One-Two Punch of High Cost Renewables and Cap and Trade System Will Further Harm Already Weak U.S. Economy

Major analytical flaws exist in a new report suggesting that the U.S. should adopt a new  $100 billion economic stimulus package promoting a “green recovery” through faster adoption of costly renewable energy.  The “green recovery” would be funded by a “cap and trade” system, which would raise the price of conventional energy sources like coal, natural gas and oil, or by increasing the federal deficit. Testifying before the House (Select) Energy Independence And Global Warming Committee today, American Council for Capital Formation Senior Vice President and Chief Economist Dr. Margo Thorning said the economic model used in the Center for American Progress study, which suggests that two million “green jobs” will be created from $100 billion in federal spending on expanded production of wind, solar and biofuels, does not accurately measure the impact of replacing lower cost conventional energy sources with the higher costs of renewable sources.  Furthermore, the report also omits the harsh economic costs associated with a cap and trade system on emissions as has been analyzed in multiple studies by the federal government and the private sector.

The higher costs of renewable energy sources and the dramatic impact that a cap and trade system will have on energy prices, jobs and household incomes are a one-two punch that the U.S. economy does not need.
-Dr. Margo Thorning

As an example of the economic drag that a cap and trade system promises, macroeconomic analysis on the impact of the recently defeated Lieberman/Warner Climate Security Act (S.2191), which requires a 40% reduction in covered GHG emissions by 2030.  The study showed that by 2014, the drag of higher energy prices caused by the cap and trade system in S.2191 reduces total U.S. employment (net of new jobs created in green industries) by 850,000 to 1,860,000 jobs in 2014. U.S. GDP and household income would also be severely impacted (see full study at http://www.accf.org/pdf/NAM/fullstudy031208.pdf).

If the proposed “green recovery” plan was paid for by imposing a cap and trade system to raise $50 billion (or more) per year, economic recovery would be slowed, not enhanced.  Similarly, increasing the federal deficit by $50 billion per year is likely to raise interest rates which will also slow overall economic and job growth.

Thorning also noted that the U.S. government is already spending billions of dollars annually to develop renewable energy. In fact, in FY 2007 renewable energy received the largest amount of federal subsides of all U.S. energy sources.  While we need all types of energy, renewables are not expected to increase their share of U.S. energy production to much more than the current level of 7 percent by 2030, according to the U.S. Department of Energy.  Furthermore, the U.S. does not have the trained engineers and manpower to spend additional billions of dollars on renewables productively over a two-year period.  Much of the money called for in the CAP’s two-year project would simply be wasted.  If it is true that the most significant problem facing U.S. homeowners is declining housing prices, it seems unlikely that CAP’s proposal to spend large additional amounts of taxpayer dollars on renewable energy projects will address this fundamental issue.

Congress should instead focus on policy changes that restore stability to the housing and credit markets and avoid further disruptions to energy markets. They should also closely monitor how the economy reacts to the recent actions of the Federal Reserve Board and the U.S. Treasury to shore up U.S. financial markets before putting any more taxpayer dollars at risk in an attempt to stimulate economic recovery. Policymakers need to promote U.S. energy supplies of all types and avoid unrealistic climate change policies. Allowing increased access to both off-shore and on-shore areas for drilling and exploration would also have a positive impact on U.S. energy supplies.

U.S. economic growth and energy use go hand in hand; each 1% increase in GDP is accompanied by a 0.3% increase in energy use.  Climate change is a global problem and meaningful reductions in greenhouse gas emissions will require the participation of developing and industrializing countries such as India, China, Brazil, Indonesia, and others whose emissions are growing rapidly. While reducing U.S. GHG growth is a worthwhile goal, it is important to realize that without international participation, U.S. sacrifices in terms of higher energy prices and reduction in energy use will slow our own economy with no meaningful reduction in global GHG emissions.

“Finding constructive policies that will create productive jobs for our growing population – while addressing the concern over greenhouse gases at the same time – is a very important policy challenge for this country and it is good those questions are being addressed by this committee,” Thorning concluded.

Founded in 1973, The American Council for Capital Formation (www.accf.org) is a nonprofit, nonpartisan economic policy organization dedicated to the advocacy of tax, energy, environmental and regulatory policies that encourage saving and investment.