Cap and Trade System Will Further Harm Already Weak U.S. Economy

Required reductions in greenhouse gas emissions under President Obama’s proposed cap and trade system will generate far greater government windfalls than originally projected, but energy price increases and broad scale changes in consumer behavior and business practices will make it far more difficult to revitalize the U.S. economy and job growth. Testifying before the U.S. House Subcommittee on Energy and Environment, American Council for Capital Formation Senior Vice President and Chief Economist Dr. Margo Thorning applauded the goals of greenhouse gas reduction but urged caution and a close study of the economic impacts of proposals on the U.S economy, job growth and competitiveness.

“Each one percent increase in U.S. GDP growth is accompanied by a 0.3 percent increase in energy use,” Thorning said. “Therefore, the higher the price of energy, the slower the rate of economic recovery. The drag of higher energy prices caused by the cap and trade system proposed by President Obama and other congressional leaders will cause substantial declines in GDP and reductions in U.S. employment.”

As one example of the high costs of a cap and trade system, Thorning pointed to an analysis by the American Council for Capital Formation and the National Association of Manufacturers of last year’s legislation by Senators Lieberman (I-CT) and Warner (R-VA) S.2191, which set targets to reduce GHGs to 15 percent below 2005 levels by 2020 and to 70 percent below by 2050. The ACCF/NAM study shows that under the proposal, GDP would decline by as much as 1 percent in 2020 and by up to 2.7 percent in 2030. She also noted reductions in total U.S. employment (net of new jobs created in green industries) by 1,210,000 to 1,800.000 jobs in 2020 and by as many as 4,100,000 in 2030, compared to the baseline forecast.

Results of other modeling efforts from CRA International, DOE’s Energy Information Administration, the U.S. Environmental Protection Agency and the Massachusetts Institute of Technology show similar findings.

Thorning noted that adjusting the Lieberman-Warner data for Obama Administration plan’s slightly different time paths for emission reductions would still impose high costs to consumers and business, and further shows that government revenues from the carbon auction would be double or triple the $675 billion revenue estimate for 2012-2019 in the Administration’s budget. Footnote 5 on page 129 of the Administration’s budget states, in reference to the proceeds from the auctioning of carbon allowances that “All additional net proceeds will be used to further compensate the public”.

If a mandatory federal requirement to reduce greenhouse gases is in order, Thorning noted that a carbon tax would be a more sensible alternative that would impose less economic pain thana a cap and trade system. A carbon tax sets a price for a ton of emissions and allows the quantity of emissions to adjust to the level at which marginal abatement cost is equal to the level of the tax. Many experts conclude that there are substantial advantages to employing a tax on emissions rather than a cap and trade approach as it provides “where and when” flexibility for businesses trying to curb emissions. .

Emission leakage and U.S. competitiveness under climate change policy is also of concern. While some policymakers suggest that combining a U.S. climate change proposal with import restrictions (called Border Tax Adjustments or BTA’s) could reduce the U.S. job loss and emission leakage from higher energy prices, Thorning noted that many experts say that BTA’s could pose a serious threat to the international trading system and could violate provisions of the WTO.

Thorning also stated that technology development and transfer can play a key role in slowing the growth of GHGs. Improving U.S. cost recovery allowances for energy efficient and less emitting technologies and continuing to develop international programs like the Major Economies Initiative and others are cost effective approaches to improving the environment as well as strengthening the U.S. economy.

“Any effective policy to reduce global GHG emission growth must include both developed and developing countries,” Thorning stressed. “Policies that enhance technology development and transfer are likely to be more widely accepted than those that require sharp, near term reductions in per capita energy use. Such international partnerships will allow developed countries to focus their efforts where they will get the largest return, in terms of emission reductions for the least cost.”