How Much Will Cap And Trade Cost?

by hilzoy

Remember how cap and trade was supposed to "cost every family as much as $3,100 a year in additional energy costs"? Surprise, surprise: 

"CBO estimates that the net annual economywide cost of the cap-and-trade program in 2020 would be $22 billion—or about $175 per household. That figure includes the cost of restructuring the production and use of energy and of payments made to foreign entities under the program, but it does not include the economic benefits and other benefits of the reduction in greenhouse gas emissions and the associated slowing of climate change."

Here's a handy chart (via Kevin Drum):

Moreover:

"CBO’s estimate also does not include the economic benefits of other provisions in H.R. 2454. The American Council for an Energy Efficient Economy estimates that the efficiency provisions alone could save businesses and consumers $22 billion annually by 2020.  The savings would be $170 per household in 2020 –- roughly equal to CBO’s cost per household estimate for ACES in 2020."

If that study is right, then, on average, the Waxman-Markey bill would involve a net cost of ... $5 per household. John Boehner was only off by $3,095. Details, details. And even that cost would go down in future years, as more permits are sold rather than being given away, with the proceeds going to taxpayers.

And, as noted, the CBO score also doesn't include the benefits of not having the planet heat up by as much. Ezra:

"For a bit more on that subject, it's worth checking out the CBO's analysis of "Potential Impacts of Climate Change in the United States." It's basically a survey of the many, many, academic papers published on the topic, and it has the virtue of being both quite careful and quite comprehensive. (...) But as the paper makes clear, a lot of the global warming debate comes down to how much we care about people who aren't us. The actual economic drag projected for the United States in the 21st century is relatively modest: 3 percent or so. The worst of climate change comes in other countries and long into the future."

Sounds like a bargain to me.

Comments

[Dane]

Hmm. Right. Estimates of the potential costs and benefits of a new, sweeping government program.

Because those are so often accurate.

[Slartibartfast]

I'm not sure I believe this. Waxman's bill has us capping US CO2 emissions at about 75% of current-year value, and it's only going to cost $5 per household?

"Net" cost looks like an interesting culprit. If gross costs are going to be offset by government rebates, incentives, etc, where are the funds for those things coming from? I'm guessing it's the general fund.

Long and short: this presumes, I imagine, a bottomless supply of greenpower trade, at some premium. If you look at the rolloff in allowances (which I admit, take place over a very long time scale), eventually this bill has us emitting at something like 17% of our current rate, which at current rates of power consumption is going to require power-generation technology a whole lot different from what we've got at present. All at $5 per household per year.

Or a substantial population reduction, but I don't think that's going to happen in less than two generations.

[Brett Bellmore]

"And, as noted, the CBO score also doesn't include the benefits of not having the planet heat up by as much."

I should hope not, since, even granting every assumption of the modelers, whether the planet heats up, and how much, is out of our hands, and up to a bunch of second and third world countries that would have to decide to remain mired in poverty to prevent it.

We're not the chief source of CO2 anymore. We could cut our CO2 back to zero, and the effort would be negated in a few years by other countries.

[Slartibartfast]

Oh. Offset credits is how we're going to accomplish that initial 25% reduction for (basically) free.

[Fred]

"Direct Relief for Households"

So where does the money in that column come from? The money fairy? The printing press? Or taxes?

I don't mean to just snark; I need to know and I do not. Somebody please tell me.

[mightygodking]

I should hope not, since, even granting every assumption of the modelers, whether the planet heats up, and how much, is out of our hands, and up to a bunch of second and third world countries that would have to decide to remain mired in poverty to prevent it.

Unless, of course, some huge first-world industrially and scientifically powerful country with the existing incentive to do so anyway were to research and invent clean and comparably cheap methods of generating energy. This would, of course, provide that huge first-world country with a brand new enormous manufacturing economy for decades.

[hilzoy]

So: in a cap and trade system, you set up a market in permits to emit CO2. The idea is that if my company can reduce emissions very cheaply, I can do so and sell my permit to your company, which (let's suppose) would find it very expensive to reduce emissions. In this way, thanks to the marvels of Mr. Market, we identify the most efficient ways of reducing emissions, without requiring that any one person (e.g., a government regulator) figure out which those are.

