
the American Clean Energy and Security Act of 2009 (H.R.2454)," CRA
International, May 2009, at http://www.nationalbcc.org/images/stories
/documents/CRA_Waxman-Markey_%205-20-09_v8.pdf (July 25,
2009); Warwick McKibbin, Pete Wilcoxen, and Adele Morris,
"Consequences of Cap and Trade," Brookings Institution, June 8,
2009, at http://www.brookings.edu
_climate _change_economy.pdf (July 25, 2009).