Overestimating the Costs of Carbon Constraints

With Congress moving forward on climate change legislation, the battle over the costs reducing greenhouse gas emissions is heating up. In mid-March, the National Association of Manufacturers (NAM) unveiled an economic analysis that found huge impacts from the provisions in the leading bill. (http://www.accf.org/nam.html ) GDP would be cut by more than $631 billion by 2030. More than 3 million jobs would be lost. Electricity and gasoline prices would double. Less than a week later, the EPA came out with its analysis, which has less alarming scenarios: GDP down less than $250 billion and only modest increases in gas and electricity prices. (http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf) Other analyses peg the costs as even lower. Some even see net increases in jobs thanks to the growth of green technologies.

Why the big differences? As in any economic modeling, the initial assumptions are crucial. One key is the expected pace of technological change. The faster the country adopts renewable energy, builds more nuclear plants, and captures and stores carbon, the lower the eventual costs will be. The high-cost NAM study, for instance, assumes slow adoption of renewables. Another important assumption: the amount of energy efficiency gains that could be achieved. The EPA study doesn’t include auto fuel economy regulations passed last year, which reduce emissions by increasing fuel efficiency. The bottom line: The real costs are highly uncertain, but the lesson from the past is that they will be far less than the opponents of regulations predict.

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