Ideally (according to me), those permits would all be auctioned off (to use the same market-based methods to identify who needs them), and the proceeds would be rebated to taxpayers. Energy costs would go up, but everyone would get their share of the proceeds; this would give everyone an incentive to cut their own energy costs, and if they did so, they would come out ahead.

Unfortunately, we are giving a bunch of the permits away to companies who say that they just can't reduce emissions fast enough, and that it would be very bad for them to have to buy their permits. (Think utilities with coal-fired plants, for instance.) But there is still money from the credits we are auctioning off, which is rebated to people.

[Slartibartfast]

But there is still money from the credits we are auctioning off, which is rebated to people.

Sounds perpetual-motion-ish to me, hilzoy. A power company can't reduce emissions to its permit level, so it buys credits from the government, which causes its prices to consumers to rise, which cost is (notionally) refunded from the very auction proceeds that caused the rise to begin with.

I can buy that, actually; there's going to be some small additional cost due to the extra auction/rebate mechanisms, but that part can probably work. I think there's going to come a crunch time, though, when the cap is going to conflict with power demand combined with marketwide CO2 emission to meet that demand (along with existing credits, that is).

[wj]

Looking just at the gross costs (never mind net costs), for at least the top 60% of the population (i.e. those who will likely be protesting the loudest) the annual cost looks like a nit. Even if the gross cost estimate is way low, and the reality is double (real dollars, I don't want to get into inflation arguments), and even in a major recession, it's still pretty trivial.

In fact, my greatest concern would be whether it is large enough to make the kind of impact that would be needed to change behavior. I mean, why set up a big bureaucracy if it isn't going to accomplish anything?

[Eric Martin]

Here's a novel question:

How much will not doing cap and trade cost?

Or is it that the results of rampant global warming are free. Magic!

[Slartibartfast]

How much will not doing cap and trade cost?

That's an excellent question, Eric. Let me know when you have a number.

Suggested methodology: Take the cost of currently projected climate change, and subtract the cost of projected climate change with cap-and-trade in place.

I submit we still don't know the cost of cap-and-trade, though.

[Brett Bellmore]

Given the probability that it will actually work? Nothing. We'll get the same result with or without it, as far as climate is concerned.

Now, if somebody proposed to aid China in putting out their coal mine fires, THAT might rationally be expected to make a difference.

[hairshirthedonist]

Let's let the quarterly-report mongers figure this out at their own pace. They wouldn't wait until it was too late and after they were able to run off with their bonuses.

Maybe we can't keep the rest of the world from reducing emissions in the short term, but at least we can try to lead in some way, set some sort of example and find solutions that others can use in the future. (Where are all the American Exceptionalists when you need them? And do the Chinese want to destroy the planet?)

[Bernard Yomtov]

Let's not confuse transfers that go utilities-govt-households with actual social costs. Those transfers are costs to the utilities, but except for the administrative costs are not costs to society as a whole.

The real costs are what CBO, in a somewhat unclear paragraph, describes as:

the cost of restructuring the production and use of energy and of payments made to foreign entities under the program

So XYZ Corp spends $1 million to reduce emissions, rather than paying $2 million for a permit. The $1 million is a cost. But it's really a gross cost because, as CBO says,

it does not include the economic benefits and other benefits of the reduction in greenhouse gas emissions and the associated slowing of climate change.

Nor does it allow for any other benefits of reduced emissions. Indeed, there is no reason to think that the net result cannot be positive - that there cannot be a social gain in terms of health and other things. Whether CBO takes these into account in coming to its $22 billion figure is not clear to me.

[Brett Bellmore]

There's no reason to suppose it can't be positive for some of the reduction approaches. It's rather dubious to think it will be positive for all of them, taken together.

If that were the case, you wouldn't have to force the changes.

[Sebastian]

Is this all really just to avoid the word tax? I thought the main benefit of the cap and trade idea was that it avoided having a government functionary set the tax at the wrong level. Aren't we doing the same thing in reverse though by exempting so many companies?

When we were comparing likely carbon taxes vs. perfect cap-and-trade programs cap-and-trade came out ahead. Is that still true now that we are getting a cap-and-trade program where almost all of the worst offenders are exempt?

[Bernard Yomtov]

There's no reason to suppose it can't be positive for some of the reduction approaches. It's rather dubious to think it will be positive for all of them, taken together.

If that were the case, you wouldn't have to force the changes.

