MIT Analysis of Carbon Policy Further Misinterpreted by Weekly Standard

Posted by Wonk Room Sat, 25 Apr 2009 18:09:00 GMT

From the Wonk Room.

Reilly Letter
John Reilly’s April 14th letter to Rep. John Boehner (R-OH). Reilly explains that the GOP continues to misrepresent his study, which found that annual price for the average household for strong cap and trade would start at $65 in 2015, averaging “about $800” through 2050.
Accusing Massachusetts Institute of Technology economist John Reilly of using “fuzzy math” and “fuzzy logic,” the Weekly Standard has further distorted an MIT study of the economics of carbon regulation. By making an economically unsupportable assumption, Weekly Standard editor John McCormack transforms a $3100 fabrication promulgated by House Republicans into a $3900 fabrication:
While $800 is significantly more than Reilly’s original estimate of $215 (not to mention more than Obama’s middle-class tax cut), it turns out that Reilly is still low-balling the cost of cap and trade by using some fuzzy logic. In reality, cap and trade could cost the average household more than $3,900 per year.

In reality, the energy economist from the Massachusetts Institute of Technology who co-authored the “Assessment of U.S. Cap-and-Trade Proposals” report does a better job of interpreting “reality” than McCormack. It’s McCormack’s logic that is “fuzzy.”

$3100?

The MIT study estimates the average value of the carbon market over a thirty-five year period to be $366 billion per year. If you were to divide that value by the number of households in America, you get $3,128 per household. Asserting that the value of the market is equivalent to the economic cost of the policy – which one has to do to claim that the cost of cap and trade is $3100 per household— requires the assumption that this revenue stream magically disappears somewhere. Reilly attempted to explain this to the Weekly Standard:

It is not really a matter of returning it or not, no matter what happens this revenue gets recycled into the economy some way. In that regard, whether the money is specifically returned to households with a check that says “your share of GHG auction revenue”, used to cut someone’s taxes, used to pay for some government services that provide benefit to the public, or simply used to offset the deficit (therefore meaning lower government debt and lower taxes sometime in the future when that debt comes due) is largely irrelevant in the calculation of the “average” household. Each of those ways of using the revenue has different implications for specific households but the “average” affect is still the same.

For example: Exxon Mobil became the largest corporation in the world by raking in $442.9 billion in revenue in 2008, “costing” the average American household $3,785.

Is the existence of Exxon Mobil a $3,800 tax on American families? No, because most of its revenues are redistributed in the economy—as oil rig employment, petroleum products (which fuel transportation and trade), and of course, multimillion-dollar salaries for its top executives and massive profits for its shareholders.

$3900?

The MIT study of the economic effects of cap and trade did estimate the “welfare cost” of the transition from an unsustainable pollution-based economy to a clean-energy economy. As Reilly explained to McCormack (to no avail), this cost to the economy involves all those actions people have to take to reduce their use of fossil fuels or find ways to use them without releasing [greenhouse gases]>

So that might involve spending money on insulating your home, or buying a more expensive hybrid vehicle to drive, or electric utilities substituting gas (or wind, nuclear, or solar) instead of coal in power generation, or industry investing in more efficient motors or production processes, etc. with all of these things ending up reflected in the costs of good and services in the economy.

The MIT study found that this “welfare cost” is tiny with respect to the size of the economy, even with strong reductions in global warming pollution and a very high price for carbon permits. The change in total welfare is less than one-tenth of one percent in 2015, never rising above two percent for the forty-year run of their model. Averaging out the “price” of a clean-energy economy versus the status quo over those forty years, Reilly found the cost for “the average household just in 2015 is about $80 per family, or $65 if more appropriately stated in present value terms,” and the “present value cost per average current household through 2050” is “about $800.”

McCormack decided to add $3100 to $800 and get $3900, even though Reilly told him one has to assume the carbon market value gets flushed down the toilet:
If you took the revenue and flushed it down the toilet or burned it, the cost would then be the Republican estimate plus the cost I estimate. But that is quite unrealistic, as the auction revenue will be recycled into the economy some way.

