CLIMATE:

Experts plumb cap-and-trade bill in search of bottom line

Looking for a price tag on the massive House climate and energy bill? Good luck.

Conflicting financial analyses abound. Some predict the measure will bring financial ruin, others say it will actually save money for most Americans.

Economists estimate costs using mathematical models. But in trying to predict the future, they struggle to account for variables -- such as how rapidly technology advances, how fast the economy grows, or how quickly consumers install more efficient water heaters and compact fluorescent light bulbs.

"This is not physics, you cannot prove it," said Frank Ackerman, senior economist with the Stockholm Environment Institute at Tufts University. "It's a matter of arguing about what do we think are reasonable assumptions about the future."

So with the sweeping legislation moving toward to a floor vote, it is unlikely that anyone will know the real bottom line. And lawmakers ultimately will vote on some combination of constituents' wishes, ideology and experts' educated guesses.

Legislation from Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) numbers almost 1,000 pages, containing scores of new policies and programs that require government or businesses to spend money. Some of those costs will be passed on to consumers.

Drawing the most attention is the bill's plan to cap carbon emissions and create a marketplace where businesses buy and sell permits for emissions of greenhouse gases. Those who oppose that cap-and-trade system claim it will lead to higher costs for consumers and businesses. Those who want action on climate change tout studies predicting smaller costs.

Even the most credible cost estimates potentially have weaknesses, economists said, because they try to answer complex economic questions. The Congressional Budget Office, as it works on determining the cost of the bill, needs to project how often businesses might act in the early years of the plan to avoid paying penalties later. And in crunching numbers on potential cost savings, CBO must estimate how consumers might respond to efficiency incentives they have not been offered before.

Predicting costs in the later years of the plan is even tougher, requiring projections of savings using technologies that don't yet exist. The legislation stays in effect through 2050 unless a subsequent Congress changes it.

"The further out in the future a number is, the less confidence there will be in it," said Robert Stavins, director of Harvard University's environmental economics program. "We have to price it out to 2050. It's sensible to estimate the costs. But some of the numbers that are less far out in the future are going to be more reliable."

Stavins added, "It's sort of like the weather. One hour out, [forecasts] are very reliable. The further out you go, the less reliable they are."

For government watchdogs, the inability to determine costs is troubling.

"Unfortunately, Congress has a bad track record of underestimating the cost of new policy proposals," said Steve Ellis, vice president at Taxpayers for Common Sense. "When you look at the budget deficit, it is particularly important that we don't lowball the cost."

A credible price tag is crucial so that people can "say it's either worth it or it's not worth it," said Tom Schatz, president of Citizens Against Government Waste, a nonpartisan group.

"People are tying to figure out how long will it take, how much will it cost and how much difference will it make," Schatz said.

Politics

Democrats and Republicans have accused each other of skewing estimates on the bill for political purposes.

Republicans cite a 2007 Massachusetts Institute of Technology study that examined a cap-and-trade bill from then-Sen. Barack Obama (D-Ill.) and estimated that permits sold through it would generate $366 billion in 2015. Republicans divided that total by American households and produced an average cost per household of $3,128 per year. Just Tuesday, former senator and Virginia Gov. George Allen announced his plan to lead a citizen effort against cap and trade and cited a monthly consumer cost drawn from that MIT study.

Democrats and economists say Republicans are using the MIT numbers irresponsibly because they fail to consider the benefit of rebates that Americans could receive from carbon-emissions permits that the government would sell at auction. Republicans counter that there is no guarantee that auction money would go back to Americans.

Democrats and environmental groups cite other studies, including a recent Union of Concerned Scientists report that looks at the effect of action on climate change. That study, however, does not specifically analyze the Waxman-Markey bill.

The research from the Union of Concerned Scientists examines the effect of changes that are significantly more aggressive than what ended up in the Waxman-Markey bill that passed out of the House Energy and Commerce Committee. The Union of Concerned Scientists projected that energy efficiencies created as part of tough policies by 2030 would save households an average of $900 a year and businesses a combined $130 billion annually.

