Cap & Trade and North Dakota’s Economic Future

Summary of Facts: Cap & Trade And North Dakota’s Economic Future

Congress is now debating far-reaching energy legislation that would impose an aggressive “cap-and-trade” system on greenhouse gas emissions (GHG) and mandate high levels of energy efficiency and renewable energy.

• Cap-and-trade is a regulatory system for mandating increasingly lower emissions of GHG. Regulated entities must purchase emission allowances from the government for each ton of GHG emitted. Unused emission allowances can be bought or sold (“traded”) by any person.

• The U.S. House of Representatives’ bill, known as Waxman-Markey, and the Senate version, known as Kerry-Boxer, would cap GHGs beginning in 2012 and become increasingly aggressive, requiring as much as a 20 percent reduction below 2005 levels in 2020 and, finally, an 83 percent reduction in 2050.

• Energy efficiency provisions would impose “energy saving mandates” across all sectors of the economy.

• Mandates in the Waxman Markey bill require that retail electricity suppliers meet a 20 percent combined energy efficiency and renewable electricity standards by 2020.

North Dakota, a state that was on track for growth despite the current recession, would lose jobs and face a declining economy if pending federal energy legislation were enacted.

• North Dakota’s employment, gross state product, industrial output, state budget revenues and household income will fall.

• Employment: By 2030, as emission reduction targets tighten and the free allocation of permits and generous carbon offsets phase out, North Dakota would stand to lose between 5,310 and 7,231 jobs. The primary cause is lower industrial output due to higher energy prices, the high cost of complying with required emissions cuts and greater competition from overseas manufacturers with less stringent emissions requirements.

• Gross State Product: Higher energy prices, fewer jobs and loss of industrial output are estimated to reduce North Dakota’s GSP by as much as $2.2 to $3.1 billion by 2030.

• Industrial Output: North Dakota is likely to experience a decrease in manufacturing output. Overall manufacturing output declines by 4.6 percent in the low-cost case and by 5.2 percent in the high-cost case. Another important North Dakota industry, nonmetallic mineral product manufacturing, would fall considerably, declining by up to 19 percent in 2030. Coal production would fall by 74 percent to 81 percent.

• State Budget Revenues: Since North Dakota typically receives about 10 cents of every dollar of income generated in the state, projected declines in GSP would result in a $220 to $310 million reduction in state tax revenues. The proposed legislation would reduce state budget receipts and force North Dakota policymakers to make hard choices about how to fund basic services, such as law enforcement and schools.

• Household Income: Disposable income would fall by an average of $762 to $1,252 in 2030. Low-income families and the elderly, who spend a disproportionate amount of their income on energy, will be especially hurt.
With increased production in the agriculture and energy sectors, the North Dakota economy was poised for real growth, but if pending energy legislation is enacted, growth in both of these industries will be dramatically reversed.

• The North Dakota economy actually grew in 2008—at a rate of 7.3 percent—compared to the U.S. economy, which grew only 0.7 percent in 2008. Employment also grew in North Dakota at a rate of 3.1 percent in 2008.

• Real per capita GSP grew 44 percent over the past decade, twice the rate of U.S. growth, allowing North Dakota to catch up with the national average. In 2008, North Dakota ranked 20th with $37,832 GSP per person.

• In the past 10 years, employment in North Dakota’s mining industry grew by 101.5 percent – that is more than twice the growth of the mining industry in the United States over the same time period.

• According to a study by North Dakota State University, the coal industry contributed 28,311 jobs and $3 billion to the state’s economy, not including an addition of $98.9 million to state tax revenues in 2008.

• North Dakota is also a substantial oil producing state and is responsible for over two percent of U.S. production. According to a 2009 study by PricewaterhouseCoopers, the oil and natural gas industry supported 27,914 jobs and contributed $2.8 billion to the North Dakota economy in 2007.

• Agriculture is responsible for nearly one-fourth of North Dakota jobs, and the state is the number one producer of many agricultural commodities, including flaxseed, canola, pinto beans, durum wheat and honey. Under pending energy legislation, farmers and ranchers would face higher costs for fuel, electricity, fertilizer and crop protection products.
Multiple economic analyses show that these federal energy bills would increase the price of electricity, gasoline and natural gas. Consequently, economic productivity, employment and household income would decline.

• To meet the stringent emissions targets of Waxman-Markey, electric companies would have to substitute high-cost technologies for conventional generation, increasing prices for North Dakota families and businesses.

• Energy prices in North Dakota, a state which now depends on coal (the energy source most at risk under mandatory greenhouse gas emission caps) for 87 percent of electricity generation, would rise higher than many other states.

• By 2030 the price of gasoline would increase by as much as 24 percent, electricity up to 64 percent and natural gas up to 77 percent.

• Faced with skyrocketing energy costs, decreasing production and greater competition from overseas manufacturers without these pressures, North Dakota businesses will have no choice but to cut thousands of jobs.

• North Dakota’s 613 schools and universities and 54 hospitals will likely experience a 28.2 to 42 percent increase in energy expenditures by 2030. For government entities, costs for services, including public transportation and vehicle fleets, such as school buses, would also rise.

• North Dakota’s current relatively favorable electricity prices are an important factor in the state’s ability to keep business costs low and thus, attract new sources of employment.

At a time when margins are running thin on family budgets, the average North Dakota family will experience higher energy costs, leaving less income to be spent on other necessities.

• The average North Dakota family would see their home electricity costs go up by as much as 64 percent by 2030.

• The ripple effect of higher energy prices would impose a financial hardship on North Dakota households with real disposable income being reduced by $762 to $1,252 in 2030.

• Because they spend a greater share of their income on energy costs, low-income families, including elderly residents on fixed incomes, will suffer disproportionately from the effects of this legislation.

This paper describes recent economic and energy trends in North Dakota and provides details on the impact of pending federal energy legislation on the state. This research is based upon realistic    economic modeling and is nationally recognized as one of the most credible analyses of the pending federal energy legislation.

• This study is a joint project of the North Dakota Policy Council (NDPC) and the American Council for Capital Formation (ACCF).

• The NDPC is a liberty-based think tank focused on developing North Dakota solutions to North Dakota problems. They provide credible nonpartisan expertise and research to help North Dakotans advocate policies that are based on individual liberty, individual responsibility and limited government.

• For nearly 30 years, the ACCF and its research affiliate, the ACCF Center for Policy Research, have brought sound information to U.S. and international policymakers, the media and the public to support the premise that a nation’s economic strength and stability depend upon well-thought-out economic, regulatory and environmental policies to promote capital formation, economic growth and a higher standard of living for all.

• This research is an expansion of a recent macro-economic study conducted by the ACCF and the National Association of Manufacturers (NAM), which found significant loss to gross domestic product (GDP) as a result of enactment of the Waxman-Markey bill. This research is a deeper examination of those initial findings specific to North Dakota.

• This analysis was undertaken using a version of the National Energy Modeling System (NEMS), the same tool used by the United States Energy Information Administration for its energy forecasting and policy analysis.

• The study authors also explored both high- and low-cost scenarios to account for a wide range of assumptions regarding the likely cost and availability of new technologies, energy efficiency and renewable electricity standards and domestic and international offsets.

• This research examines the impact of Waxman-Markey on North Dakota’s economy. Because Kerry-Boxer requires further emissions reductions, the economic impacts addressed in this research could be higher if that legislation were enacted.

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