Using McCormack’s logic, we could take our $3,800 Exxon Mobil “tax” and then add in, say the $855 per household per year spent on the war in Iraq (given a lowball estimate of $100 billion in total expenditures per year) as the welfare cost of the existence of Exxon Mobil. Adding $3785 to $855 returns a figure of $4640 per average household.

Saying “Exxon Mobil is a $4640 tax” would be silly and intellectually irresponsible. But that’s essentially what McCormack is doing, as is the once-respected Heritage Foundation, who is promoting McCormack’s nonsensical $3900 figure.

THE AVERAGE HOUSEHOLD?

The actual costs and benefits to individual consumers is dependent on how the policy is constructed. As Reilly explained in his April 14 letter, “the burden on lower income households can be offset through the use of auction revenues.” The cost of building a green economy could be paid entirely, in fact, by the richest one percent of the United States, for example – those whose income has nearly tripled in the last thirty years of our pollution-based economy while the bottom 80 percent has seen an increase of only 20 percent.

A cap-and-trade market involves only the corporations who own the power plants, oil refineries, and large factories that are responsible for the covered emissions. Any “cost” for the “average household” can only be derived from a model of how corporations pass costs onto consumers. This is not a simple one-to-one process, as both the House Republicans and McCormack assert. For example, the MIT study found that oil companies enjoy significant economic “rent” – in other words, undeserved profits – because of factors like the inflexibility of production with respect to consumption, the lack of fuel switching in the transportation sector, and the existence of oil cartels. Carbon regulation acts “in effect like a monopsony buyer that extracts some of the producer rent,” substituting the undeserved profits of companies like Exxon Mobil with public revenues.

To calculate the macroeconomic cost of carbon regulation, economists compare a model of the economic status quo with a model that implements the effects of a cap and trade system. As the MIT study warns, pulling out “precise numerical results” from these models is dangerous:
Given the many assumptions that are necessary to model national and global economic systems, the precise numerical results are not as important as the insights to be gained about the general direction of changes in the economy and components of the energy system and about the approximate magnitude of the price and welfare effects to be expected given alternative features of cap-and-trade design.

Reilly’s $800 estimate does not explain how, say, a family earning $36,000 in Toledo would be affected in 2015, or how their electricity or gas bills would change. What this figure does indicate, however, is that the cost of rebuilding our economy to end our dependence on Exxon’s oil and avoid catastrophic global warming is on the order of a dollar a day per person.

THE SAFE STATUS QUO?

The biggest lie of McCormack’s piece, putting aside the deliberate refusal to accept economics 101, comes from the assumption that staying on a pollution-fueled path is cost-free. The MIT study, like other economic models of the cost of new policy, fails to factor in the significant health benefits of reducing fossil-fuel pollution, and most significantly ignores that the level of greenhouse gas emissions in the reference case would lead to catastrophic global warming, with out of control floods, storms, wildfires, droughts, and sea level rise, mass extinction and international insecurity.

Furthermore, no attempt was made to model the economic benefits to either the nation at large or to individuals of the mandate for technological innovation. The shift from a pollution-based economy requires the widescale deployment of modern technologies. The new pathways of economic growth that follow are difficult, if not impossible, to model accurately. The cost of being left behind in the race to develop twenty-first century technologies by clinging to nineteenth-century fuels is similarly difficult to model. So most economists don’t make the attempt.

A National Carbon Tax: Another Option for Carbon Pricing

Posted by Brad Johnson Tue, 09 Dec 2008 14:00:00 GMT

You are invited to a briefing which will discuss a phased-in, revenue-neutral national carbon tax as a policy option for addressing climate change. This briefing is sponsored by the Environmental and Energy Study Institute (EESI), the Carbon Tax Center, the Climate Crisis Coalition, Friends Committee on National Legislation and Friends of the Earth.

