WSJ's Strassel Claims Cap And Trade “Is An Economy Killer”

From Strassel's January 28 Wall Street Journal column:

The official end of cap and trade, and Mrs. Browner, wasn't conciliation -- it was necessity. The public now understands that cap and trade is an economy killer, and no small number of Democrats lost their seats in midterms for supporting it. Few in the party want to take it up again, and House Republicans won't let it pass. Mr. Obama would be crazy to continue calling for it. [Wall Street Journal, 01/28/11]

CBO: Cap And Trade Bill Would Have “Modest” GDP Cost

CBO: Climate Legislation “Would Probably Reduce GDP By A Modest Amount” While Significantly Cutting Greenhouse Gases. In Congressional testimony on “The Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions,” CBO director Douglas Elmendorf stated that “CBO concluded that climate legislation that would significantly reduce greenhouse-gas emissions in the United States would probably reduce GDP by a modest amount compared with what it would be without the legislation.” From Elmendorf's written testimony for a Senate Energy and Natural Resources Committee hearing:

Researchers often report the likely effect of climate policies on the economy in terms of their projected impact on GDP. On the basis of a review of estimates by other analysts, CBO concluded that climate legislation that would significantly reduce greenhouse-gas emissions in the United States would probably reduce GDP by a modest amount compared with what it would be without the legislation. The studies reviewed by CBO yielded a wide range of estimates of losses in GDP from climate policies, but all of them concluded that, all else being equal, higher prices for emission allowances would impose greater losses in GDP. On the basis of those studies, CBO concluded that GDP losses over the entire period of the policy were likely to fall in the range of 0.01 percent to 0.03 percent per dollar of allowance price.11 CBO then estimated losses in GDP by combining its own estimates for the prices of allowances under H.R. 2454 with the range of predicted GDP losses per dollar of allowance price.

Using that approach, CBO concluded that the cap-and-trade provisions of H.R. 2454 would reduce the projected average annual rate of growth of GDP between 2010 and 2050 by 0.03 to 0.09 percentage points, resulting in progressively larger reductions in the level of GDP over time relative to what would otherwise occur (see Table 1). To place the size of those changes into perspective, CBO projects that real GDP in the United States will grow at an average annual rate of about 2.4 percent between now and 2050 and will be roughly two and a half times as large in 2050 as it is today. [CBO, 10/14/09]

CBO: House Bill Would “Slightly Dampen” Growth Of GDP. In a report on “The Costs of Reducing Greenhouse-Gas Emissions,” CBO stated:

All of the models reporting macroeconomic impacts project that the emission reductions required by H.R. 2454 would slightly dampen the growth of GDP over the long term. (One model projects small increases in the early years of the program). Quantitative estimates of the losses in GDP and consumption vary among studies, depending in large part on differences in assumptions about the availability of offsets (reduced availability of offsets increases the emission reductions required in the energy sector and thus increases economic costs) and differences in assumptions about the sensitivity of energy use to changes in prices (reduced sensitivity increases the price increases required to reach emission targets and thus increases economic costs). On the basis of those estimates and its own analysis, 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 (see the right panel of Figure 1).19 By way of comparison, CBO projects that real GDP will be roughly two-and-a-half times as large in 2050 as it is today. Losses in consumption and overall well-being would probably be smaller than losses in GDP.

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. Nonetheless, CBO concludes that the net effects on GDP of restricting emissions in the United States--combining the effects of diverting resources to reduce emissions and moderating losses in GDP by averting warming--are likely to be negative over the next few decades because most of the benefits from averting warming are expected to accrue in the second half of the 21st century and beyond. [CBO, 11/23/09]

Impact Of Cap And Trade Dwarfed By Expected Growth. CBO estimated that the House cap and trade bill would reduce GDP by between 1 percent and 3.5 percent. The following chart represents a 1.2 percent reduction in GDP by 2050:

[The Atlantic, 6/26/09]

