THE VINE JUNE 8, 2009
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In Greenwire today, Anne Mulkern looks at the always-cantankerous debate over how much we can reasonably expect a big climate bill like Waxman-Markey to cost. It turns out to be a surprisingly knotty question. Economists do try to model these policies, but their results depend on lots of slippery variables—the rate of technological advance, say, or how quickly consumers adopt more efficient appliances. (If you want your model to "show" that an environmental bill will have unbearable costs, all you have to do is assume near-zero technological progress, as the National Association of Manufacturers did with a Senate cap-and-trade bill last year.)
Basically, there are always assumptions to quibble with: At the moment, for instance, the EPA is estimating that the House energy bill's cap on carbon emissions will cost the average U.S. household anywhere from $98 to $140 per year through 2020. But that doesn't factor in, among other things, the bill's ambitious new efficiency standards for utilities, buildings, and appliances, which could well lower overall electricity bills for many consumers. On the flip side, these estimates get much, much shakier when you're looking further out, to 2030 or 2050.
One of the more interesting tidbits in Mulkern's story was her glance back at how previous estimates of various congressional policies have actually panned out. They're often wildly askew. The 2003 Medicare expansion, for example, has so far been about 40 percent cheaper than even the rosiest forecasts had hoped. And green regulations in particular have a long history of proving far less pricey than opponents claimed they would be:
When Congress debated what became the 1990 Clean Air Act amendments, both industry and the government overestimated the cost, said David Hawkins, director of National Resources Defense Council's climate programs. ... "The industry estimates were the highest," Hawkins said. "The EPA estimates were lower, but still higher than it turned out in reality."
Early estimates showed that cutting sulfur dioxide emissions to comply with the Clean Air Act would cost utilities $4 billion to $5 billion annually, according to a 1997 Economic Policy Institute briefing paper. But costs shrank due to technological advancements and a switch to lower-sulfur fuel. Utilities actually saved at least $150 million in 1994 through steps taken to comply with the new law, EPI said, citing other research.
When estimating the cost of new policy, Hawkins said, industry and government often underestimate how quickly technology will catch up. And experts are crunching numbers for policies that do not exist.
And it's not just the Clean Air Act's acid-rain program. Back in 1997, economists Eban Goodstein and Hart Hodges scrutinized the history of cost predictions for a whole slew of environmental rules, and a distinct pattern emerged: "Not only do industry lobbyists wildly overestimate the costs of proposed environmental regulations. More surprisingly, academic and government economists do too." The reason, they concluded, is that analysts consistently underestimate the U.S. economy's capability to innovate its way out of limitations.
P.S. Speaking of which, the Congressional Budget Office just unveiled its new analysis of the House climate and energy bill today. No surprise, it's already attracting critics: Joe Romm argues, with good reason, that the CBO is overstating the likely carbon price that will result from a cap on emissions.
(Flickr photo credit: Mulia)
--Bradford Plumer
15 comments
I think trying to make cost estimates out to 2030 or 2050 is pointless, unless you can predict what the cost of a barrel of oil or ton of coal will be. I don't know what they will cost, but I predict it will be a LOT higher than today. I just don't think there is enough readily accessible oil out there at today's price to accommodate another 20 years of growth in demand, much less 40 years. (There might be enough oil accessible at a much higher price to meet that demand.) Long-term, the energy savings from reducing energy consumption are going to be big, really big, and I think will far outweigh the costs of reducing consumption and shifting to renewable alternatives.
- JEFF FREY
June 9, 2009 at 2:37am
My initial estimate, based on 15% carbon allocations to be paid for by the public, is $350 per household. This will increase yearly as substitutes for fossil fuels are mandated into the mix. There is no technology that appears to be on the horizon that actually would reduce energy cost, except conservation.
- r-ennis
June 9, 2009 at 9:49am
R-ennis, what do you assume about the future cost of fossil fuels? Is that $350 above today's baseline, or $350 above last summer's baseline, or $350 above a projected future baseline?
If we had filled our fuel tank at the wrong time last summer, my household would have paid far more than $350 in additional heating costs last year due to the oil price spike. I think last year's spike illustrates that if production falls behind demand even slightly, the price can go up substantially.
I agree with your assessment of cost savings, but only if the price of oil and gas stay at present levels. I expect they will rise long-term, and will in time become more expensive than alternatives.