The briefing will focus on the environmental, economic, economic-efficiency, logistical and political benefits of a national carbon tax, particularly one that is phased-in and revenue-neutral. Many economists have called for enactment of a carbon tax as the simplest, easiest to administer and most transparent approach to carbon pricing, despite the conventional wisdom that a “cap and trade” regime is key to a political consensus.

Speakers for this event include:

  • Rep. John B. Larson (D-CT)
  • James Hansen, PhD, Director, Goddard Institute of Space Studies, National Aeronautics and Space Administration
  • James Hoggan, British Columbia Public Affairs Advisor; Chair, David Suzuki Foundation
  • Gilbert Metcalf, PhD, Professor of Economics, Tufts University; Research Associate at the National Bureau of Economic Research
  • Robert Shapiro, PhD, Co-Founder and Chairman, Sonecon; former U.S. Under Secretary of Commerce for Economic Affairs
  • Brent Blackwelder, President, Friends of the Earth (Moderator)

Issues to be discussed include:

  • The need for carbon emissions pricing
  • Relative time frames for implementing a carbon tax and a carbon cap and trade system
  • Revenue-neutrality vs. targeted investment
  • Revenue tax-shift vs. revenue distribution via “dividends”
  • Potential implications for cap and trade from the financial crisis
  • Lessons from Canada’s recent national election which turned, in part, on a carbon tax proposal, and from British Columbia’s carbon tax which took effect in July 2008

This briefing is free and open to the public. No RSVP required. For more information, please contact James Handley at (202) 546-5692 or jashand@juno.com, Charles Komanoff at (212) 260-5237 or charles@carbontax.org, or Laura Parsons at (202) 662-1884 or lparsons@eesi.org.

Climate Change Legislation and Revenue Recycling 2

Posted by Brad Johnson Tue, 16 Sep 2008 12:00:00 GMT

Clean Air-Cool Planet and the Environmental and Energy Study Institute (EESI) invite you to a policy discussion to explore how revenues generated through potential climate change legislation can be recycled through the tax code to lower the overall societal cost of reducing greenhouse gas emissions. During debate of climate legislation on the Senate floor earlier this year, use of generated revenues was a significant area of discussion.

The expert panel will include a Member of Congress who has sponsored climate change legislation that provides for revenue recycling; a senior analyst from the Congressional Budget Office who has written extensively about the design of efficient climate change legislation; a leading academic; and experts from two think tanks.

Panelists:

  • Rep. John Larson (D-CT), Member, House Ways and Means Committee
  • Terry Dinan, PhD, Senior Advisor for Climate Policy, Congressional Budget Office
  • Kenneth P. Green, PhD, Resident Scholar, American Enterprise Institute
  • Robert Repetto, PhD, Senior Fellow, UN Foundation
  • Robert J. Shapiro, PhD, Chairman of Sonecon, LLC; former Under Secretary of Commerce for Economic Affairs

Continental breakfast will be served.

Please RSVP to Brenda Rogers at (202) 775-8971 or BRogers@cleanair-coolplanet.org with your name, affiliation, phone number and email address.

Counting the Change: Accounting for the Fiscal Impacts of Controlling Carbon Emissions

Posted by Brad Johnson Thu, 01 Nov 2007 15:30:00 GMT

The purpose of the hearing is to explore the fiscal and distributional impacts of limiting greenhouse gas emissions.

Witnesses

Witnesses testified that global climate change will have serious effects— Witnesses testified that the atmospheric concentrations of greenhouse gases, particularly carbon dioxide, have gradually increased over the past century and are contributing to the warming of Earth’s climate.

In light of the scientific evidence about the potential damages this could cause, momentum is growing to impose mandatory limits to stabilize and eventually reduce U.S. emissions of greenhouse gases.

Taking action now to mitigate greenhouse gas emissions would produce social benefits exceeding costs, according to the Congressional Budget Office (CBO)— While it is difficult to assign a quantitative value to the benefits of climate change mitigation, CBO testified that “most analyses suggest that a carefully designed program to begin lowering carbon dioxide (CO2) emissions would produce greater benefits than costs.” This hearing examined ways to minimize the cost of climate change policy, apart from the benefits that would be derived from pursuing the policy in the first place.

