In his September 24, 2009 column in the New York Times, Nobel Prize-winning economist Paul Krugman stated that, in the year 2020, the Waxman-Markey greenhouse gas legislation would cost the average family $160 per year, or as he put it, “roughly the cost of a postage stamp per day.” Golly. Save the planet, the polar bears, and all of God’s other little furry creatures for just pennies per day. Who, except for climate change-denying loons, could be against that?
At best, Krugman’s argument is disingenuous. At worst, it is dishonest. First, he uses a well-known advertising device under which one justifies a costly item by breaking down the cost into lots of small time periods. Under this sort of logic, you can go buy that new BMW for less than the price of a cup of coffee … every hour. Such “pennies per day” nonsense is better suited to late night television advertisements than to an economics column. Costs are costs. Slicing and dicing them into Ginzu knife-sized bits does not change the total cost.
Second, the $160 per year figure is simply wrong. According to the March 12, 2009 testimony
of Congressional Budget Office Senior Advisor Terry Dinan,
[W]ithout incorporating any benefits to households from lessening climate change, CBO estimates that the price increases resulting from a 15 percent cut in CO2 emissions could cost the average household roughly $1,600 (in 2006 dollars), ranging from nearly $700 in additional costs for the average household in the lowest one-fifth (quintile) of all households arrayed by income, to about $2,200 for the average household in the highest quintile.
Thus, Krugman’s cost figure is off by an order of magnitude. So, Waxman-Markey’s cost has increased to the cost of a grande latte every day. Isn’t that still a tiny price to pay for climate salvation? But wait, there’s more.
Remember that the CBO cost estimate is for a 15% cut in CO2 emissions by the year 2020. Waxman-Markey calls for CO2 reductions of over 80% by 2050. For American businesses and households, the easiest and cheapest reductions are reflected in the CBO estimate, since Waxman-Markey’s bite does not come until after the year 2020. Although technology will have improved by then, unless cap-and-trade proponents are betting on “too cheap to meter” pollution-free technologies, reducing carbon emissions to 1800s levels or lower will be really expensive.
It is possible to reduce the costs to families. For example, under Waxman-Markey most of the allowances will be “given away” initially. In that case, the local utility won’t have to pay for those allowances, and thus pass along the costs of to ratepayers. Of course, in addition to the problem of deciding which industries will be the beneficiaries of such emissions largesse, giving allowances away defeats the entire purpose of a cap-and-trade system. Besides, aren’t we facing a “climate emergency?” Aren’t we only months away from permanent ecological catastrophe? Another way to reduce costs is to “recycle” the revenues raised by a cap-and-trade system by reducing other taxes, such as corporate and personal income taxes. This was noted in the CBO testimony. However, given our Government’s seemingly endless appetite for additional revenues, the prospect of offsetting tax reductions—especially in the presence of mounting deficits—seems slim.
Although Krugman’s numbers are wrong, far worse is his failure to address the benefits of Waxman-Markey. In fact, the bill’s benefits have been sold on everything but climate change. Supposedly, Waxman-Markey will create oodles of “green jobs,” even though nobody really knows what a “green” job is. It will improve our energy security. It will reduce other bad pollutants. It will make our coats shiny.
If the experience in Spain with wind power subsidies is any indication, some of those green jobs are likely to be very expensive indeed, at over $1 million each. So expensive that it would be less costly just to give away the money to lucky individuals who would be green jobs winners. As for energy security, the idea that we can become energy-independent strains credulity, for the simple reason that it makes as much economic sense as growing oranges in Oslo. And, while shutting down coal-burning power plants would indeed reduce emissions of pollutants like sulfur dioxide and oxides of nitrogen, those two pollutants are already priced in the market under their own cap-and-trade system. In other words, the benefits of reductions in those pollutants are already accounted for.
There have been studies of the economic benefits of Waxman-Markey. The most recent is a study issued by the Pace University Institute for Policy Integrity which shows that the net benefits of Waxman-Markey are positive as long as the “social cost of carbon” is greater than $9 per ton
. Interestingly, the report shows that, in the year 2020, the annual cost of Waxman-Markey would only be between $7.2 and $8.6 billion in 2007 dollars. If you assume an inflation rate of 2.5% per year, that translates to between $9.6 and $12 billion per year. If there are 200 million US households in the year 2020, that translates into a cost per household of only about $50 - $60 per year, far less than even Krugman’s incorrect value. If, however, one uses the CBO average cost estimate of $1,600 per household in the year 2020, then the “social cost of carbon” needed for the costs to exceed the benefits increases from $9 per ton to $300 per ton.
According to the report’s authors, DOE uses a $19 per ton breakeven assumption, which is slightly below the $300 per ton cost. Moreover, the Pace Study authors conclude that the benefits could increase with even more stringent reductions of CO2, although how we can reduce emissions more than the over 80% reduction called for by Waxman-Markey by the year 2050 is not obvious. Well, there is always the extinction of the human race. That would certainly reduce anthropogenic CO2 emissions.
The majority of any climate change benefits would not accrue to the United States. Instead, the authors of the Pace study suggest that the costs paid by US consumers should “be viewed as a highly effective, highly leveraged form of foreign aid.” No doubt, this will be a great comfort to US consumers paying $1,600 more per year, when nations such as China and India benefit from the US hoisting itself on its own economic petard, in the hope that other nations will reciprocate. Laughably, the authors of the Pace report state that, “experts believe that US domestic action on climate change is a prerequisite to future global climate efforts, at which point Americans will see additional (and essentially free) benefits derived from international action.” In other words, you (US) jump first. If you survive, we’ll think about jumping after you.
None of the preceding has even addressed the uncertainty regarding man-made climate change or the costs of adapting to climate change. Mankind has always had to adapt to changing climate. Moreover, why today’s climate is, to quote the immortal Goldie Lox, “just right,” is not clear. Worst of all, proponents of Waxman-Markey, including Krugman, appear to have forgotten one of the most basic of all economic concepts: the need to allocate scarce economic resources. In the 2008 Copenhagen Consensus, addressing climate change ranked at the very bottom
of numerous environmental and health challenges. Viewed in that light, Waxman-Markey is all sham, and no wow.
Jonathan A. Lesser is the CEO of Continental Economics, a Sandia Park, New Mexico-based consulting firm.