The Congressional Budget Office and the Congressional Research Service both weighed in this week with reports on the costs of the Waxman-Markey energy bill (H.R. 2454), passed by the House in June.
The CBO’s analysis found the effects of a program to significantly reduce greenhouse gas emissions would “probably reduce GDP by a modest amount compared with what it would be without the legislation.”
The studies reviewed by CBO yielded a wide range of estimates of losses in GDP from climate policies, but all of them concluded that, all else being equal, higher prices for emission allowances would impose greater losses in GDP. On the basis of those studies, CBO concluded that GDP losses over the entire period of the policy were likely to fall in the range of 0.01 percent to 0.03 percent per dollar of allowance price.
CBO then estimated losses in GDP by combining its own estimates for the prices of allowances under H.R. 2454 with the range of predicted GDP losses per dollar of allowance price. Using that approach, CBO concluded that the cap-and-trade provisions of H.R. 2454 would reduce the projected average annual rate of growth of GDP between 2010 and 2050 by 0.03 to 0.09 percentage points, resulting in progressively larger reductions in the level of GDP over time relative to what would otherwise occur (see Table 1).
CRS, on the other hand, didn’t offer specific cost projections opting instead to review seven other cost studies of the bill. The report suggests examining all long-term cost estimates with, “attentive skepticism,” as the longer the time horizon for projections stretches out, the greater the amount of uncertainty in projections.
And while the report’s authors don’t make specific cost projections, they identify key factors that will affect the long-term price of the legislation.
If enacted, the ultimate cost of H.R. 2454 would be determined by the response of the economy to the technological challenges presented by the bill.
The allocation of allowance value under H.R. 2454 will determine who ultimately bears the cost of the program.
The cases generally indicate that the availability of offsets (particularly international offsets) is potentially the key factor in determining the cost of H.R. 2454.
The interplay between nuclear power, renewables, natural gas, and coal-fired capacity with carbon capture and storage technology among the cases emphasizes the need for a low-carbon source of electric generating capacity in the mid- to long-term. A considerable amount of low-carbon generation will have to be built under H.R. 2454 in order to meet the emission reduction requirement.
Attempts to estimate household effects (or other fine-grained analyses) are fraught with numerous difficulties that reflect more on the philosophies and assumptions of the cases reviewed than on any credible future effect.
