Reminder: the cost of cap-and-trade, etc.

Nothing new here, but a useful review from Environmental Capital as things heat up a bit in DC:

Congress will soon face its moment of truth on climate-change legislation, prompting the Senate’s Committee on Energy and Natural Resources to convene a Scrabble board of government agencies Tuesday morning to clear up some lingering questions for once and for all. Such as: How much will this thing cost the U.S. economy, and why are cost estimates all over the place?

One takeaway: Lieberman-Warner can cut a big chunk of U.S. greenhouse-gas emissions without killing the economy. Estimates vary between about 0.5% of GDP and about 2% of GDP by 2030.

The biggest question mark for most experts is how quickly industry can develop and deploy newclean-energy technology, like “clean coal.” If clean coal doesn’t materialize and the nuclear renaissance gets derailed, for example, the bill’s cost to the U.S. economy will be twice as large over the next two decades, the EPA said.

Peter Orszag, the director of the CBO, focused on the bill’s cost for business and individuals rather than the economy in the abstract. Two things are key.

The bill has to be flexible enough to let business cut emissions when cutting is cheap, and throttle back when it doesn’t make economic sense—the emissions reductions in the end will be about the same, but will cost less. A “safety valve” and a floor price would be the best way to build in flexibility, Mr. Orszag said—better than some of the ideas in the current Lieberman-Warner bill. That notion makes environmentalists nervous: They say a safety valve — an upper limit on the cost of emissions — would let the environmental steam out of a climate cap.

Comments

[Bob Murphy]

John,

I would be interested if you shared your views (or could link to a previous post where you have done so) on what would be an acceptable climate change policy. E.g. to me, 2% of GDP sounds outrageously expensive, since I don't think China will agree to a comparable limit anytime in the near future.

[Steve]

I'm not sure what China has to do with it. CO2 stays in the atmosphere for 100+ years. We have been the largest emitter for the past 100 years. We emitted around a third of the GHGs that are causing the planet to warm. China emitted a small percentage.

China did surpass the US in current emissions last year and we do need to engage them diplomatically and economically to get them to cut back on emissions. However, inaction by them does not justify inaction by us since we are the largest contributer to problem due to our emissions over the last 100+ years. Holding up any meaningful action until China is on board is more akin to cutting off one's nose to spite one's face.

[Cervus]

And not having China on board will make all our efforts meaningless.

[reason]

Now personally, I think such cost estimates are pie in the sky numbers someone picked out of their arse, and really mean nothing at all. One persons cost is another persons income so there are distributive consequences but if we have to change the technology ANYWAY starting earlier (and perhaps getting royalties from patents) may not hurt.

But is that NET cost (net of global warming costs I mean)?

[Bob Murphy]

Steve,

I'm not sure what China has to do with it. CO2 stays in the atmosphere for 100+ years. We have been the largest emitter for the past 100 years. We emitted around a third of the GHGs that are causing the planet to warm. China emitted a small percentage.

If the government were cleaning up toxic waste, and fined the companies that emitted it, that would make perfect sense.

But that's not what's happening here. The purpose of cap-and-trade isn't to fund efforts to suck CO2 out of the atmosphere. Rather, the purpose is to give incentives to curb future additions to the concentration that's already up there (and yes, is disproportionately due to the US).

The estimated cost of 2% of GDP is a huge; in 2007 that would have been something like $275 billion. And so we have to be sure we're getting something really useful when it has such a high price tag.

My point is, if China and other industrializing countries don't participate, that will greatly diminish the benefits of US cap-and-trade. For an analogy, if just the city of San Fransisco did cap-and-trade, surely you agree that wouldn't do much to stem global climate change.

The same is true at the national level, just not as much.

Also, it's not merely that if you have cap-and-trade over 20% of the world, then you only get 20% of the benefits. It's worse than that, because GHG emissions can move to the unregulated countries. (This is called "leakage.")

So if cap-and-trade in the US causes a factory to move to China, that will actually increase overall emissions, because the technology is "dirtier" on average in China than in the US.

Now not everything will move, so I'm not saying on net US cap-and-trade will cause global GHG emissions to be higher than they otherwise would be. But I'm saying the benefits of US cap-and-trade are a lot lower if the rest of the world doesn't participate.

And when the program is estimated to cost 2% of GDP once it fully kicks in, I think we should be really concerned about the benefits to justify that huge cost.