October 15, 2009

The Bean Counters Take

Climate Costs: The CBO’s Take on Cap-and-Trade–and Carbon Taxes


By Keith Johnson

As the Senate wrestles with the climate bill, the cost of curbing greenhouse-gas emissions reigns paramount. Yesterday, a host of officials paraded before a Senate panel to estimate how much similar legislation passed by the House could hurt the economy.

The director of the Congressional Budget Office sparked headlines when he acknowledged that climate legislation could dent GDP growth and lead to a net loss of jobs in the short term. Well, that’s exactly what the CBO said publicly a month ago.

But there are three interesting takeaways from CBO boss Douglas Elmendorf’s testimony.
First, it’s not an either-or question. There are costs to not acting on climate change, too. While the CBO analysis focused on the costs of curbing emissions, the U.S. economy would suffer from rising temperatures and climate change throughout the century: “As a consequence, a relatively pessimistic estimate for the loss in projected real gross domestic product is about 3 percent for warming of about 7°Fahrenheit (F) by 2100,” Mr. Elmendorf said, cribbing directly from last month’s report.

Second, the U.S. isn’t acting in a vacuum. The cost and effectiveness of whatever the U.S. does will be determined by what the rest of the world does or doesn’t do. If the U.S. limits carbon-dioxide emissions while other big economies don’t, for example, economic activity (and emissions) will probably “leak” to those unregulated economies. Which would undermine U.S. efforts, the CBO said: “Such emissions ‘leakage’ would lead countries that were controlling emissions to incur greater costs while achieving smaller reductions in global emissions.”
Third, candy’s dandy but a carbon tax is still nicer. That’s been the CBO’s line back since this whole debate began, championed by former CBO boss and now White House budget director Peter Orszag.

Mr. Elmendorf’s point? A cap-and-trade program, like the one the Senate is considering, offers certainty on the level of emissions reductions—but only by offering a lot of uncertainty about the costs. That makes the whole system less appealing:

In essence, the additional certainty that a cap-and-trade program could provide about the amount of cumulative emissions would be bought at a relatively high cost without yielding corresponding certainty about the amount of climate change that would occur. The greater certainty about the price of emissions in the future that a tax would offer would provide affected firms and households with greater certainty about the conditions they would face in adjusting to restrictions than a cap would provide. That greater certainty would ease planning for capital investments and could lower the risk associated with developing new technologies.

Still, when it comes to cap-and-trade or a carbon tax, it looks like the die’s already been cast in favor of the former—whatever people such as Mr. Elmendorff or Rex Tillerson say.


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