- JEFF FREY
June 9, 2009 at 11:23am
I neglected to count the subsidies for ethanol and biodiesel in may calculation above. These subsidies will either comtinue or add to the price for gasoline, heating oil, diesel and jet fuel. When these are added in the cost to the public will be roughly $2,000 per year.
This $2,000 figure is low as it does not include the additional cost for electricity that will result from mandating more renewable energy for electric power and/or the cost of carbon capture from coal burning facilities.
- r-ennis
June 9, 2009 at 11:31am
For Americans, $350/household is a pittance. You could easily squeeze that sum from the average annual household budget for, among other things, crap food and crap entertainment. This is yet another case where Obama needs to step up and spend some of his political capital, aka LEAD the nation, make a case, persuade ordinary people INCLUDING moderate- and low-income Americans, to make a sacrifice.
- teplukhin2you
June 9, 2009 at 2:38pm
Here's something I never would've expected: When the House Energy and Commerce Committee held
- Anonymous
June 9, 2009 at 3:57pm
Tep, you are right and wrong. I am around people all day who do not even have health insurance. They could buy it for the $6-$10 per day they piss away on cigarettes, lottery tickets, 32 ounce soft drinks from convenience stores and junk food. Getting them to do so and adopting a more responsible life style would be quite an accomplishment.
- r-ennis
June 9, 2009 at 4:06pm
Tep, I forgot to add that the low to moderate income people you are talking about are not at all concerned with global warming.
- r-ennis
June 9, 2009 at 4:08pm
JEFF FREY, my estimate is based on the cost of CO2 emissions at $25 per ton and is additive to any price rise for petroleum products. This cost is approximately $0.25 per gallon ($10.50 per barrel) or its equivalent for gas and coal. The industry expects oil to settle out at about $80-$90 per barrel for crude oil and about $10 more per barrel for a mix of oil related products.
As time goes on and more CO2 is mandated to be eliminated, the average household cost will go up considerably. Ethanol, biodiesel, wind turbines, nuclear are all far more costly than the fuel they will displace. I hope that the sacrifice is worth it, but have my doubts.
- r-ennis
June 9, 2009 at 4:18pm
JEFF FREY, my estimate is based on the cost of CO2 emissions at $25 per ton and is additive to any price rise for petroleum products. This cost is approximately $0.25 per gallon ($10.50 per barrel) or its equivalent for gas and coal. The industry expects oil to settle out at about $80-$90 per barrel for crude oil and about $10 more per barrel for a mix of oil related products.
As time goes on and more CO2 is mandated to be eliminated, the average household cost will go up considerably. Ethanol, biodiesel, wind turbines, nuclear are all far more costly than the fuel they will displace. I hope that the sacrifice is worth it, but have my doubts.
- r-ennis
June 9, 2009 at 4:18pm
r - decent health insurance for a family of four-- assuming they're not denied same due to a "pre-existing condition" (try translating that Americanism into any modern language)-- will set them back many many times $350/year.
They're not concerned with GW because BHO hasn't persuaded them. He's off a-shmoopin' with destiny, Lawrence-like, in the levant. Bigger stage 'n' stuff.
- teplukhin2you
June 10, 2009 at 1:14am
Thanks, r-ennis. The Alaska state government predicts a similar range for oil prices once the world economy recovers.
Taking a longer view, it is hard to predict the price, but I think 10-15 years out it is quite likely that the price differential between oil and wind/solar will look very different than it does today.
- JEFF FREY
June 10, 2009 at 2:13am
tep, I know that health care costs way more than $350. What I said that many poor people I know here, mostly rednecks, without health care spend $6-$10 per day on crap that could get them health care. They don't because hospitals take them anyway when then need a procedure. And they are totally against preventive care, smoke cigarettes, eat crap, etc.
- r-ennis
June 10, 2009 at 1:03pm
JEFF FREY, you are probably right that the relative cost of oil will go up. But, wind and solar compete with coal and nuclear, not oil. Of course, if coal remains in the picture, carbon capture would have to become commercially viable. I do not see an economic substiute for transportation fuels. Renewable fuels are a joke. Remember that CO2 emissions from transportation accounts for only 25% of total emissions and is hardest to displace. CAFE standards are the best course. Electric vehicles, to a lesser extent also.
- r-ennis
June 10, 2009 at 1:11pm
The Congressional Budget Office has been causing heartburn for health care reformers in recent weeks
- Anonymous
June 22, 2009 at 12:02am