Climate Change Legislation Would Slow Economy, Says Congressional Budget Office
November 24, 2009The non-partisan Congressional Budget Office released a report on Monday saying that the climate change legislation being considered by Congress could reduce the purchasing power of the middle class and shrink or slow the economy.
The report, “The Costs of Reducing Greenhouse-Gas Emissions,” says market-based regulations such as a cap and trade scheme would boost the cost of emission-intensive activities. In turn, household incomes would shrink along with consumer consumption and savings, real wages would fall, the supply of labor would shrink, and economic investments would be discouraged because of rising production costs.
In general, with cap and trade, the government would set a ceiling (cap) on how much carbon a company could emit during its production process. If a company’s emissions went above that cap, it could purchase (trade) carbon credits, the proceeds of which would be redistributed by the government to help foster more environmentally friendly companies.
The House of Representatives passed H.R. 2454, the American Clean Energy and Security (ACES) Act, in June. The Demcrats' bill would create a system of carbon allowances that become more costly over time. The goal is to reduce CO2 emissions 80 percent by 2050 (compared with 2005 levels).
The Senate has not yet approved a climate change bill.
The CBO said if the House bill is enacted, it could shrink real Gross Domestic Product up to 3.5 percent by 2050. The “CBO concluded that H.R. 2454 would slightly reduce real GDP—by roughly 0.25 percent to 0.75 percent in 2020 and by between 1.0 percent and 3.5 percent in 2050,” reads the report.
The Gross Domestic Product is the total market value of all goods and services in the United States over any year.
Generally, a range of provisions like the ones in the House bill “would tend to dampen overall economic activity” by affecting several aspects of the U.S. economy, said the CBO report.
The regulations, for instance, would reduce “the productive capacity of existing capital and labor,” which would in turn “reduce consumption and saving,” reads the report. They also would reduce real wages and “the supply of labor,” they would “discourag(e) investment through increasing the cost of producing capital goods,” and they would divert research dollars to develop “more expensive sources of energy.”
Furthermore, Congress’ auditor said that if the United States were to enact such a range of provisions on its own while other carbon-emitters continued about business as usual, the trade deficit could also be harmed through “leakage,” as other nations benefited from our stricter standards.
“As long as a significant percentage of the world’s economy did not restrict greenhouse-gas emissions, a portion of any reductions achieved in the United States would probably be offset by increases in emissions elsewhere,” the CBO researchers wrote.
“For example, as U.S. consumption of oil declined, pushing down international oil prices, foreign consumption of oil would rise,” states the report. “In addition, energy-intensive production overseas (and exports of such products to the United States) would most likely grow as U.S. manufacturing costs rose relative to foreign costs.”
“Such emissions ‘leakage’ would lead countries that were controlling emissions to achieve smaller net reductions in global emission and to incur greater costs than it would if all countries were controlling emissions simultaneously,” states the report.
The findings are mitigated in the report by the CBO’s assertion that taking no action to curb carbon emissions would also harm the economy. “Unchecked increases in greenhouse-gas emissions would also tend to reduce output compared with a situation where climate change did not occur—especially later in this century as emissions accumulated in the atmosphere,” the report reads.
It also says any “benefits from averting warming are expected to accrue in the second half of the 21st century and beyond.” A CBO spokesperson confirmed that the authors were assuming carbon emissions would cause climate disruption, which in turn would cause economic harm, but said the office would not talk about those effects, nor potential benefits, with any specificity.
The ACES Act narrowly passed the House in June, 219-212, with only eight Republican votes, one of whom was Rep. John McHugh (R-N.Y.) who has since left to join the Obama administration as Secretary of the Army.
One of the few Republican groups that backed the legislation was the national grassroots organization Republicans for Environmental Protection (REP). Its vice president for Government and Political Affairs, David Jenkins, told CNSNews.com that the CBO did not make clear the full range of risks associated with unchecked emissions because it was difficult to predict.
The report “doesn’t really go into trying to analyze it,” he said, “and there’s a lot of that that’s unpredictable. [But] I think doing nothing is a huge gamble.”
His colleague, Vice President for Policy Jim DiPeso, told CNSNews.com that “the use of the atmosphere as a free disposal site carries a cost, which we don’t have right now. By [putting a price on carbon emissions], then the market will get a signal to start redirecting investments away from polluting, wasteful forms of energy production to cleaner energy production that doesn’t use the atmosphere as a free garbage can.”
But David Kreutzer, a senior policy analyst in energy economics and climate change at the conservative Heritage Foundation, said that, just like the CBO, no one can fully quantify what risk, if any, emissions or warming impose. “[T]hey (the CBO) don’t give citations and I sort of wonder about that,” he said.
Kreutzer pointed out that he was struck by the fact that a part of the Obama administration was admitting that cap and trade legislation would not help the economy.
“The fact that they even are willing to admit that this is not an economic stimulus, even if we include supposed benefits from reducing global warming -- this is all going to be negative for decades, and any hope from payback is in the second half of the 21st century and beyond,” said Kreutzer. “So you know, we’re talking 100, 200, who knows how many years.”
With all that uncertainty, Kreutzer said the costs to GDP and employment would not be the “slight” changes the CBO reports or the pittance that the REP members called them.
“It’s a big deal,” he said, “and it’s an especially big deal given the current debate where they’re trying to spin this as an economic stimulus. There’s been debate over how much something like [ACES] would cut employment and how much they would cut income, but there’s not a debate over whether they cut it or not, and that’s emphasized here by the CBO. They point that out and it’s true.”
“So I think that people,” he added, “to talk about known catastrophes [as if] there’s any sort of certainty whatsoever, or any sort of consensus on the size of the catastrophe -- that’s so large that we have to do anything that it takes to cut it even the slightest amount-- that’s just silly. I can’t even imagine where they’re getting that, other than ‘An Inconvenient Truth.’”
“An Inconvenient Truth” was a 2006 documentary film about former Vice President Al Gore’s campaign to educate Americans about the alleged dangers of global warming.
The Senate is currently considering legislation that contains a similar market-based regulation of carbon emissions, sponsored by Sens. Barbara Boxer (D-Calif.) and John Kerry (D-Mass.). It was reported out of the Senate Committee on Environment and Public Works but has yet to be taken up by the full Senate.