Unintended Consequences: Northeastern State Proposals to Limit Greenhouse Gas Emissions

By Paul M. Bernstein, W. David Montgomery, Sugandha Tuladhar | Charles River Associates Incorporated

A number of northeastern states (Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and possibly Pennsylvania and Maryland) are considering policies to limit their greenhouse gas emissions. One target, the New England Governors/East Canadian Premiers agreement, would cap greenhouse gas (GHG) emissions at 1990 levels by 2010, reduce the cap to 10% below 1990 levels by 2020, and then reduce emissions to between 75% and 85% below 2000 levels by about 2050 (the Climate Change Action Plan or “CCAP”). Another proposed target would cap the region’s GHG emissions at 2000 levels by 2010 and keep northeastern emissions at that level permanently (“Cap 2000”). To make these reductions in emissions, fossil energy consumption would have to fall dramatically because carbon dioxide, the primary GHG covered by these proposals, is a necessary byproduct of the combustion of fossil fuels to produce energy.

This report, based on an analysis commissioned by the American Council for Capital Formation Center for Policy Research, summarizes the results of an in-depth analysis of the costs of these proposals under a number of assumptions and scenarios designed to identify the likely range of costs, while acknowledging that these costs cannot be predicted precisely. Among the key impacts on northeastern states are the following:

  • Energy prices rise significantly: Electricity prices rise by 35% in 2010 and 39% in 2020 under CCAP. Under the Cap 2000’s lower targets, electricity prices increase by 15% in 2010 and 23% in 2020. Industrial natural gas prices rise by 111% in 2010 and 119% in 2020 under CCAP and by 41% and 62% under Cap 2000 in 2010 and 2020 respectively. Similarly, gasoline prices increase by 39% and 44% in 2010 and 2020 under CCAP and by 15% and 24% under the Cap 2000 for the same time period.
  • Job losses are substantial: Under the CCAP targets, job losses are 192,000 in 2010 and 218,000 in 2020; under the Cap 2000, job losses range from 54,000 to 98,000 in 2010 and 2020.
  • Burden of reducing carbon emissions falls most heavily on the poor and elderly: In 2010 and 2020, the poorest 20% of households will bear an increased cost burden over 100% greater than the highest-income households due to the increased cost of energy. The elderly will face a burden 42% greater than the population under 65.
  • Purchasing power erodes because household income falls and prices rise. A typical household in the northeastern states loses an average of $2,600 and $3,000 in purchasing power for the years 2010 and 2020, respectively, under the New England Governor’s proposal (CCAP).1 Under the Cap 2000, the emission reductions and impacts are smaller: the average northeastern household suffers a loss of $1,300 and $2,000 in 2010 and 2020, respectively.
  • Regional economic output decreases: The loss in northeastern gross state product (GSP) grows over time. For the CCAP target, GSP would fall by 1.1% and 1.9% for the years 2010 and 2020, respectively. Under the Cap 2000 policy, GSP would fall by 0.4% and 0.9% in the years 2010 and 2020, respectively.
  • State tax revenues decline: Budget problems for the northeastern states would worsen. Lower wages and incomes lead to a loss in state income tax collections. In addition, reductions in gasoline tax collections and the linked loss in federal highway trust fund grants lead to a combined loss in state tax revenues of $2.9 billion under the CCAP target and $1.3 billion under the Cap 2000 for the northeastern region by 2010. Any increases in state outlays for energy-related costs would further worsen these budgetary impacts.
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