Distorting Costs and Benefits in Climate Legislation

Update: additional thoughts on the latest article from Jim Manzi are here.

While I am always interested in Jim Manzi's perspective, I feel his most recent post ("Dear Member of Congress: Why You Should Vote Against Waxman-Markey") gets things dead wrong.  Although much of his piece is open to debate, I wanted to focus on his analysis of costs vs. benefits in the Waxman-Markey climate bill, otherwise known as the American Clean Energy and Security Act (ACES).  It's useful to understand the context of the various "numbers" getting tossed about, and vital to focus on the benefits of ACES as well as associated costs.

Manzi's piece outlines a number of reasons why ACES is "contrary to the public interest", beginning with his thoughts on the lack of value it provides:

[ACES] would be a terrible deal for American taxpayers. According to the Environmental Protection Agency, it is projected to impose annual costs of about $1,100 per household (a little less than 1% of total consumption) by 2050. The benefits we will get in return? If the law works precisely as intended, in about one hundred years we should expect surface temperatures to be a about one-tenth of one degree Celsius lower than they otherwise would be.

First, this distorts the EPA analysis, which actually demonstrated that the cost of ACES would be very low on a household basis.  The annual cost estimate that Manzi uses ("$1,100 per household by 2050") is inaccurate as it ignores the need to discount this amount to arrive at its value in today's dollars. If one uses the appropriate net present value estimate (which is what the EPA calculated and reported) the average annual cost to households is $80 - $111 per year...less than 10% of $1,100 quoted.  Secondly, and more broadly, the EPA analysis is a cost-effectiveness analysis, not a cost-benefit analysis. As such, the benefits of reducing GHG emissions were not measured in this analysis and accordingly do not filter through to any discussion on household consumption decrease.  Finally, Titles I, II and IV in ACES were not modeled in this EPA scenario, meaning ACES's myriad renewable energy and efficiency measures were not taken into account.  These provisions are designed (among other things) to drive investment towards energy efficiency and renewable energy which will mitigate future impacts from a carbon price, and ultimately reduce the total costs of transforming to a low-carbon economy.  

More importantly, the benefits of ACES are much more significant than the narrow frame of one temperature statistic cited by Manzi (which was arrived at by modeling what would occur if the U.S. was the only country ever to pass climate legislation and assumes no other global action whatsoever).

In fact, there is considerable economic value associated with ACES.  Noted economists such as Larry Summers and Sir Nicholas Stern, and Nobel Prize winner Joseph Stiglitz have argued for the long-term benefits of energy and climate policies (h/t Laurie Johnson).  The various clean energy provisions included in ACES will redirect trillions of dollars of investment with benefits for American industry and workers.   ACEEE, for example, just released an analysis indicating that the energy efficiency provisions in ACES would save households $1,050 by 2020 and $4,400 by 2030.  Two new studies demonstrate the potential for 1.7 million new jobs most of which could be accessed by low-income workers. 

And of course - there is perhaps the most important benefit in addressing climate change: reducing the risk of the potentially catastrophic economic, environmental and social costs of climate change.  The Congressional Budget Office recently released a study that portrayed devastating environmental and social damage to the U.S. from runaway climate change, and perhaps more germane to this blog, estimated a 3% loss in real adjusted GDP by 2100.

Finally, Manzi also argues that we need to stop focusing on capping carbon, and more on government funding of research into clean energy.  In the comments section of his piece, Manzi states:

If there is a real, though unquantifiably small, possibility of catastrophic climate change, and if we would ideally want some technological hedges as insurance against this unlikely scenario, and if raising the price of carbon to induce private economic actors to develop the technologies would be an enormously more expensive means of accomplishing this than would be advisable, then what, if anything, should we do about the danger?  One obvious approach is to have the government fund technology research directly.

In fact, there are several provisions within ACES where the government is funding (or driving allocations) towards cleantech RDD&D (research, development, demonstration and deployment).  Subtitle D in Title I of ACES provides 10% for State Energy and Environment Development (SEED) funds which will drive anywhere from $5-10 billion in each of the next 10-15 years for investment in energy efficiency and renewable energy by states.  There are the allocations given to transportation (1%-3%), energy efficiency (4.5% to 9.5%), and CCS (2%-5%).   Additionally, long-term innovative research initiative ARPA-E will now receive a full 1% of allowances (with another 0.5% going towards other clean energy innovation programs).  This means additional billions provided for high-risk, high-reward, transformational clean techresearch.

Bottom line - there are extensive economic and environmental benefits encouraged by the American Clean Energy and Security Act, which is one of the many reasons why this bill should be supported.