CBO values carbon market in the billions—One of the most prominent methods of reducing greenhouse gas emissions involves a “cap-and-trade” mechanism. Under this system, the total level of CO2 emissions would be capped and corresponding emissions allowances would be issued. According to CBO, “the annual value of emissions allowances would be roughly $50 billion to $300 billion by 2020.”

According to CBO, under a cap-and-trade system, giving allowances away for free would generate windfall profits for private industry and shareholders—According to CBO’s review of the evidence, less than 15 percent of the total value of the allowances would be needed to compensate for the net financial losses of companies affected by the policies to restrict emissions. CBO cites one study that examined the impacts of a 23 percent reduction in emissions. Under this scenario, if all of the allowances were distributed for free to energy producers, stock values would double for oil and gas companies and increase more than sevenfold for coal producers.

Giving emission allowances away will not solve issue of energy prices, according to testimony—Witnesses testified that it is a common misperception that giving away the allowances to affected companies will mitigate against energy price increases. The law of supply and demand means that energy prices would be expected to rise whether energy companies have to buy allowances or are given them for free. A cap on emissions will limit the amount of energy produced from fossil fuels. Regardless of whether the government gives away or sells the allowances, witnesses testified that market forces would be expected to raise the price of fossil fuel energy.

Witnesses testified that government’s capture of the carbon market’s proceeds can be used to mitigate economic impacts— If allowances are sold, such as through an auction, the government would capture significant resources that could then be used to buffer the negative impacts of carbon trading systems for certain sectors, regions, and households.

Climate change control policies could disproportionately affect low-income households— The Center for Budget and Policy Priorities (CBPP) estimates that the average increase in energy-related costs for the poorest fifth of the population could amount to $670 to $950 per year (from a modest 15% emissions reduction). “Households with limited incomes will be affected the most by those higher prices, since they spend a larger share of their incomes on energy-related products and services than more affluent households do,” said Bob Greenstein, Executive Director of CBPP.

14 percent of auction proceeds would fully offset the increased costs to impoverished families, according to CBPP CBPP estimates that the impact of carbon controls on the poorest 20 percent of the population could be fully offset by using just 14 percent of the total resources.

According to CBPP, use of existing mechanisms such as electronic benefit transfers and increases in the Low Income Home Energy Assistance Program would be the most effective way of reaching large numbers of low-income households.

Carbon tax vs. cap-and-trade— Carbon taxes represent another option to control greenhouse gas emissions. While CBO pointed out that “a tax is generally the more efficient approach,” CBO Director Peter Orszag (along with other panelists) suggested that there are ways of enhancing the economic efficiency of a cap-and-trade program to provide flexibility and minimize price spikes.

Federal cap-and-trade system may be reflected in the budgetary scoring process— CBO indicated that “there is a solid case to be made that even allowances that were given away by the government should be reflected in the budgetary scoring process—specifically that the value of any allowances initially distributed at no cost to the recipients should be scored as both revenues and outlays, with no net effect on the budget deficit.”

A Climate of Change: Economic Approaches to Reforming Energy and Protecting the Environment

Posted by Brad Johnson Tue, 30 Oct 2007 13:00:00 GMT

On October 30, The Hamilton Project at Brookings will host a two-part forum on mitigating climate change through market mechanisms and new technologies. In addition to the release of a new Hamilton Project strategy paper, the forum will highlight two new discussion papers on how to best design market mechanisms to reduce greenhouse gas emissions and will include proposals to expand — and possibly restructure — the federal research and development program to better promote the development of new greenhouse gas reducing technologies.

Former U.S. Treasury Secretary Robert E. Rubin and Hamilton Project Director Jason Furman, also a Brookings senior fellow, will open the event with a special award presentation, followed with opening remarks by former U.S. Treasury Secretary Lawrence H. Summers on economic approaches to energy security and climate change—the subject of the new strategy paper.

