Trump’s Withdrawal from Climate Accord Saved U.S. from Higher Energy Prices

Diana Furchtgott-Roth | June 2, 2017 | 11:27am EDT
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President Donald Trump speaks about the U.S. withdrawal from the Paris Climate Accord. (Youtube Screenshot)

It is fitting that President Trump withdrew from the Paris Accord the day before the Labor Department issued its employment report for May, thereby saving the economy from future higher energy prices and additional regulation. With only 138,000 jobs created, and a decline in the labor force participation rate, the economy needs to do better.

With the exception of tax reform, nothing is better for American jobs than withdrawing from the Paris Accord, which would have raised U.S. energy prices and forced our companies to move energy-intensive industries offshore.

Moving production offshore to countries such as China and India, which under the Paris Accord will not have to reduce emissions until 2030, will not help global warming. It will just mean that higher emissions will come from countries with fewer regulations.

It is remarkable how CEOs of leading corporations, few of whom supported President Trump in his campaign, have publically requested that the administration stay in the Paris deal. These are individuals who in large part supported the Clinton campaign.

For example, Apple CEO Tim Cook, in an email to employees reported by Axios, said, “I know many of you share my disappointment with the White House’s decision to withdraw the United States from the Paris climate agreement. I spoke with President Trump on Tuesday and tried to persuade him to keep the U.S. in the agreement. But it wasn’t enough.”

Apple already produces electronics offshore, so an increase in energy prices would not cause it to shift operations overseas. However, other companies are in a different situation.

The Paris Accord would have required America to lower its emissions by 27 percent below 2005 levels by 2025. This would have either led to further regulations or to a carbon tax, both of which would have raised the price of energy. This discourages energy-intensive manufacturing, the use of electricity, and transportation.

Raising the price of energy is regressive. Since those in the bottom fifth of the income distribution spend 25 percent of their income on energy, compared with 4 percent for people in the top fifth, higher energy prices would have to be accompanied by transfers to low-income groups. Some low-income earners are not required to file returns, and they would have to do so in order to be identified and compensated. That means extra work for them, and for the Internal Revenue Service.

The Paris Accord would have harmful geographic and social effects with the United States. It would fall primarily on coal, which has the largest carbon content of any fuel. The tax on coal would be many multiples of the tax on natural gas. Residents of West Virginia, Michigan, Ohio and Pennsylvania did not vote for President Trump because they liked the Paris deal. They voted for him because they did not like it.

In contrast, the relative beneficiaries of a carbon tax would be Democratic states that have committed to green energy schemes, such as California and New York and Massachusetts. Residents of these states voted Democrat.

Implementing the Paris Accord would have raised the prices of energy-intensive goods relative to imports from countries without carbon taxes. So Americans will prefer to buy imports, and American firms will lose business to developing countries which would not have had to comply with the Paris deal until 2030, if ever.

Proponents of the deal suggested putting tariffs on imports in proportion to their carbon content so that American companies would not be at a disadvantage. But the lack of support for the border adjustment tax floated by House Republicans suggests that carbon import taxes would be equally unpopular.

The American government, businesses, and individuals are free to make efficient investments in energy without the Paris Accords. All the Paris deal does is prevent America from making efficient investments in energy—and anything else.

The ultimate test of whether renewable energy such as wind, solar, or corn-based ethanol offers a promising choice to consumers is whether people are prepared to buy them and companies are willing to invest in them. If a product were to pay for itself with a five-year tax credit, then some enterprising corporation would take the risk and invest its own capital. The very need for subsidies and mandates shows that few want to buy these products.

For two centuries, carbon-based energy fueled global economic growth without global summits, bringing a world of barely one billion souls largely at a subsistence level to a world of seven billion yearning for the middle class. The Paris Accord is a refutation of that progress, substituting the corrupt regulations of an international conference over the free markets of economic growth.

We are told that disaster is imminent unless America stays in the Paris Accord. Yet U.S. emissions decline every year, and are now at 16 percent of global greenhouse gas emissions. The United States suffers the biggest economic losses under the Paris deal, while China, the largest global source of emissions, does nothing for years. There is little surprise that China backs the deal. The only surprise is why America ever did.

Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute.  Follow her on Twitter here.

Editor’s Note: This piece was originally published by Economics21 at the Manhattan Institute.

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