I don't know if it's dubious or not, but your conclusion is false. Not all benefits are captured by those spending money to reduce emissions. So they may not be willing to spend despite the fact that the total benefit exceeds the cost. The company spending money doesn't consider benefits it can't capture in making its decisions.

[Anarch]

If that were the case, you wouldn't have to force the changes.

Inertia is a powerful force.

[p mac]

Astonishingly, the first time I saw this described was by John Tierney in 2006. It made sense then, and it makes sense now. (And the numbers haven't shifted either.)

[Brett Bellmore]

The perpetual dream of a world without trade offs. I don't believe we're going to eliminate nearly 90% of CO2 production, AND improve the economy, on a government timetable.

And certainly not with nuclear power largely off the table.

[Bernard Yomtov]

The perpetual dream of a world without trade offs.

I don't understand what you're saying here, Brett. Yes, there are often trade-offs, but the net effect of those tradeoffs is quite often positive. Thta's what ordinary trade is about. The mechanic fixes the carpenter's car. The carpenter builds the mechanic a table. Both give up something - both are better off. Adam Smith understood this.

The difference when environmental benefits are concerned is that it is hard or impossible to privatize the gains, so govt has to help out. Think of it like public health measures.

[Brett Bellmore]

And quite often the net effect is negative, in cases where people have to be compelled to make the tradeoff.

Yeah, I know some of the approaches actually improve the economy. I've been roundly mocked in the past for suggesting incorporating into building codes a requirement for low albedo roofing materials, but it would actually save people money on their airconditioning bills, in addition to cooling the planet.

But it's awfully polyanish to think that everything that would be necessary to reduce CO2 by 80% would involve net savings. A lot of it is only going to save money on the assumption that it averts warming which would cost a huge sum.

And if the Chinese don't put out their coal mine fires, (That's a metaphor, btw.) it won't do that, and will be all cost.

[Sebastian]

I definitely agree that the apparent refusal to talk about nuclear power on a Congressional level, which is available right this very moment, as opposed to speculative technologies which are not available yet, betrays a lack of seriously weighing options.

[yoyo]

I love that covservatives have spent so long using the words "market" "free market" etc. to mean " give money to rich people " that they literally can't comprehend how a market could be used to increase efficiency.

[yoyo]

Congress talks a lot about Iran's use of nuclear power. Oh, that isn't waht you meant?

[Bernard Yomtov]

But it's awfully polyanish to think that everything that would be necessary to reduce CO2 by 80% would involve net savings.

I have not made such a claim. I merely maintain that not counting social benefits that are not captured by identifiable private actors distorts the calculations rather badly.

[Brett Bellmore]

And assuming benefits that only happen if the whole world gets together and does the same thing, (IOW, when pigs fly.) tends to distort calculations badly, too.

[Mike Blue]

When the Federal Income Tax became a permanent part of our lives in 1913, only 1 in 271 people paid tax, and the maximum rate of taxation was 7%, the lowest rate 1%. In fact, in 1913 dollars, only people making $20,000.00 or more paid anything (I don't know what that would be in 2009 dollars, sorry).

The reality of government figures such as these is they are compiled and manipulated until the figure the government desires is achieved. I doubt very seriously that a severely left-leaning Democratic party controlled Congress would provide us with any information contrary to their goal. (I don't think the Republicans were any more honest when they controlled Congress). It is also reality that no matter what the government tells us in the beginning, the costs will jump dramatically over time. It is very easy to give us a feel-good story about how the programs really won't cost us anything. We are easily convinced by eloquent politicians that we really can have a free lunch.

The true costs of this program are hidden from us deliberately. Once companies have to actually purchase the credits, and invest in technology, then we will get a true idea of what this tax will truly cost. And yes, I did read the part where they say it was based on their estimates of 2020 rules being in effect in 2010, but that for now, the credits will be freely issued to the companies. I suspect we will find the figures will be much closer to the high-end projections than most of us desire.

I personally e-mailed every senator and about 1/3 of the House of Representatives and urged them to vote against this bill. Apparently, they were as easy to convince with this "creative accounting" as most of the American people.

[bob]

"CBO estimates that the net annual economywide cost of the cap-and-trade program in 2020 would be $22 billion—or about $175 per household."

Isn't this saying how much the program will cost in 2020? How about until then? Apples and oranges with the numbers, here.