Saturday, October 25, 2014

Lower Carbon Emissions! Now Available at Low, Low Prices!

When the EPA proposed its Clean Power Plan last June, the usual special interest groups, including the Montana Chamber of Commerce, went on the attack. After all, the plan was intended to reduce carbon emissions from existing coal fired power plants, which surely meant that less coal would be mined, energy would be more expensive, and the economy would languish in depression and misery. To prove it, the US Chamber of Commerce trotted out a commissioned economic study of the EPA plan which showed that it would cost the economy something like $50 billion a year every year through 2030; that, from the Chamber’s perspective, was far too much to pay to secure the benefits of reducing carbon emissions (which the Chamber, by the way, made no attempt to quantify).

All that might’ve seemed scary - the Chamber certainly wanted you to be scared - but as it turned out, it was also overblown. For one thing, as I pointed out in a previous post, $50 billion may look like a pretty serious chunk of change, but when you consider what the US economy produces every year (currently about $16 trillion worth of goods and services), it shrivels in comparison. And then there was the inconvenient fact that the Chamber study examined the cost of a plan that reduced emissions by much more than the EPA was proposing to, and that meant that the EPA plan would not cost $50 billion, but something substantially less.*

The Chamber could offer only a wobbly defense for being less than completely straight forward with these cost estimates, so I’m sure you’ll be relieved to know that they bounced back earlier this week when Glenn Oppel at the Montana Chamber was able to tout a new study by NERA Economic Consulting.  You can find the NERA analysis here, and while I am happy to report that it does appear to assess the regulations that the EPA is actually proposing, there’s some bad news as well: the numbers are bigger and scarier than ever. As Oppel pointed out in a press release, the cost of complying with the EPA regulations is now estimated to be more than $366 billion! It looks like we're going to hell in a hand basket after all.

Now before you drive yourself crazy trying to figure out why smaller emissions reductions should cost 7.3 times more than larger ones, you need to recognize that we are comparing apples and oranges here. The first study said that the EPA plan would cost us $50 billion a year; the new study says that it will cost $366 billion a …well, who knows? If Oppel does, he’s not telling. So you need to read the study itself.

It turns out that $366 billion is the “present value...taken in 2014 using a 5% discount rate” of all the costs of compliance from 2017 to 2031. The “simple” way of explaining what all that gobbledygook means is this: $366 billion is the amount of money we would have to set aside this year - in a trust fund or bank account or some other investment earning 5% - in order to cover our total compliance costs from 2017 to 2031. It’s sort of like the wise parents of a new baby salting away enough money now (if that’s possible) to cover the astronomical college tuition the kid is going to have to pay in 2032.

Is $366 billion a lot of money? One way to look at it is to imagine that we really do want to prepay right away, this year, for our future emissions reductions: $366 billion, cash on the barrel head. How hard would that be? Well, as I said before, our GDP this year is about $16 trillion, so our emissions reductions nest egg would eat up about 2.3% of our total economic output. Not cheap, but doable.

Doable, but not very sensible. Why should we pay for all the costs of the next 17 years of emissions reductions out of this year’s GDP? After all, aren’t we going to be producing GDP like gang busters all those years as well? Shouldn’t we use some of that future GDP to pay our future emissions bill? Well, of course we should. And what we should compare that $366 billion to is the “present value...taken in 2014 using a 5% discount rate” of all the GDP that will be produced from 2017 to 2031. And that is about $196 trillion dollars.

So there you have it: according to numbers in the NERA analysis, complying with the Clean Power Plan over the next 17 years would cost a little less than 1/5th of 1% of GDP over the same period. That’s pretty darned cheap, and something to think about the next time somebody tells you that fighting climate change is going to lead to our economic ruination.

* None of this has deterred a number of Republican politicians from repeatedly using, and misusing, the Chamber study in the past few months. See my previous posts on this point concerning Rick Hill, Steve Daines, and Alan Olson and Keith Regier.

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