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Another Look at the Costs/Benefits of Waxman-Markey: A Dog that Won't Hunt

Longtime MasterResource readers know of Chip Knappenberger’s post on the negligible climatic effects of unilateral adherence to Waxman-Markey. Across the board, the response from supporters of Waxman-Markey was not to deny Knappenberger’s calculations, but rather to insist that the U.S. had to show leadership. The (perhaps unspoken) premise was that if the whole world adopted the steep emission cuts proposed in Waxman-Markey, then the climatic benefits would clearly outweigh the economic costs.

In an earlier post, I tried to show that this view is simply false. According to the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report (AR4)–the very document showing the “consensus” on the physical science basis of manmade climate change–the best estimates of climate change damages do not justify the aggressive limits contained in the current Waxman-Markey bill.

Then in a follow-up post, I documented that a recently released summary paper from Resources for the Future (RFF) reached the same conclusion: Using standard cost/benefit analyses, the peer-reviewed literature cannot justify the aggressive emission cutbacks in Waxman-Markey. In order to justify the bill’s 83% cut (relative to 2005 levels) by 2050, proponents must stipulate that there are climatic tipping points beyond which it is too dangerous to proceed. But the actual expert models of the global economy and climate system cannot themselves spit out these “tipping points” as the efficient policy choices. (In general, many proponents of aggressive government action have repudiated cost/benefit analysis altogether when it comes to climate change policies.)

In the present post, I want to show the contradictions in Paul Krugman’s recent advocacy for Waxman-Markey, and then comment more generally on the implications of a cost/benefit result. Just because Waxman-Markey fails the cost/benefit test, doesn’t automatically mean the government “should do nothing.” However, it does mean that–even on the IPCC’s own terms–the aggressive targets in Waxman-Markey are the wrong “solution,” and will cause more total harm than total good.

Supporters of aggressive government action cannot have it both ways. If the IPCC “consensus” is solid enough to banish any outliers to the ranks of the crazy, corrupt, or even criminal, then shouldn’t it matter that the IPCC figures themselves show how Waxman-Markey’s costs outweigh its benefits?

In the posts linked above, I go through the various demonstrations of why Waxman-Markey–if applied on a global scale–would have economic costs that far outweighed the environmental benefits, according to the consensus of cost/benefit analyses. (To repeat: Plenty of economists might say that Waxman-Markey is a good idea, but my point is that they can’t justify its targets using their standard tools. They simply have to stipulate that global warming above a certain, somewhat arbitrary cutoff point is “too much” and work backwards from there.)

For this post, I’ll make the point in reference to a recent Paul Krugman op ed, where he said:

Even with stringent limits, says the M.I.T. group, Americans would consume only 2 percent less in 2050 than they would have in the absence of emission limits. That would still leave room for a large rise in the standard of living, shaving only one-twentieth of a percentage point off the average annual growth rate.

But by using this very same trick of converting a future year’s GDP loss into a reduction in annualized growth rates, we can see how “trivial” the dangers of even unrestricted emissions are. Look at Table SPM.3 from the AR4 on page 13 here [.pdf]. Even under the worst case scenario (A1FI), the best estimate of additional warming over the 21st century is 4 degrees Celsius.

Now look at the top right paragraph on page 17 here [.pdf]. We see that a 4C warming will cause GDP losses between 1% and 5%.

Thus, even under the worst case scenario studied by the IPCC models, and plugging in the top range of the estimated damage from such warming, we would still only suffer 5% GDP losses by 2100.

That is a huge number, to be sure, but guess what? If we take the annualized loss in GDP growth–namely, a loss of five basis points, meaning the economy grows at (sa) 2.95% instead of 3.00%–then the shortfall is 2% by 2050. Krugman thought this was completely worthwhile, in order to save the planet. Yet that same shortfall of five basis points eventually translates into a 5% shortfall by the year 2114.

Thus, the drop in annual GDP growth that was so insignificant in Krugman’s mind, when it came to measuring the economic costs of aggressive carbon legislation, is just shy of the drop in annualized GDP growth matching up with the environmental benefits of such legislation, in the worst case scenario. But when we realize that Krugman’s estimate of 2% GDP loss by 2050 is much lower than what the IPCC itself says (as I document in the earlier posts linked above), the answer is a no brainer: The benefits of fighting climate change do not exceed the costs, even using the IPCC’s own models.

In conclusion, the above arguments do not show that the government should “do nothing.” If one accepted the premises of manmade climate change, and the property rights of certain people to be protected from emissions of others, then advocates could still plausibly argue that greenhouse gas emitters should be forced to pay a certain fine per ton of emissions, which would then be funneled into the hands of the aggrieved parties.

However, under no circumstances would the correct outcome be to cap emissions at the level proposed by Waxman-Markey. That would be akin to banning automobile usage, on the grounds that sometimes pedestrians get hit by drivers.

One final point: If the proponents of carbon legislation took the IPCC models (including the economic ones) seriously, and wanted to start penalizing emitters to compensate those damaged by the emissions, then the obvious thing to do would be WAIT and STUDY THE PROBLEM MORE. Even on their own terms, the damages to poor nations will not really kick in until many decades from now. To refine the analogy above, Waxman-Markey seeks to seriously restrict automobile usage now, on the grounds that some pedestrians might be killed by drivers in the year 2100.

3 comments

1 Richard W. Fulmer { 06.17.09 at 12:22 pm }

There are other problems with Krugman’s op ed. For example, he states that the cost of a cap-and-trade system will be “modest,” while at the same time claiming that “emission limits… would … create major incentives for new investment — investment in low-emission power plants, in energy-efficient factories and more.”

The only way in which limits could create these “major incentives” is if they increased the costs of running such facilities beyond that of building and operating alternative plants. Given that the available alternative power sources are currently far more costly than those that rely on fossil fuels, these incentives would only be created if the costs imposed by emissions limits are anything but “modest.”

Krugman then falls into the “broken window fallacy.” (This is the belief that a vandal helps the community when he breaks a window by providing work for the glazier. The fallacy, of course, is that resources that could have been spent increasing the wealth of the community must now be spent restoring the status quo ante.) He argues that the investment in new plants necessitated by the costs imposed by emission limits will give the country an economic boost. While existing plants would not be “broken” by emission limits, enough of their economic value must, in Krugman’s scenario, be destroyed so that they would have to be replaced. Scarce resources would then have to be shifted from other uses to build the new facilities.

Repairing a broken window entails only a one-time cost. Under Krugman’s plan, however, the costs would be ongoing given that low operating-cost energy plants would be replaced with higher cost facilities. These higher operating costs would have to be paid year after year. Broken windows without end.

2 Ed Reid { 06.17.09 at 3:25 pm }

The investments required to comply with W-M would be ~1 TARP per year (~$700 billion per year) through 2050. That is a lot of broken windows!

3 Rent Seeking, Crony Capitalism, and U.S. Energy Politics: Who Wins from the Racket? — MasterResource { 08.05.09 at 8:58 am }

[...] (HR 2454) on this site and others have shown that the proposed cap-and-trade legislation will cost consumers dearly by raising the prices of electricity and gasoline, while ignoring viable sources of clean energy [...]

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