With the Senate scheduled to take up the Lieberman-Warner emissions bill later this year, the debate over the economics of the bill, and cap and trade in general, rages on. During today's OnPoint, Margo Thorning, senior vice president and chief economist at the American Council for Capital Formation, discusses a new ACCF/National Association of Manufacturers-sponsored report on the economic viability of the Lieberman-Warner emissions bill. Thorning explains why she believes a cap-and-trade plan could prove to be devastating to the U.S. economy, saying massive job loss and sky-rocketing utility rates are likely under such a plan. Thorning also discusses the role of the emissions bill debate in the 2008 presidential race.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Margo Thorning, senior vice president and chief economist at the American Council for Capital Formation. Margo, thanks for coming on the show.
Margo Thorning: My pleasure, Monica.
Monica Trauzzi: ACCF, along with the National Manufacturers Association recently released a report giving a state-by-state and also a national analysis of the economic impacts of the Lieberman-Warner bill. The report is not a favorable one of the bill. Explain how the study was conducted and how exactly you came to these findings. And then we're going to get into some of the specific findings.
Margo Thorning: Sure. The study used the National Energy Modeling System's model, which is the one that the U.S. Department of Energy, Energy Information uses when they make their estimates of the impact of climate change bills. So, we used the NEMS model and we built into it a set of assumptions, a low-cost case and a high-cost case. And in these assumptions we determine how much new nuclear generating capacity we would expect to see. Our low-cost case assumed that we would have about 25 new nuclear plants operating by 2030. Our high-cost case said about 10 new plants. We placed other restrictions on the model. We assumed that we'd have about 50 gigawatts of coal gasification and sequestration under our low-cost case, under the high-cost case about 25 by the year 2030. We made assumptions about how much biomass, how much wind, how much solar. We made assumptions about oil prices. Would they be high for the next 25 years or would they be somewhat more favorable? All of these assumptions are spelled out in the study. The model calculated the allowance price. The model calculates how much companies will have to pay to emit a ton of carbon over the next 25 years. So, the allowance prices showed that by the year 2020, the cost of a ton of CO2 would range between about $54 and about $66, depending on whether it was the high-cost or the low-cost simulation. And the GDP impacts in those years ranged from about 0.8 percent to a little over a 1 percent reduction in GDP. But, by 2030, as the targets under the Lieberman-Warner bill tighten and as U.S. population increases, both of our high-cost and our low-cost case showed reductions in GDP of about 2.6 to 2.7 percent annually. And, to put that into perspective, that's, in dollar terms, about what we're spending on social security payments right now.
Monica Trauzzi: All right. So, let's walk through some of the specifics that are outlined in the report. You're saying that there would be significant job loss if Lieberman-Warner was implemented. But, something we're hearing a tremendous amount about is this idea of green collar jobs and that if we start reducing emissions and maybe switch over to more alternatives, we're going to have a growth spurt in jobs. Why isn't that squaring? Why don't you think that we will, in fact, have that growth spurt?
Margo Thorning: Well, we will have some growth in green jobs because there will be more jobs in renewable fuels and alternative technologies. But our calculations show that even when you factor in the new jobs in those industries there will be net job loss because we will see substantial loss in energy intensive sector jobs, a substantial loss in manufacturing jobs that don't happen to deal with renewables. Productivity of the overall labor force falls because energy prices have to rise so sharply to bring down emissions to the targets in the Lieberman-Warner bill. The productivity loss means that living standards grow more slowly, household income falls, and I encourage everybody to look at the study on the ACCF in a Web site and also look at all 50 states. We do have analyses on the job impact in all 50 states. So, the productivity loss caused by the premature obsolescence of the capital stock, whether it's manufacturing, electric utilities, or transportation, means that living standards grow more slowly, income grows more slowly, fewer jobs are created. According to our estimates, there would be approximately 3 million fewer jobs in 2030 than under the baseline forecast under our low-cost case. The high-cost case shows about 4 million fewer jobs created than under the baseline.
Monica Trauzzi: All right. And you mentioned energy prices and how you're expecting them to be a lot higher. And specifically the report says that Lieberman-Warner would cause a rise in coal, oil, and natural gas prices and we could see electricity rates go up by 77 to 129 percent and that's a very frightening figure. What factors are responsible for that dramatic rise?
Margo Thorning: The energy prices have to rise across the board because producers of electricity and oil and gas producers have to pay to emit a ton of carbon. So, as they have to pay to emit carbon, whether it's a utility, they have to raise the price of that to cover their costs. Otherwise, they simply won't be able to stay in business. So, if the carbon price were to rise to, as our model suggests, over $200 a ton of CO2, in fact, under the high-cost case, approximately $270 by 2030 per ton of CO2, that's a huge cost that the utility or the producer of oil and gas has to pass forward. Energy prices have to rise, otherwise you can't get people and factories and others to curb their energy use. And, in curbing their energy use so quickly, that's what causes the significant loss of GDP.
Monica Trauzzi: But, something that's likely going to have an impact on utility rates is going to be the future of carbon capture and sequestration technology, this idea of clean coal and how that's going to impact electricity. Are you skeptical about the future of this technology? Do you think that our predictions of having it up and running in, let's say, the next 20 years, are those accurate? Can it happen?