The cost of cap and trade should not be looked at in isolation, argued Eben Burnham-Snyder, a spokesman for Markey, who is chairman of the House Select Committee on Energy Independence and Global Warming.

"It's a carbon cap that is combined with a whole bunch of other cost-containing, technology-promoting, consumer-protecting, job-creating policies," Burnham-Snyder said. A requirement that utilities generate a portion of their electricity from renewable energy, he said, will drive innovation and cut the cost of the program overall.

And energy efficiency requirements and standards for buildings and appliances will lead to more conservation, he said.

In terms of the carbon cap, Burnham-Snyder said, there are protections built in to contain costs for consumers. Backers of the bill also are pushing the idea that the costs of inaction are too high because carbon is warming the planet.

Republicans on the Energy and Commerce Committee disagree.

"Democrats don't say how much Waxman-Markey's cap-and-trade plan costs, but they do say with great conviction that it costs less when you deduct other things in the bill that they can't say the cost of, either," said Lisa Miller, spokeswoman for committee Republicans. "The last guy who told me that one wore plaid pants and worked on a used car lot."

"In fact, we think their costs add up to at least $128 billion over 10 years," Miller added, "not including the 13 instances of authorizations for 'such sums as may be necessary,' which amount to 13 blank checks. And if the cost of inaction is so tragically enormous, why are 85 percent of CO2 emitters getting a free ride on the status quo bus?" (In the early years of the cap-and-trade program, 85 percent of the carbon allowances would be given free to industry.)

Economic studies likely will play little role in how lawmakers vote, said Jerry Taylor, senior fellow and energy analyst with the libertarian Cato Institute. Lawmakers, he said, are probably more interested in polls showing voter support or opposition to climate change policies.

"You can explain basically everything a politician does on an attempt to maximize voter support in the next election. Period," Taylor said. "The numbers that are being offered and the studies that are being thrown around, that's ammo, these are talking points. These are good rationale used by the politician to do what he wants to do anyway."

Getting it wrong

Projections for other sweeping policy changes have missed the mark.

In 2003, when Congress narrowly approved a prescription drug benefit for Medicare, costs were estimated at $633.5 billion for 2004 through 2013. Two years later, the Bush administration dramatically increased estimates, projecting costs of $1.2 trillion for 2006 through 2015. The administration also said cost savings could shrink the net price to $720 billion.

All those numbers were wrong.

The latest estimate from the 2009 Medicare Trustees Report puts the cost for the 2004-2013 time frame at $377.7 billion, about 40 percent lower than even the early estimates.

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. He worked as assistant administrator for air, noise, and radiation at U.S. EPA from 1977 to 1981, during the Carter administration.

"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.

"The analysts look at what's on the shelf," Hawkins said. "Almost by definition, when you have a major new policy that's being proposed, what's on the shelf is not what's actually going to be used in the real world."

And, he said, analysts have an incentive to overestimate.

"The analysts fear criticism for underestimating the cost," Hawkins said. "It's much less risky to overestimate. If you're wrong, you have good news to deliver."

What is more useful than trying to find the cost of a policy is comparing one proposed policy to another, Stavins of Harvard said. Disparate groups are likely to come up with similar answers, he said, when asked to determine the cost of reducing carbon emissions 17 percent by 2020 versus 20 percent in the same time period.

Pricing permits

All estimates make assumptions, economists said, and groups with a bias often pick the assumptions that best suit the outcome they want.

Studies that want to show enormous costs, for example, might assume little growth in technology 40 years out, said Ackerman with Tufts. Studies that want to show a lower cost for the program might assume fast adoption of low- and no-cost solutions. There are credible ways, he said, to predict how technologies will improve over time, such as looking at the rate at which prices for wind and solar power have dropped.

