The Economic Effects of Proposed Cap-and-Trade Legislation

President Obama and several members of Congress have proposed legislation to reduce greenhouse gas (GHG) emissions in the United States. The Waxman-Markey Bill currently before Congress would bring GHG emissions, and hence carbon emissions, below 2005 levels in steps – 3% below those levels by 2012, 20% by 2020, 42% by 2030, and 83% by 2050.

Waxman-Markey would create a “cap-and-trade” system, under which U.S. producers would receive tradable permits to emit greenhouse gasses. Producers buying the permits would, in effect, pay a tax for the privilege of emitting greenhouse gasses currently emitted without charge. The resulting “carbon tax” would have an effect on production and employment similar to an explicit excise tax on production.

In this report, the Beacon Hill Institute (BHI) uses two computer modeling capabilities to estimate the economic effects of this tax on the Louisiana economy. The first of these is the “DICE” (Dynamic Integrated Model of Climate and Economy) model developed by William Nordhaus of Yale University.(1)

Table 1 displays the results.

Table 1:  The Net Costs and Price Effects of Waxman-Markey*   

*2007 Prices

Cutting CO2 emissions by 83% over four decades – as proposed in the Waxman-Markey Discussion draft – might appear to be an easy goal, but the results indicate otherwise. The first point to note is that such cutbacks, whether done by the U.S. alone or in concert with others, would all be more expensive than doing nothing at all!

If the United States were to cut emissions alone, with no cutbacks (relative to trend) by other countries, it would bear the full cost of abatement (PV = $3.85 trillion) while reaping only about $0.27 trillion in benefits. This represents a net cost, relative to doing nothing, of $3.42 trillion. It would cost the United States $154 billion by 2020 and $1.318 trillion by 2050.

By 2045, the tax on carbon would need to rise to $714 per metric ton of carbon (equivalent to $195 per metric ton of CO2) to induce consumers to make the necessary cutbacks; from Table 1 we see that this would add $1.73/gallon to the cost of gasoline (in 2005 dollars) and 6.8 to 15.07 cents to a kWh of electricity – essential doubling the retail price of electricity.

The benefits are modest because by 2050 the U.S. would account for less than a sixth of world emissions of CO2; reducing U.S. emissions by 83% (relative to the 2005 level) by then would cut global emissions by just 11%, which would have a modest effect on climate, moderating the increase in global temperature by 2100 from 3.30ºC (the baseline no-controls case) to 3.12º.

The Beacon Hill Institute used its STAMP® (State Tax Analysis Modeling Program) model to estimate the resulting effects on the economy of selection of states.(2) See the reports.

(1) William Nordhaus, 2008, A Question of Balance, Yale University Press.
(2) For a description about the model visit STAMP at www.beaconhill.org.

BHI State Analysis

Arkansas
Colorado
Delaware
Illinois
Indiana
Louisiana
Michigan
Missouri
Montana
Nebraska
New York
North Carolina
Ohio
Pennsylvania
SouthCarolina
Tennessee
Texas
Virginia
West Virginia