CBO: Total Employment Would Decrease “A Little” As Economy Shifts

CBO: “Total Employment Would Probably Be Reduced A Little” As Economy Adjusts. Elmendorf stated in his Congressional testimony:

Climate legislation would cause permanent shifts in production and employment away from industries focused on the production of carbon-based energy and energy-intensive goods and services and toward the production of alternative energy sources and less-energy-intensive goods and services. While those shifts were occurring, total employment would probably be reduced a little compared with what it would have been without a comparably stringent policy to reduce carbon emissions because labor markets would most likely not adjust as quickly as would the composition of demand for different outputs. [CBO, 10/14/09]

CBO: Cap And Trade Would “Have Only A Small Effect On Total Employment In The Long Run.” The CBO brief states that “the cap would probably have only a small effect on total employment in the long run,” while noting that "[j]ob losses would be concentrated in particular industries and in particular geographic regions":

Impact on Employment

H.R. 2454 would cause a significant shift in the composition of employment over time. Production and employment would shift away from industries related to the production of carbon-based energy and energy-intensive goods and services and toward the production of alternative and lower-emission energy sources, goods that use energy more efficiently, and non-energy-intensive goods and services. Those shifts in employment would occur gradually over a long period, as the cap on emissions became progressively more stringent and the allowance price became progressively higher. The experience of the U.S. economy over the past half-century in adjusting to a sustained decline in manufacturing employment strongly suggests that the economy can absorb such long-term changes and maintain high levels of overall employment. As a result, CBO concludes that the cap would probably have only a small effect on total employment in the long run.

Nevertheless, the employment effects of H.R. 2454 could be substantial for some workers, families, and communities. Labor markets would take time to adjust to shifts in demand. Job losses would be concentrated in particular industries and in particular geographic regions. Some workers would probably end up working fewer hours or at lower wages than they did previously, and some might leave the labor force entirely. Involuntary job losses could significantly reduce the lifetime earnings of some affected workers. Several provisions of H.R. 2454 would subsidize the development and deployment of technologies that reduced emissions or would subsidize production by specific industries and firms, tending to dampen the bill's effects on employment--especially in industries and areas where they are expected to be most severe.[CBO, 11/23/09]

House Bill Contained Provisions To Mitigate Employment Costs For Those Most Affected. From Elmendorf's testimony:

Provisions of H.R. 2454 Intended to Ameliorate Those Employment Effects. Some provisions of the bill -- those that would subsidize the development and deployment of technologies that reduced emissions or that would subsidize production by specific industries and firms -- would dampen the effects of the policy on employment in industries and areas where they are expected to be most severe.

• Selected provisions of the bill would subsidize petroleum refiners through 2026 and trade-exposed, energy-intensive industries--those in which domestic firms compete with foreign firms that do not bear the cost of complying with comparable policies to control emissions -- through 2035. Those subsidies would be linked to output, causing the firms receiving them to produce more than they otherwise would under the cap-and-trade system and in doing so employ more people (although that process also dampens the reallocation of output and employment to industries that produce fewer carbon emissions).

• The bill also includes measures that would decrease the negative effects of the cap-and-trade system on output and employment in the coal mining and processing industries. Those provisions would establish and provide funding for the Carbon Storage Research Corporation. That entity would, in the 15 years after enactment of the bill, support the development of technologies to capture and store carbon, potentially enabling coal-fired plants to generate electricity without releasing greenhouse gases into the atmosphere. Through 2050, utilities or merchant generators that invested in and operated plants that used those technologies to generate electricity would be paid subsidies to offset the higher costs of that technology. Those subsidies would increase demand for coal and boost output and employment in the coal industry relative to what would occur under the emissions restrictions in the legislation but without those subsidies.

• The bill also would establish the Climate Change Worker Adjustment Assistance program and provide funding of $4.1 billion through 2019 for that program. That program would aim to cushion the effects of the emissions-control policies on workers who lost their job as a consequence of the policy. It also would seek to complement the flexibility evident in U.S. labor markets by providing job training and assisting workers searching for employment. [CBO, 10/14/09]