Higher Energy Prices, GDP Declines and U.S. Job Loss Are Consequences of Cap and Trade Policy

Cap and trade proposals to curb greenhouse gases such as those proposed by President Obama and congressional leaders bear a high price tag to U.S. consumers including substantial spikes in energy prices that will slow economic growth—resulting in dramatic declines in U.S. employment and GDP. Testifying before the U.S. House Ways and Means Committee American Council for Capital Formation Senior Vice President and Chief Economist Dr. Margo Thorning urged lawmakers to closely weigh the minimal environmental benefits of cap and trade policies against their adverse impacts on the U.S economy, job growth and competitiveness.

“Higher energy prices slow economic growth,” Thorning said. “Under a cap and trade system, the large spikes in electricity, natural gas and other energy sectors will be passed on to consumers that can ill afford higher bills in this difficult economy.”

As one example of a cap and trade system effect on energy prices,, 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 analysis of the Lieberman/Warner bill shows significant energy price increases by 2030.The cost of electricity to the residential sector will rise by 101 to 129 percent by 2030, while the industrial natural gas price increase is projected to range between 180 and 244 percent. The effect of mandatory GHG reduction targets is to significantly increase the share of U.S. electricity generated by natural gas compared to the baseline forecast and industrial natural gas prices would rise by 180 to 244 percent by 2030.

The ACCF/NAM study also shows that under the proposal, GDP would decline 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. The Administration appears to expect the price of a carbon allowance to be approximately $13 to $16 dollars per ton of CO2 and that its cap and trade proposal would yield $675 billion over the 2012-2019. Based on the various studies, the estimated payments to the Federal government for carbon permits seem far too low.

Sadly, U.S. cap and trade proposals will have virtually no environmental benefits unless developing countries, whose emissions are growing strongly, also participate. Thorning cited the new Council of Economic Adviser’s Report to the President which states that global concentrations of CO2 in 2100 will be almost unaffected by U.S. emission reductions unless developing countries participate. Thus, sacrificing U.S. economic and job growth through unilateral climate change policies would yield little environmental benefit.

“Under a cap and trade system the U.S. will suffer significant economic pain with virtually no environmental gain,” Thorning concluded. “Lawmakers should be praised for the noble goal of reducing greenhouse gases, but the right approach is needed. To be effective, policies to reduce global GHG emission growth must include both developed and developing countries. Polices that enhance technology development and transfer are likely to be more widely accepted by the developing countries that must be brought to the global table on climate change solutions.”