Climate:

ACCF's Thorning discusses economic impacts of EPA regulation

With the legislative battle over cap and trade on hold, all eyes are on U.S. EPA as it moves to regulate greenhouse gas emissions beginning next year. During today's OnPoint, Margo Thorning, senior vice president and chief economist at the American Council for Capital Formation, discusses the economic impacts of EPA regulation. She also gives her take on the Senate's failure to pass a climate and energy package and discusses prospects for the fall.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Dr. Margo Thorning, senior vice president and chief economist at the American Council for Capital Formation. Margo, it's nice to see you again.

Margo Thorning: Nice to see you.

Monica Trauzzi: Margo, the legislative battle on climate may be over for the time being, but the wheels are turning on EPA regulation unless Congress is able to halt it at some point this fall. We're going to see regulation as early as March of next year. What do you believe will be the immediate economic impacts of such regulation?

Margo Thorning: I think if Congress doesn't intervene and does allow EPA to go ahead, starting January 2, 2011, to regulate greenhouse gas emissions from major emitters, I think there will be a definite slowdown in new projects and investment spending. The business community already faces major sources of uncertainty, what with the health care bill, the financial reform bill, the prospect of the Bush tax cuts going away, the prospect of higher corporate taxes, the very large, looming federal deficits. And then to add on the uncertainty of what it may mean if EPA does require changes in technology, mandates a best available technology that might not exist, all of those factors add to the hurdle rate that a company will need in order to make new investment. And people are probably aware that investment spending is what has really dragged down our economic growth rate since the fourth quarter of 2007. Investment spending has fallen by about $330 billion this past quarter compared to the fourth quarter of 2007. So, when we add more uncertainty to business-making decisions, it requires a higher hurdle rate, meaning fewer and fewer projects will meet that hurdle rate. So it will impede U.S. economic recovery and slow job growth to have EPA's regulation of greenhouse gases starting in January of 2011.

Monica Trauzzi: But we do have this issue of climate change. What do we do, just not address it?

Margo Thorning: No, I think most people think climate change is a serious issue and it needs to be addressed through a global initiative. For example, the Asia-Pacific Partnership that was started back in 2005 has gone forward with initiatives to trade best available technology on coal mining, steel making, aluminum production, electricity production, renewable energies. We need to work together globally to reduce the amount of CO2 emissions per dollar of output and the U.S. is doing a pretty good job at doing that. So climate change certainly needs to continue to be researched, we continue to need to spend money on new technologies to try to be able to capture and store carbon, to develop nuclear energy, to develop new energy sources. So it's an issue, but there are other very important issues like job growth and economic recovery that we need to keep our eye on.

Monica Trauzzi: Politically, why do you think cap and trade failed in the Senate this year?

Margo Thorning: Because most people realized and a host of studies showed, including one by the ACCCF and the Small Business Entrepreneurial Council, we modeled the impact of the Kerry-Lieberman bill and saw that by 2030, when all the permits were no longer being given away, we would have between 1.4 and 1.9 million fewer jobs, depending on whether our high-cost or low-cost case occurred, and we would see GDP slower by between 1.3 and 1.7 percent. It was going to reduce jobs, it was going to slow growth and, as EPA administrator Lisa Jackson admitted, it won't help the environment unless developing countries take strong steps to reduce their greenhouse gas emissions. So, it was just seen as a factor that would hinder our recovery, not help it.

Monica Trauzzi: So, the other option for the Senate here heading into the fall is to pass some kind of energy package, perhaps an energy lite package. What do you think the prospects for that are?

Margo Thorning: I would guess they're not real high, because people are also realizing that renewable energy, for example a renewable energy package will require substituting more expensive energy. Wind and solar are more expensive because they have to be backed up by conventional generation, which has to run all the time. So it's more expensive per kilowatt hour to mandate renewable portfolio standards. And in this weak economy and faltering recovery, I think proponents of those programs will probably want to go slowly. So I would think it's unlikely we'll see much legislation come out of either this session or a lame-duck session.

Monica Trauzzi: But when we're talking about economic recovery and jobs growth, doesn't it make sense to put money and efforts behind green job creation?

Margo Thorning: Well, unfortunately, a lot of green jobs are low-paying and what happens when you substitute let's say solar or wind energy for natural gas or nuclear or coal, is that you're making energy more expensive for all the people in the area. Which means a manufacturing company that's energy intensive may find its product is no longer competitive and it may have to close down. So you might pick up some green jobs, but you will lose, as our Kerry-Lieberman study showed, you will lose jobs overall and you will find that carbon leaks out of the U.S and manufacturing facilities abroad, who have weaker standards than ours, will pick up the slack. So you'll probably have a negative impact on greenhouse gas emissions.

Monica Trauzzi: Senator Lisa Murkowski conceded her seat in the race for Senate in Alaska last week. If she's unable to regain that seat in some other way, how do you think her absence in the Senate is going to impact the climate debate and, in particular, efforts to stop EPA regulation?

Margo Thorning: Well, she was clearly a leader in that effort, but I would suppose, if Miller does take that seat, that he would probably want to continue that effort since he himself is on record as having concerns about cap and trade legislation. So I don't think the effort will die. And then you have Senator Rockefeller, who's also very concerned and it wouldn't surprise me if quite a few members, having come back from being with their constituents, decide that it would be the wiser thing to delay the implementation of EPA regulation.

Monica Trauzzi: Where do you think the discourse on climate and cap and trade stands at this point in the United States? Is cap and trade dead with this latest failure? It's failed a few times before.

Margo Thorning: Well, it's hard to say dead. I think the issue is probably going to be on the back burner because Americans, with 9.6 unemployment rate and economic growth rate of 1.3 percent last quarter, I think the last thing most people want is higher energy prices. And it's become pretty clear, to most people, that a cap-and-trade bill, you know, it's designed to raise energy prices to make you use less of it. So, I think it's perhaps not dead, but certainly not going to be the first thing that members of Congress want to address.

Monica Trauzzi: So, what signal are you looking for in the economy then in order for it to be the right time for cap and trade or some type of climate legislation?

Margo Thorning: Well, I think we need to see economic growth a lot stronger before we put in place something that would mandate greenhouse gas emission reductions. I think until the unemployment rate is steadily heading down towards 6 percent or 5 percent and economic growth is ticking along at say 3 percent, I think most people would be concerned about the impact of imposing mandatory controls or higher energy prices. So, I think it will be a while before that debate is taken up again.

Monica Trauzzi: OK, we'll end it there. Thank you for coming on the show.

Margo Thorning: Thank you.

Monica Trauzzi: Nice to see you again. And thanks for watching. We'll see you back here tomorrow.

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