Margo Thorning: Most of the experts I talked to think it's extremely unlikely that we will be able to use carbon capture and storage on a commercial basis in the next 15 years. Most people say, optimistically, 20 to 30 years will we be able to capture and store carbon. Bear in mind, we have about 600 existing coal-fired utilities. We don't have the technology to go back to these plants and capture and store the carbon. Many of them are in urban areas where there's no physical room to even put in place the doubling of size that such technology would require. So, the challenge is going to be to learn to capture carbon, especially on new plants, and then overcome the challenges of storing it or building a pipeline that worked to pipe it to places where it can be stored. So, most of the experts say this technology is not going to be available in the next 10, 15, 20 years. And that means that existing coal-fired plants will either have to shut down or simply continue to emit CO2 and pay the price.
Monica Trauzzi: You recently participated in the U.S. Chamber's climate change dialog and the Chamber has been very vocal about its opposition to the Lieberman-Warner bill. But several companies that belong to the Chamber are supporting a cap-and-trade bill and many specifically the Lieberman-Warner bill. Their job is to make money. So, do you think that they're just wrong here, that they're missing something, because they're supporting these bills, but they're also looking at their economic outlook?
Margo Thorning: Some companies that have a lot of nuclear, for example, in their portfolio mix may be able to meet these challenges a lot better than companies that rely extensively on coal or natural gas. Some companies have a regulatory situation where they can hope to pass through, rather easily, any extra cost that's associated with emitting CO2. So, each company is different and I think it's up to the legislators to evaluate what the real economic consequences are going to be and then make an informed decision.
Monica Trauzzi: So, you're saying that there's a high price to pay if we act in this way, in the way that Lieberman-Warner lays out. But isn't there also a high price to pay for inaction?
Margo Thorning: Well, I think people need to realize that the U.S. federal budget already allocates about $8 billion a year to study in climate science, to study in carbon capture and storage, to trying to figure out how to increase energy efficiency. We've also embarked on the Asia-Pacific Partnership, which is six countries, China, U.S., Japan, Australia, South Korea, working to exchange best practices and to put in place more efficient, cleaner technology in China. As you may know, China's emissions are now growing at 10 percent a year. That means, over the next decade, their emissions would be twice as high as that of the U.S. So, no matter what we do here, even if we were to meet the Lieberman-Warner targets, according to some previous work that EPA did, it would only make about, by the year 2095, if we were to hit the Lieberman-Warner targets here in the U.S., but China and India don't slow their emission growth, global concentrations of CO2 would be about 3 to 4 percent less than without our adhering to Lieberman-Warner. Almost no difference at all.
Monica Trauzzi: But the international community is trying to get China and India to sign onto a post-2012 agreement. And many people say if the U.S. leads, China and India will follow. Are you of that thought as well?
Margo Thorning: Well, having been to China and India and seen their focus on strong economic growth and hear them repeatedly say that they want more energy, cleaner energy, but that their focus has to be on growth, I don't think they're going to be signing onto any strong emission reduction targets, because their priority is more energy. And they're building a coal plant every week or so in China.
Monica Trauzzi: You've said that while the environmental impact of climate change is still under scientific analysis, the economic implications of the proposed legislation are quite evident and that's evident in this report. I want to focus on the first part of that statement because you're talking about the scientific analysis of the environmental impacts. Isn't the science settled? What are you referring to when you say that?
Margo Thorning: I don't question the science. I believe we do need to slow the growth of greenhouse gas emissions. What I think we do need to be debating is, what's the most cost-effective way to do that? How can we slow emission growth without unnecessarily harming the U.S. economy or the economies of other developed countries? You only have to look at what's happened to the U.S. in the last three or four years. Energy prices have doubled and tripled in many cases. The U.S. economy has slowed its economic growth from about 3 1/2 to 4 percent a year down to almost zero this year. Most economists think that the rise in energy prices is, in part, responsible for our sluggish economic performance. It's not all the subprime situation. You only have to look at the headlines. Delta is laying-off 2000 pilots this week because high energy prices mean they can't compete. We've lost our chemical industry because natural gas prices are high. We've lost our aluminum industry. It's moved offshore because of high electricity prices. High energy prices do take a toll and that's why we need to be cautious as we try to figure out the best way to slow growth in greenhouse gas emissions. And, also, the U.S. did, in 2006, produce less CO2 than it did in 2005, even though we were growing at 3 percent a year. So, we are making progress in spite of population growth.
Monica Trauzzi: Final question here. I want to talk about the public for a moment and we were discussing this before the show. How do you think a discussion like this, a report like this, will impact the presidential elections? How is this permeating the public discourse? Are they on the same level of policy discussions? What are they talking about at the kitchen table?
Margo Thorning: I think that the discussions among the presidential candidates need to get down to some of the nitty-gritty. They need to be taking a look. I know all three major presidential candidates are supporting a cap-and-trade proposal, but they need to be taking a look at what different types of caps would mean in terms of how quickly energy prices would have to rise to force down emissions. And, if the energy prices rise, what does that mean for jobs, employment, and U.S. competitiveness? So, we need the political candidates to take a look at this study and other studies that may follow and look at the assumptions and see whether they think the assumptions are reasonable or not and then move the debate forward. And we encourage everyone to look at our study.
Monica Trauzzi: All right. We'll end it there on that note. Thanks for coming on the show.
Margo Thorning: My pleasure.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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