More on Debate over Waxman-Markey

Given the link from Andrew Sullivan, I wanted to address a couple additional points in Jim Manzi's recent post on climate change. He and I had exchanged perspectives on the topic a few months back, and it appears we may be reconnecting. Again, I immensely respect his intellect and his thoughts on topics such as entrepreneurialism and innovation. But when it comes to analyzing the economic impacts of climate change he continues to posit the same arguments that inaccurately discredit credible, non-partisan research, and rely on weak counter-studies from highly partisan sources to argue his case.

In the most recent edition, Manzi rebuts Paul Krugman's column arguing for legislative action on climate change, by stating that the cost estimates are understated and not properly appreciated, and that the benefits do not outweigh the costs.

First, there are a number of new studies that do a far better job than I will addressing some of the questions on economic benefits of action, and costs of inaction on climate change:

Beyond that, to quickly address the points in Manzi's most recent piece - he takes a data point from 2050 and applies it to current data, exaggerates GDP and household impacts, ignores the post-2050 benefits from pre-2050 action, and continues to refer to one (poorly received) study to argue that it's cheaper (and safer) to do nothing about climate change.

(One quick note: all of the analysis below - and featured in Krugman's column and Manzi's response - is from the most recent Congressional Budget Office study on the economic impacts of Waxman-Markey. CBO is an independent, non-partisan federal agency that has been informing economic and budgetary debate for the past three decades).

First, in responding to Manzi's argument, it's useful to distinguish between impacts on GDP (all U.S. economic activity) and impacts on households (loss of household purchasing power). The CBO measures both, in separate sections.

Per CBO, the impact of Waxman-Markey on annual GDP growth through 2050 would be miniscule. As Waxman-Markey begins to work (i.e. attaching a cost to the pollution externality), it will lead to a tiny reduction in GDP, reducing the forecast GDP growth rate anywhere from 3 to 9 ten-thousandths (i.e. .03% - .09%). As a result, by 2020, GDP will be 99.8% what it would have been without Waxman-Markey, and by 2050, GDP will be 98.9% what it would have been otherwise. While certainly this represents an additional cost, it's easily arguable that Waxman-Markey will not damage the overall U.S. economy in any material way.

Additionally, there is a telling line in the CBO analysis:

"CBO concludes that the net effects on GDP of restricting emissions in the United States-combining the effects of diverting resources to reduce emissions and moderating losses in GDP by averting warming-are likely to be negative over the next few decades because most of the benefits from averting warming are expected to accrue in the second half of the 21st century and beyond. [my emphasis]"

CBO also takes a look at household impact, and determines that Waxman Markey will lead to a slight reduction in household income, but the effect over the first decades will be exceedingly small (e.g. 0.1% reduction in 2012 and 0.2% in 2020), given various cost mitigation measures in place (offsets, banking, strategic reserve, etc.). Again, as above, this impact will rise over time, and by 2050 the cost to households from Waxman-Markey will reduce gross household income by approximately 1%.  However, it is important to reiterate the issue of timing here.  Waxman-Markey takes great pains to limit the early impact of carbon pricing on households (especially lower income) and allow other provisions to take hold that will make it easier (and cheaper) to limit our aggregate carbon emissions.  

Therefore, I'm not quite sure where Manzi arrives at the number "$150 billion, every year for over a hundred years" to use as a reference for the "cost" of this program:

But 1% of U.S. income is an enormous amount of money. Suppose I proposed some government program, and told you that it would cost "only" $150 billion per year, every year, for more than a hundred years, and then told you that this was no big deal because it's only about 1% of the economy?

First, as above, impacts will arrive gradually, over a period of decades. Second - is he referring to household costs or GDP? Either way, his numbers are way off. For the next 20 years, the cost on households (0.4% on average per CBO) will be one sixth of that, and when income impact peaks in 2050, the result will be half that figure. In terms of GDP, again, the effect will be much less - in 2020, the reduction would be a quarter of Manzi's $150 billion and even by 2030, the impact will be half that amount.

But I think an obsession on refuting numbers misses the much bigger, bigger issue.

Of course, if there were a persuasive case that it would create benefits that would more than offset this cost, it would be rational to support it.

Looking only at the direct cost of reducing greenhouse gas pollution ignores the costs that climate change would impose on all of us and the economic and environmental benefits that developing and deploying low-carbon technology will generate. When one considers the risks to our economy and national security brought on by climate change, coupled with the benefits that come from cleaner power and cleaner transportation, increased energy efficiency and millions of new green jobs, passing legislation to limit the overall impact of unchecked climate change is extremely worthwhile government policy.  For those interested, a good starting point for research would be the new studies listed above.