ACCF/SBE Council Study on Kerry-Lieberman Bill

American Council for Capital Formation | Science Applications International Corporation (SAIC)

Executive Summary

The American Council for Capital Formation (ACCF) and the Small Business and Entrepreneurship Council (SBE Council) believe it important to fully examine the potential costs that enactment of the Kerry-Lieberman bill, “The American Power Act of 2010” (APA), would impose on the U.S. economy.  It is especially important to provide the analysis in the context of scenarios and assumptions on what we believe are realistic views on the timing and future availability of key technologies, carbon offsets and economic options.  It is well recognized that the cost to U.S. consumers and employers of implementing greenhouse gas (GHG) emission reductions is highly dependent on the market penetration achieved by key technologies and the availability of carbon offsets.   This project is designed to assist in understanding the potential economic impacts at the national, state and individual household levels.  It is offered to help guide choices on climate change policy to minimize the impacts on economic growth, energy security, and U.S. competitiveness and maximize the benefits to the environment.

This analysis was undertaken by ACCF and SBEC using NEMS/ACCF-SBEC, the version used in this project of the National Energy Modeling System (NEMS) model, the model used by the U.S. Energy Information Administration (EIA) for its energy forecasting and policy analysis. ACCF applied input assumptions under two scenarios (high cost and low cost) investigating the sensitivity of assumptions that have proven in the past to significantly impact the cost of limiting CO2 emissions from energy activities.  The ACCF-SBEC input assumptions embody judgment on the likely cost and availability of new technologies in the early decades of a long-term effort to reduce GHG emissions. These assumptions include the availability of nuclear power and wind and biomass technologies for electric generation, and the availability of carbon capture and sequestration (CCS) for more efficient coal and natural gas-based power generation. The ACCF-SBEC input assumptions also included assumptions regarding the likely availability of domestic and international offsets – – key factors influencing analysis of the cost of limiting greenhouse gas emissions.

Overview of Findings in the ACCF-SBEC Analysis of the Kerry-Lieberman Bill

The NEMS/ACCF-SBEC model study’s findings indicate substantial and growing impacts to consumers and the economy of meeting the increasingly stringent emission targets through 2030 established by the APA.  Among the NEMS/ACCF-SBEC study’s general findings are:

U.S. economic growth slows:
U.S. economic growth slows under the Kerry-Lieberman bill, especially in the post-2025 period as the free emission allowances are phased out for both energy producers and energy consumers. In 2030, the inflation adjusted, annual GDP level is reduced by 1.3% (or $319 billion) under the low cost scenario and by 1.7% (or $418 billion) under the high cost scenario, compared to the baseline forecast (see Table 3).  To put these GDP losses in perspective, in 2010 the Federal government spent $ 715 billion on social security payments to retirees and $451 billion on Medicare.  Looked at another way, if GDP levels are reduced by $418 billion in 2030, Federal and State tax receipts will be approximately $125 billion lower that year since Federal and State governments take approximately 30 cents out of every dollar of GDP. Thus, government budgets will be harder to meet.Over the entire 18 year period (2013-2030) covered by the ACCF-SBEC analysis, cumulative GDP losses are substantial, ranging from $1.5 trillion dollars under the low cost case to $2.1 trillion under the high cost case. Again, the hit to Federal and State budgets is large, cumulative tax receipts will be reduced by between $450 billion and $630 billion compared to the baseline forecast. Given the size of projected Federal deficits and State budget receipt shortfalls, policymakers may want to think carefully before imposing the Kerry-Lieberman bill on the already struggling U.S. economy.

Industrial production begins to decline:
Industrial production (manufacturing, mining and electric utilities) begins to decline immediately in 2013, relative to the baseline forecast, under the Kerry-Lieberman bill.  In 2030, U.S. industrial output levels are reduced by between 4.9% and 5.8% under the low and high cost scenarios.

Among the hardest hit industries are aluminum (down almost 40%), steel production (down 18 %) and petroleum refining and glass production (down by almost 13%) compared to the baseline forecast. A hallmark of economic downturns and recessions is a slowdown in the growth rate or an absolute decline in the level of industrial output. Clearly, the negative impact on industrial output of the Kerry-Lieberman bill would make it harder to strengthen the U.S. economy and restore strong job growth.

Employment is negatively impacted:
Employment is negatively impacted by Kerry-Lieberman, even when additional “green” jobs are factored in. Over the 2013 – 2030 period, total U.S. employment averages between 351,944 and 497,180 fewer jobs each year under the low and high cost scenarios than under the baseline forecast.  In 2030, there are between 1,400,000 and 1,900,000 fewer jobs in the overall economy. Manufacturing employment is hard hit: by 2030 there are between 500,000 and 700,000 fewer jobs, or between a 5.3% and 6.8% reduction in total manufacturing employment in the U.S compared to the baseline forecast.  On average, over the 2013 – 2030 period, the manufacturing sector absorbs 67% to 74 % of the overall job losses caused by the Kerry-Lieberman bill.

Energy prices rise:
Energy prices rise over the 2013-2030 period, due to the various features of the Kerry-Lieberman bill including prices for carbon permits which gradually rise to between $100 and $118 dollars per ton of CO2 in 2030.

Over the past decade, each 1% increase in GDP in the U.S. has been accompanied by a 0.2% increase in energy use, thus higher energy prices will make it harder to recover from the current period of sluggish economic growth and to reduce the current high rate of unemployment. The ACCF-SBEC study shows that residential electricity prices by 2030 are between 29.3% to 42% higher. Gasoline prices are also higher; by 2030 prices are up to 15.2% to 18% higher than under the baseline forecast (or 60 to 71 cents per gallon cents in inflation adjusted dollars).

Per Capita GDP drops:
Per capita GDP drops under the Kerry-Lieberman bill, even after accounting for rebates to consumers mandated in the bill. In 2030, the decline in annual income per capita GDP ranges from about $850 in the low cost case to about $1,115 in the high cost case.

 

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