Energy Policy:

CRA's David Montgomery analyzes economic impacts of energy legislation

As Congress tries to wrap up talks on the proposed energy package, questions remain about the economic viability of some of the proposals and the impacts they may have on industry and consumers. During today's OnPoint, David Montgomery, vice president of Charles River Associates (CRA International), discusses a new study, commissioned by the American Petroleum Institute, that analyzes the impacts of the proposed energy bill on the U.S. economy. Among the findings: 5 million jobs could be lost by 2030, the cost of petroleum could more than double, and the average American will be spending a greater percentage of their income on energy. Montgomery explains how CRA conducted the research and responds to energy bill proponents who disagree with the economic impact assessments.

Transcript

Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is David Montgomery, vice president of Charles River Associates. David, thanks coming back on the show.

David Montgomery: You're welcome. It's very good to be here again.

Monica Trauzzi: David, Charles River Associates recently released a report on the economic impacts of the energy bill that's currently being debated in Congress. What's the bottom line of the report, good or bad? What are we talking here?

David Montgomery: I think the best summary of the impacts of the bill comes from looking at what it would do to the purchasing power of the average household. Because if you put its impacts of all the provisions that we looked at together they add up to an increase in costs of transportation fuel, increase in costs of new cars, increase in the cost of just about everything else as businesses face those higher costs, which turns into lower productivity growth, fewer job opportunities, slower rate of growth for the economy. That all adds up, in a summary measure that we've constructed, to a cost of about $1700 per year per household by 2030.

Monica Trauzzi: The report was commissioned by the American Petroleum Institute. Is the information presented in the report skewed to strengthen the petroleum industry's stance on the energy bill?

David Montgomery: No. We've been working on these issues for a very long time at CRA. We used a set of economic models that we have developed over the past 15 years and have applied in a variety of studies of energy policy and environmental policy. The models have been peer-reviewed. They have been scrutinized by everyone from the IPCC to Stanford's Energy Modeling Forum and this is the story that comes out of that analysis.

Monica Trauzzi: So, I want to focus first on the aspects of the energy bill that would most directly impact the petroleum industry, tax increases and a price gouging provision. According to your research, how do these two fare economically?

David Montgomery: We looked at the entire bill as a package. We didn't take out any specific provision to try to say this is the economic impact of this provision alone, mostly because they're so overlapping and duplicative that that would be essentially arbitrary. But let me answer your question kind of in a qualitative fashion. The access provisions and the tax provisions essentially raise the cost of doing business for companies that want to explore for and produce oil in the United States. So they will produce a net drag on that investment unless oil and gas production in the continental U.S., in North America, than we would see otherwise. The price gouging provisions are really disturbing because they are extremely vague. They threaten criminal penalties and they are likely to produce a much greater likelihood of gasoline lines than we've seen at any time since we got rid of price controls back in the early '80s.

Monica Trauzzi: You focused on seven key provisions, as you mentioned, and the others are renewable fuel standard, renewable portfolio standard, CAFE, oil savings, we discussed the different petroleum programs. U.S. automakers have said that a large increase in CAFE could hurt their bottom line. On the flipside of that, raising CAFE could make them less competitive with foreign automakers. So as far as CAFE goes, talk about that relationship and what you found in your research.

David Montgomery: This is something we've seen over the years as we've done many studies of corporate average fuel economy standards. They are a very expensive way of trying to achieve a goal of reducing either greenhouse gas emissions or gasoline consumption. Because first of all, it's expensive to improve fuel economy beyond the point that consumers are choosing. It takes a long time to improve fuel economy because the fleet turns over very slowly and fuel economy standards have a number of basically damaging effects compared to more market-based measures, including simply slowing the rate at which new cars are purchased and brought into the fleet and encouraging people to drive more, because it becomes cheaper to drive when your car gets better fuel economy. We only tried to capture one of the aspects of the fuel economy standards in this study, which is pushing beyond the reductions in gasoline consumption that we would simply see higher prices producing and the impact on new-car sales and auto manufacturers. So, those are the two parts we tried to capture in the study.

Monica Trauzzi: So you're not saying that fuel economy doesn't need to be increased?

David Montgomery: No, actually we have substantial improvement in fuel economy in our baseline, which are driven both by progress of technology and by rising gasoline prices. We're seeing that the market already, that manufacturers are putting more effort into technologies that reduce fuel economy, like hybrids, that consumers are deciding not to buy the biggest and most fuel-inefficient cars and trucks. So that's all built into the baseline. What the fuel economy standards in these bills would do is require much larger improvements in fuel economy than the market would choose based on current and the anticipated gasoline prices.

Monica Trauzzi: I want to talk about jobs for a moment because you do focus on that in the report and the report says that 5 million jobs could be lost by 2030. How is that so if we're expecting more jobs to come out of some of the provisions that are in the energy bill? What about the green-collar job market?