The new Hamilton Project strategy paper argues that the best way to address climate change is to give the private sector the right incentives to undertake emissions reductions. At the same time, the strategy calls for policies to protect low- and middle-income families from the consequences of higher energy prices.

The two new discussion papers will feature alternate views on how to best harness market forces to protect the environment. Gilbert E. Metcalf of Tufts University will discuss his proposal for a carbon tax and Robert N. Stavins of Harvard University will present his proposal for a cap-and-trade system. John Deutch of the Massachusetts Institute of Technology and John Podesta of the Center for American Progress will also discuss their recent proposal for a new federal research and development strategy, and Richard Newell of Duke University and Resources for the Future will share his ideas for creating science and technology policies that would enable new technologies to work effectively.

Welcome and Special Presentation
  • Robert E. Rubin, Citigroup Inc. and Jason Furman, The Hamilton Project

An Economic Approach to Energy Security and Climate Change

  • Lawrence H. Summers, Harvard University

Panel One

Creating a Green Market: How to Best Price Carbon

  • Moderator: Sebastian Mallaby, Council on Foreign Relations
  • Gilbert E. Metcalf, Tufts University
  • Robert N. Stavins, Harvard University
  • Jason Furman
  • Kathleen McGinty, Pennsylvania Department of Environmental Protection

Panel Two

Warming up to New Technologies: Innovating Our Way To a Stable Climate

  • Moderator: Roger C. Altman, Evercore Partners
  • John Deutch, Massachusetts Institute of Technology
  • John Podesta, Center for American Progress
  • Richard Newell, Duke University
  • Kelly Sims Gallagher, Harvard University
  • David Sandalow, Brookings Institution

Hyatt Regency Regency Ballroom 400 New Jersey Avenue, NW Washington, DC

Dingell Unveils Carbon Tax Proposal 1

Posted by Brad Johnson Thu, 27 Sep 2007 01:01:00 GMT

As he announced he would last month, Rep. John Dingell (D-Detroit), chair of the House Energy and Commerce Committee, unveiled draft legislation for a carbon emission fee and related elements.

Dingell is soliciting comment online.

The elements:
  • A $50 tax per ton of carbon (approximately equivalent to a $14 price on CO2, not the $100/ton CO2 reported by CNSNews) to be phased in over five years and then indexed to inflation
    • Revenues will be apportioned to Medicare and Social Security, universal healthcare, SCHIP, conservation, renewable energy research and development, and LIHEAP
  • A $0.50/gallon gasoline tax to be phased in over five years and then indexed to inflation
    • Diesel would be excluded from this tax because “the fuel economy benefits of diesel surpass even its emissions benefits; it provides about a thirty percent increase in fuel economy and a twenty percent emissions reduction,” figures basically in line with the Union of Concerned Scientists report, The Diesel Dilemma “on an energy-equivalent basis, each gallon of diesel fuel results in about three percent more heat-trapping gas emissions than gasoline.”)
    • Biofuel blends would only be taxed on their petroleum content
    • Revenues go to the highway trust fund, with 40% going to the mass transit and 60% going to roads
  • A $0.50/gallon jet fuel tax, with revenues going into the airport and airway trust fund
  • McMansion provision: Phases out the mortgage interest deduction on primary mortgages on houses over 3000 square feet, going to zero for homes 4200 square feet and up
    • Exemptions for historical homes (prior to 1900) and farm houses
    • Exemptions for home owners who purchase carbon offsets to make home carbon neutral or own LEED certified homes
    • Budget savings will go to pay for an increase in the Earned Income Tax Credit

Larson Carbon Tax Bill: America's Energy Security Trust Fund Act (HR 3416) 1

Posted by Brad Johnson Thu, 16 Aug 2007 15:27:00 GMT

Just before the August recess, Congressman John B. Larson (D-Conn.) introduced HR 3416, a federal carbon tax proposal that follows the basic model of Al Gore’s carbon tax recommendation.

