The Energy Bill: What Will It Cost?

On June 26, the House of Representatives "passed the most important environmental and energy legislation in our nation's history," in the words of Environmental Defense Fund President Fred Krupp. By putting limits on the emissions that cause climate change, the bill would alter the economy and make the nation cleaner and greener. The price tag for Americans in higher costs for energy and all manner of consumer products: as high as $3,000 a year per family, say Republicans. Hold on, it's more like $175 per family per year, says the Congressional Budget Office.

Why the wildly divergent estimates? Much depends on how forecasters factor in basic assumptions, such as how quickly low-carbon technology can be developed. In addition, the cost depends heavily on the specifics of regulations yet to be written. "To be honest, it is just very uncertain what the outcome of the bill will be," says Scott J. Bloomberg, principal at economic modeler CRA International.

The basic concept behind the bill is that utilities and other companies must have a permit, or allowance, for each ton of carbon dioxide or other greenhouse gas they emit, with an overall cap. Over the years the cap will be lowered to cut emissions 83% by 2050. Allowances get scarcer, and the price of emitting goes up.

How much the price rises, however, depends on "things that are truly unknown," explains modeling expert Thomas Wilson of the Electric Power Research Institute. Costs will be lower, for instance, if the nation builds a lot of nuclear plants or if supplies of natural gas are abundant. The costs go up, though, if the technology to capture carbon dioxide from coal plants fizzles or if solar panels don't come down in price.

If that's not complex enough, other provisions in the House bill add to the uncertainty. To reduce the impact on the economy, the legislation would allow companies to buy "offsets"—emission reductions made by, say, preventing deforestation—instead of making their own reductions or buying permits. In an analysis by John M. Reilly at the Massachusetts Institute of Technology, such offsets cut the price of a ton of CO2 emissions from $55 to $17 in 2015. But other studies are less sanguine about how many offsets will be allowed, so they end up predicting higher costs.

Meanwhile, separate provisions boosting incentives for energy efficiency would lower consumers' energy bills, but only some of the analyses figure in those savings.


Given all these moving parts, it's easy for politicians to pick the numbers they want. In fact, "there's been outrageous demagoguery on the costs of the bill," says Daniel Lashof, director of the Natural Resources Defense Council's climate center. For instance, the Republicans' widely used $3,000-per-household figure comes from Reilly's MIT study, they say. Reilly says that's a misinterpretation—the number is far lower.

For now, the most credible estimate, say experts, is the Congressional Budget Office's relatively low cost, although even it can't account for all the unknowns. But the reassuring lesson from history is that new regulations, such as the 1990 rules on acid rain, usually spur enough clever ideas to reduce costs below predictions and deliver greater benefits. "No economic model has ever accurately modeled technological change induced by government action," says Joseph J. Romm, a former Energy Dept. official. "That's why they overestimate the cost of action."

    Before it's here, it's on the Bloomberg Terminal.