David Montgomery: We've included all of those in our analysis, with one minor exception because what we look at are the net jobs and the effect on the total number of jobs in the economy. There is a substantial amount of investment that we expect in the renewables industry, in producing equipment that's more energy efficient in order to help reduce energy use in the rest of the economy, a substantial amount of investment in new generating equipment to replace existing generators with ones that can produce renewable fuels. So the green jobs are all there. But what the claims about huge numbers of green jobs being created misses is that there's a loss in jobs in the rest of the economy. There are direct job impacts, for example, one oil refining and then there are indirect job impacts that are coming about to the increases in business costs and reduction in productivity in the rest of the economy. So we look at the net.

Monica Trauzzi: One of the things that's being discussed quite a bit both inside and outside the Beltway is the importance of creating cleaner alternatives that don't necessarily interrupt the American lifestyle. And your report contends that Americans will be forced to make lifestyle changes and will end up spending more on energy. So explain how you came to that conclusion.

David Montgomery: Well, the way we came to that conclusion is simply looking at what these provisions of the bill would require. First, the provisions on access to domestic resources and taxation of oil and gas investments would essentially produce more oil imports than we would have been the absence of those provisions. And instead of producing oil that we could get at relatively cheaply in the U.S., we would be importing oil that costs more. That's a net use of resources that are not going to be available to produce things that people actually want in the economy, the goods and services that households consume. The same way if we look at renewable fuels. The current estimate of the cost of those fuels, even if we get beyond the current disaster of trying to use ethanol, they're going to be much higher than the cost of the gasoline that they will replace. Similar, the corporate average fuel economy requires manufacturers to build motor vehicles; it will be more expensive than otherwise. That all adds up to a squeeze on consumers, which is where we see the increase in costs.

Monica Trauzzi: So what gives then? What's the alternative here? Do we just sit back and let things go as they're going now or do we try to address the climate issue, the oil dependency issue? What do we do here?

David Montgomery: I think you have it right at the end of your question, which is we need to address the climate issue and we need to address the oil, I would say the energy security issue, and we need to be realistic about what different policies can accomplish. First of all, for all of these I'd say R&D. There's nothing in this bill that provides any stimulus to the kind of R&D that's actually required to get us the new technologies that can make it affordable to deal with those issues without requiring lifestyle changes. So that's an important place to start. And if we think about climate, I would say this bill, the energy bill, represents a very disturbing trend. Congress is now considering various measures that would put either a comprehensive cap on greenhouse gas emissions or would establish a consistent price for greenhouse gas emissions to create a uniformed disincentive across the economy. What this bill does is if that kind of legislation passes the provisions that we looked at in the energy bill would simply make it much more expensive to achieve those broad goals. Because the energy bill, instead of using a broad set of economic incentives, goes back to the old-fashion world of technology standards, mandates by the government, requirements telling the private sector what to do instead of allowing it to make choices. And in the process, it makes achieving those goals much more expensive.

Monica Trauzzi: A coalition of institutional investors recently wrote a letter to Congress about the energy bill and here's what they said. "Regulatory certainty in the form of clear and consistent federal energy policies is essential to seizing the immediate economic benefit that clean energy technologies pulled for the U.S." They go on to talk about jobs, global technological advancements, and they all consider the energy bill to be positive in these aspects. Investors, business leaders, they're all calling for more certainty about energy policy and many of them are supporting the energy bill. Are they wrong here?

David Montgomery: I think that in looking at individual investors and businesses and the positions that they are taking it's useful to look at where they're coming from. And so it's hard to say that any particular investor is not advocating something that would be beneficial to them, but as we look at the bill, these kinds of bills across the board and across the economy, regulatory certainty is not the only thing. Being certain of extremely high costs and mandates that are going to push in a direction that's unnecessarily costly to achieve the goals may not be as good as a bit of uncertainty, for example, about what future carbon prices are going to be. That actually leads to a path that moves toward the goal in a more cost-effective way.

Monica Trauzzi: Final question, we're almost out of time. We've been focusing a lot about the negatives of the energy bill; did you find any positives, any positive aspects economically of the energy bill that's currently being discussed?

David Montgomery: We were looking just at a particular set of provisions and we're looking at them kind of as a package. In order to, and I think I've kind of described what our results are on all of those, that they will have costs, that those costs need to be judged in light of how much benefit those bills could be thought to provide for climate change, which is indicated I think as absolutely zero and for energy security, which I think is a limited effect on the global oil market that may not have much effect on the U.S. energy security. So that's kind of how I would put together a picture that I think emerges from our analysis. But really the point of the analysis is simply to try to help Congress and those who care about what Congress is doing understand what the consequences are likely to be.

Monica Trauzzi: So we're not quite giving a thumbs-up to any of the provisions? We'll end it right there. Thanks for coming on the show.

David Montgomery: Thanks Monica.

Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.

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