Elements:
  • Covers coal, petroleum, and natural gas
  • Only regulates carbon dioxide content, not other GHG emissions (the bill calls for a proposal to cover those emissions within 6 months of enactment)
  • Tax starts at $15 per ton and rises at 10% faster than the cost of living adjustment each year
  • Tax refunds or credits include feedstock and any offset project other than enhanced oil recovery, and all exports
  • Revenues raised go into “America’s Energy Security Trust Fund”. 1/6 up to $10 billion goes to clean energy technology R&D, 1/12 goes to industry relief (declining to zero by 2017), and the remainder goes to offset payroll taxes.

John Dingell Announces Global Warming Proposal 3

Posted by Brad Johnson Mon, 13 Aug 2007 19:30:00 GMT

At his town hall meeting last week, House Energy and Commerce chairman John Dingell unveiled the outline of his global warming legislative plan, which he will introduce in committee on September 1:
  • cap-and-trade system with an 80% cap by 2050
  • $100 per ton CO2 emissions tax
  • 50-cent increase in federal gax tax
  • funding for research on renewable energy
  • ending the McMansion mortgage deduction (homes larger than 3,000 square feet)
Glenn Hurwitz at Grist pens a stinging assessment of the chairman: Dingell is dispensible.
So far, he’s fought hard against all steps forward, but it hasn’t made much difference in policy. That suggests that environmentalists and Democrats would be well served to reconsider conventional wisdom about Dingell. Partly because of his gratuitous and repeated swipes at leadership and the environmental movement, his sway with both leadership and rank-and-file Democrats is considerably less than it once was. As the RES vote and Hoyer’s prediction that Congress will pass aggressive fuel efficiency standards shows, his support is no longer essential to passing major environmental legislation. This doesn’t mean that Democrats or environmentalists can ignore all sometime-opponents of environmental progress within the caucus (some, like Gene Green and Charlie Gonzalez, have shown that they retain considerable pull), but it does mean we can stop obsessing about Dingell.
Earlier at Grist David Roberts criticized the Greenpeace activists protesting Dingell’s recent efforts to block an increase in CAFE standards: Dingell’s dimwitted detractors.
Argh. Silly, gimmicky, irrational crap. If this is what Dingell runs into, it’s no wonder he holds green activists in such contempt. Relative to what Dingell’s proposing, the difference between a 35mpg CAFE (which he supports) and a 45mpg or 50mpg CAFE (which greens support) is meaningless. Utterly and completely trivial. A distraction. If we could get in place a carbon tax and a cap-and-trade system, the effects will dwarf minor changes in CAFE. Instead of hectoring Dingell about CAFE, activists should be using their energy to push other legislators to support these bills.

What's Missing from the House Energy Bill; Dingell on Carbon Tax

Posted by Brad Johnson Thu, 02 Aug 2007 14:10:00 GMT

The New York Times has an editorial on the energy bill to be debated this week (HR 3221): An Incomplete Energy Bill.

The House will begin debating Friday on a generally useful energy bill that would increase energy efficiency, encourage more responsible oil and gas development on public lands and stimulate investment in cleaner fuels. Yet the bill is incomplete. If it truly hopes to address the problems of global warming and energy independence, three vital issues need to be addressed.
The three missing components:
  • CAFE Standard (Markey-Platts, HR 1506)
  • Renewable Energy Standard (Udall, HR 969)
  • Low-Carbon Fuel Standard

This is also the Union of Concerned Scientists platform.

Rep. Dingell, meanwhile, wrote an op-end on the carbon tax: The Power in the Carbon Tax. It’s a critical insight into the thinking of perhaps the most influential person in Congress in shaping global warming policy.

I apparently created a mini-storm last month when I observed publicly for at least the sixth time since February that some form of carbon emissions fee or tax (including a gasoline tax) would be the most effective way to curb carbon emissions and make alternatives economically viable. I said, as I have on many occasions, that we would have to go to some kind of cap-and-trade system for carbon emissions.