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Incomplete Study Still Shows Affordable Results

EPA Looks at Lieberman Warner Bill

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On March 14, the Environmental Protection Agency released a study, “EPA Analysis of the Lieberman-Warner Climate Security Act of 2008, S. 2191” which projects that that the Lieberman Warner Climate Security Act would achieve significant global warming pollution reductions at an affordable price. The study found that “the global CO2 concentration in 2095, while not stabilized, would likely be lower than 491 ppm [parts per million] if the US adopts S. 2191.” This very cautious estimate still indicates that emissions will be in the 450 ppm-550 ppm range advanced by scientists to stave off the worst effects of global warming.

The EPA study was tilted toward overestimating carbon dioxide pollution reductions costs, while ignoring other important elements. The study includes no modeling of economic benefits from carbon dioxide reductions, the cost of inaction, or the significant greenhouse gas reductions from the Energy Independence and Security Act, which became law on December 19, 2007.

The EPA study also ignores S. 2191’s rebates and energy-efficiency assistance to low- and middle-income families. It does not attempt to estimate the tens of thousands of clean energy jobs from the additional 61 gigawatts of renewable energy—equal to 120 new 500 megawatt power plants—spurred by this bill. And it does not calculate the economic cost of inaction from prolonged drought, more severe storms, larger wild fires, and many other effects linked to global warming.

Despite these shortcomings, the EPA study still indicates that the global warming reductions mandated by S. 2191 would have limited impact on overall economic growth, and lead to very small increases in electricity prices.

The EPA study modeled many possible scenarios, but most were based on extremely unrealistic assumptions, such as no nuclear power plants or the emergence of a natural gas cartel. It did examine one credible scenario that assumed the adoption of more advanced technology, such as carbon capture and storage by coal fired power plants.

Under this advanced technology scenario, EPA predicted that decreases in global warming pollution would make only a tiny dent in economic growth. It estimated only a “0.04 Percentage Points” reduction in “average annual growth” of Gross Domestic Product from 2010-2050. In other words, the emissions reductions required by S. 2191 would have almost no effect on economic growth.

This prediction likely overstates the impact of the Lieberman Warner bill on the economy. During debates over the acid rain provisions in the Clean Air Act of 1990, studies from the EPA and other “impartial” entities also predicted significant economic costs. Yet EPA analysis a decade later determined that the actual cost of cutting sulfur emissions by 40 percent was just one quarter of its original estimates.

EPA’s acid rain studies also inaccurately predicted that electricity rates would rise since the primary source of sulfur emissions was coal fired power plants. The Lieberman Warner Climate Security Act study tells a similar story, noting that because coal fired electric plants are the number one stationary source of U.S. global warming pollution, they will bear a large share of the emission reductions.

The EPA study does not predict large electricity rate increases—it anticipates that rates would not rise above 2005 levels until 2020, and after that, electricity rates will rise only one-fifth by 2040. Yet later analyses of the acid rain provisions still found that the exact opposite occurred.

Average electric rates dropped from 8.05 cents per kilowatt hour when the Clean Air Act was passed in 1990 (calculated in 2000 dollars) to 7.48 cents per kwh in the first year of the sulfur reduction requirements in 1995, to 6.81 cents per kwh when Phase II began in 2000. By 2006, electricity was up slightly to 7.63 cents per kwh (2000 dollars) but still 5 percent less than before the acid rain program began.

S. 2191 controls carbon dioxide emissions with a cap-and-trade program similar to the sulfur dioxide emissions trading system set up under the Clean Air Act. Companies will be required to have an “allowance” for every ton of carbon dioxide that they emit. The purchase price of allowances could be viewed as the cost of reducing carbon pollution that causes global warming. A recent industry study guessed that allowances will cost “$55/ton” in 2020, even under its “low cost” scenario. The EPA study projects that allowances will cost about half of that—$26/ton in 2020.

EPA has made such estimates before during the congressional debate over acid rain controls in 1990. Back then, EPA estimated that each allowance to emit a ton of sulfur would cost $750 during the first phase of the program. The actual prices began at $250-$300 in 1992, and eventually fell to $70 in 1996 — one tenth of the predicted cost.

In its S. 2191 analysis, EPA projects that, contrary to industry predictions, manufacturing facilities will not flee overseas to escape the carbon cap-and-trade reduction system. Instead, the study anticipates that other countries would also reduce their emissions, and indeed the European Union already plans to reduce its greenhouse gas emissions by 20 percent by 2020.

This EPA analysis and other “independent” studies by government entities are likely to overstate compliance costs and ignore benefits of global warming solutions. They are inherently flawed because they attempt to predict future clean up results and costs based on a snap shot of current technologies. They cannot capture the technological and operational innovation that occurs when managers and engineers are given binding reduction targets and firm deadlines. History has taught us that industry almost always finds better ways to meet these requirements more cheaply. And this sort of dynamic innovation is very difficult to factor into a static model.

Many studies also fail to factor in the economic benefits from compliance, the cost of inaction, or recently passed laws that may reduce the same pollutants targeted by the pending policies under study.

The EPA study, flaws and all, provides a more realistic guess about the impact of the Lieberman and Warner bill than a study released the day before by the National Association of Manufacturers and American Council for Capital Formation Thursday. It has frightening predictions about the economic effects of the Lieberman Warner Climate Security Act, S. 2191: huge unemployment, gasoline price hikes, and higher electricity bills. Yet, as we saw in the past with similar industry analyses of the acid rain control program, this scare-study contains more agitprop than economic analysis and will ultimately be proven totally wrong.

The Lieberman Warner Climate Security Act is not perfect. It could require more greenhouse gas reductions in the early years and by 2050. It gives away, rather than auctions off, too many allowances early on, which could decrease the revenue to aid low- and middle-income families, invest in clean energy, and provide assistance to developing nations to help them adapt to the effects of global warming.

The Lieberman Warner Climate Security Act should establish a new source performance standard for all new coal fired power plants to speed the development and deployment of carbon capture and storage technology that could reduce coal power plant emissions by 85 percent or more.

Yet even with these shortcomings, the Lieberman Warner bill is an essential first step in the urgent effort to reduce global warming pollution. AFL-CIO President John Sweeney recently warned that if unchecked, global warming could lead to “economic damage on the scale of the Great Depression.” And an examination of the EPA study shows that the economic predictions it makes both overstate compliance costs and purposely ignore benefit assessments.

EPA’s overly cautious, incomplete analysis nonetheless suggests that S. 2191 could make a significant reduction in greenhouse gases without slowing economic growth, spiking electric prices, or causing massive unemployment. If history is any indication, these conservative estimates tell us that if enacted, the Lieberman Warner bill will bring fewer economic drawbacks and more gains than anticipated.

Thanks to Jeremy Symons

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