May 5, 2009

May 5, 2009 | Testimony on Economy, Regulation

The National and Local Economic Impacts of Cap and Trade

STATEMENT BEFORE THE AMERICAN ENERGY SOLUTIONS GROUP
MAY 5, 2009

I would like to thank the American Energy Solutions Group, both for its work in ensuring a balanced congressional discussion on energy and related environmental issues, and for extending me the privilege of participating in today's energy summit.

We all know that the Waxman-Markey cap and trade proposal will be very expensive and amounts to nothing more than a massive energy tax. After all, the way cap and trade works is by raising the cost of energy high enough so that individuals and businesses are forced to use less of it. Consider recent Congressional Budget Office testimony that a 15 percent reduction in carbon dioxide emissions, a target that the Waxman-Markey proposal would reach within a decade, was estimated to cost the average household $1,600 per year. And then annual costs would continue to increase for the rest of our lifetimes. It would result in higher electric and natural gas bills, higher gasoline prices, and higher costs for food and manufactured goods because they require energy to produce and to transport.

But the costs go well beyond consumers. The higher energy costs also kill economic activity and jobs. This is particularly true of manufacturing jobs. Earlier Heritage Foundation analyses of proposals comparable to Waxman-Markey have estimated up to 3 million lost manufacturing jobs. Some of those jobs will be destroyed entirely, while others will be outsourced to China and other developing nations, nearly all of which have stated that they will never constrain their own economic development by imposing energy price-raising global warming measures on themselves.

The adverse impacts are substantial. The Heritage Foundation estimated cumulative gross domestic product losses from last year's less stringent Senate Lieberman-Warner bill at $1.7 trillion to $4.8 trillion by 2030. But it is important to add that the burden is not evenly spread throughout the nation. Some parts of the country rely more than others on coal for electricity, which is the most heavily targeted energy source under Waxman-Markey. And some parts of the country still manufacture things and other parts no longer do so, so the job losses from Waxman-Markey would burden some states and districts more than others.

I have attached some information on the Heritage Foundation's Manufacturing Vulnerability Index, and more can be found on our Web site http://www.heritage.org/cda/index.cfm. The Manufacturing Vulnerability Index is a measure of each state and district's reliance on coal for electricity and on manufacturing for jobs. Not surprisingly, there is a clear regional pattern. The coal-using and industrial Midwest is hardest hit. Eight of the 20 congressional districts with the highest Manufacturing Vulnerability Index are in Indiana, and eight are in Ohio. Seven of the top 50 are in Wisconsin, five are in Michigan, and four are in Kentucky. It should be noted that our analysis did not look at the adverse impact on those districts with oil and natural gas industry jobs.

The least-hurt regions are the West Coast and the Northeast, which of course is where we see the strongest support for Waxman-Markey. But even there, the impact on energy costs and jobs would be bad enough, and keep in mind that an energy tax like this is highly regressive, hurting low income persons the most.

In conclusion, it is important to be honest and up front with the American people about the costs of Waxman-Markey. And these costs are far higher than many proponents of the proposal have suggested. While the nationwide costs are substantial, the regional differences are also very important, especially for those states and districts identified by the Manufacturing Vulnerability Index as likely to be very hard hit. I thank you for the opportunity to participate in this effort and look forward to any questions you may have.

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Center for Data Analysis Working Paper

March 25, 2009

Manufacturing Vulnerability Index

As Congress begins debate on President Obama's budget proposal, it should keep in mind that the United States economy is in the midst of a severe recession and any attempt to restrict carbon-dioxide emissions (CO2), either by cap-and-trade or by carbon tax, will inflict further damage on the economy. Energy-intensive sectors (i.e. manufacturing) will experience the most severe consequences. As energy prices rise, producers will raise their prices out of necessity. However, because consumers will be constrained by their budgets, the consumption of energy-intensive products and services will decline.

As consumption declines so too does employment in those firms. For instance, by the year 2029, there would be nearly 3 million less manufacturing jobs in the United States, under a cap-and-trade regime envisioned in the Lieberman-Warner bill, which the Senate rejected last year. Even more alarming, CO2 reductions of this magnitude would destroy more than half the jobs in some parts of the manufacturing sector by 2029, including machinery manufacturing (57%) and plastic and rubber products (54%).[1]

Whereas Lieberman-Warner proposed cutting CO2 emissions by 70% below the 2005 emission level, President Obama has proposed an 83% reduction. Any cut enacted along these lines does not bode well for manufacturing employment and most especially in those regions that are both coal dependent and manufacturing intense. However, other regions will not be spared the indirect costs that are associated with a cap-and-trade program. Consumers everywhere will be saddled with higher direct costs for energy and pay, yet again, as the prices of the products they buy rise.

The Manufacturing Vulnerability Index (MVI) reveals which areas of the country will experience direct harm under such a scheme. The East and West North Central, East South Central and South Atlantic regions are especially vulnerable to direct impacts and manufacturing job losses. Again, though some areas of the U.S. rank relatively low on the MVI, they will not escape the aforementioned indirect costs.

Methodology

Center for Data Analysis (CDA) analysts obtained employment data for each Congressional district and state from The U.S. Census Bureau.[2] The analysts obtained statewide energy resource mix data from the Environmental Protection Agency.[3]

A previous analysis of a cap-and-trade regime performed by the analysts revealed a dramatic increase in the price of coal and tremendous job loss in the manufacturing sector.[4]

The Manufacturing Vulnerability Index (MVI) was established to gauge a district and state's likely vulnerability to each of the observed trends. The percentage of employment based in manufacturing in each district was multiplied by the percentage of power generated by coal.

The higher the MVI, the more vulnerable a particular area is to the economic harm imposed by a policy that limits CO2. For further information, contact Dan Holler at 202-608-6053.

About the Author

Ben Lieberman Senior Policy Analyst, Energy and Environment
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Economy, Regulation

Show references in this report

[1] David W. Kreutzer, and Karen A. Campbell, "CO2-Emission Cuts: The Economic Costs of the EPA's ANPR Regulations," Heritage Foundation Center for Data Analysis Report No. 08-10, October 29, 2008, at http://www.heritage.org/Research/EnergyandEnvironment/cda08-10.cfm.

[2] U.S. Census Bureau, "American Community Survey, 1 Year Estimates," Table C24030, http://factfinder.census.gov/home/saff/
main.html?_lang=en

[3] "eGRID2007 Version 1.1, Year 2005 Summary Tables," Environmental Protection Agency, 2008, at http://www.epa.gov/cleanenergy/documents
/egridzips/eGRID2007V1_1_year05_SummaryTables.pdf
.

[4]William W. Beach, David W. Kreutzer, Ph.D., 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
.