Credible studies need to look at both the potential costs to consumers in the form of higher prices and also the revenue from the cap-and-trade program, said Chad Stone, chief economist at the Center on Budget and Policy Priorities, a nonpartisan research group that focuses on government programs affecting low-income households.

The Waxman-Markey bill progressively tightens the cap on carbon. As that happens, the cost of buying permits to emit carbon will increase, Stone said. That means more revenue will be generated, he said, that government can rebate or spend to help taxpayers.

"The real impact on consumers is what's the difference between what comes out of their pockets" in the form of higher energy costs "and what do they get back" from rebates or government programs, Stone said.

"Yes, these policies will raise the price of using dirty energy," Stone said. "But they will also have a number of mechanisms that will return money to consumers."

But consumers also pay as taxpayers. And the Congressional Budget Office, in a letter to the Energy and Commerce Committee's ranking Republican, Joe Barton of Texas, noted that carbon permits would be both a benefit and a cost to the government.

While the permits would generate money, businesses that would have to buy the permits would have less taxable revenue, CBO wrote. If some of those permits are given for free -- as is proposed in the early years of the legislation -- that would offset the tax loss, CBO said.

In the case of a cap-and-trade plan, one of the most important numbers to determine is the cost of allowances for emitting carbon. Disparate groups have priced those permits at numbers as low as $12 per ton of carbon emitted, up to a $30 to $35 per ton range. Pricing those allowances is difficult, Stone said, until the policies become law.

"The allowance value will be what it is," Stone said.

Waiting for CBO

Lawmakers are looking to CBO's cost estimate for the Waxman-Markey bill. The estimate will need to put a price on those carbon-emission permits.

CBO in an April report said to price the cost of climate policies, it will look at estimates for greenhouse gas emissions in the absence of new policies, and at the likely price of fossil fuel energy sources. It would then look at how quickly households and businesses would respond to rising electricity prices. That would include the development of energy efficiency measures.

And, CBO said, it would examine market forces that would affect the price of the emissions allowances, including any subsidies firms would get for reducing emissions, the ability to earn an allowance in one year and use it in another, and the extent to which they can purchase credits for emissions reduction projects such as tree plantings.

In analyzing the cost of the Waxman-Markey bill, CBO will synthesize several other economic models, including those used by EPA, the Energy Information Administration and the Joint Global Change Research Institute; one created by Stanford University and EPRI (formerly called the Electric Power Research Institute); and MIT's emissions prediction and policy analysis (EPPA) model.

CBO's estimate will then factor in specifics of the Waxman-Markey bill, such as the ability to bank allowances. The bill allows companies to take steps to reduce emissions in any year, and then bank that and use it in any other year of the program. That means CBO will have to estimate the rate at which companies will act early on to prevent future costs.

Climate policies now under consideration likely would push up electricity and fuel prices, Ackerman with Tufts said. The question that is difficult to answer in advance, Ackerman said, is how flexible the economy will be in adapting to changes in energy prices. But there is 40 years of history, he said, to look at for guidance. Even when energy prices have surged, he said, the economy mostly adapted.

"It's not possible to exactly know what the costs are, but you can look at some of these studies and know what the costs aren't," Tufts' Ackerman said. "We know that the projections of enormous [economic] losses from relatively small cost changes must be wrong."

In the 1980s, energy prices did affect the economy, Ackerman said, but there were other contributors to the recession during that period. But in the earlier part of this decade, he said, the economy grew steadily even as energy prices rose.

Some of that growth was unsustained, built on the housing bubble, he conceded. But, Ackerman said, "if higher energy prices were an immediate deal breaker, then you couldn't have had any economic growth at a time of higher energy prices."

A goal of climate policy, Ackerman said, is to make it expensive to use fuel that emits greenhouse gases in order "to encourage people to make substitutions." The choices industries, individuals and the government make after that, he said, will help determine the cost of the policies.

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