What Would Climate Change Reform Cost Us?

It's unlikely that Congress will get to a climate change bill in 2010. Between financial regulation, another jobs bill, the summer hiatus, the fall midterms and necessary end-of-year tax reform (pre-2001 tax levels and the estate tax are scheduled to reappear in January 2011), there's little time to debate, amend, conference and pass the most complicated and far-reaching energy legislation in American history.

But let's talk about it anyway! Doug Elmendorf, the Congressional Budget Office chief, recently published five economic lessons about climate change on his blog. Most of the lessons are self-explanatory. For example, Lesson One: if you want to account for the negative externality of pollution, you have to price it, with either a direct tax or an overall cap. Good lesson. Lesson Four is more debatable: An efficient system for reducing greenhouse gas emissions would probably lower overall GDP, employment, and households' purchasing power.

Although estimates are very uncertain, most experts project that the long-term loss in gross domestic product (GDP) from a policy like the American Clean Energy and Security Act of 2009 (ACESA) would be a few percent, which is roughly equal to normal growth in GDP over just a few years. Employment would probably also fall slightly as production shifted away from industries related to the production of carbon-based energy and energy-intensive goods and services, and toward the production of alternative and lower-emission energy sources, goods that use energy more efficiently, and non-energy-intensive goods and services; workers would follow those shifts in demand, but that would take time and entail costs. The reduction in households' purchasing power would occur because resources would be devoted to achieving a goal not included in measured income. CBO estimated that the loss in purchasing power from the primary cap-and-trade program that would be established by ACESA would rise from about 0.1 percent of GDP in 2015 to about 0.8 percent of GDP in 2050.

I'm torn on this point.

On the one hand, it makes sense that introducing a tax on pollution will have short-term costs. One of the costs will appear in monthly bills. Energy companies will pass along the higher cost of energy to consumers, and the government will probably promise rebates to lower-income families. But the rebate won't cover all of the cost for all customers, and it shouldn't. Richer families can afford slightly higher energy prices, and with an elevated debt burden the government should be prudent with its rebates. Another cost will be in employment. Faced with a new tax, some carbon-based energy produces might lay off workers. Demand will shift to lower-emission energy companies and the long-term impact could be a net positive energy jobs -- especially if national renewable energy companies replace our demand for foreign sources. But you'd be crazy to expect payrolls not to change at carbon-heavy plants.

On the other hand, an energy bill with efficiency programs and guidelines will almost certainly have long-term cost savings -- savings the CBO typically does not score. A McKinsey survey found that setting energy efficiency standards for appliances and upgrading the energy efficiency of new buildings could produce hundreds of billions of dollars in savings within a decade. On top of that, you have the incalculable impact of the United States leading an international effort to reduce greenhouse gases and diffuse and potentially devastating impact of climate change.

So you can see the climate change bill at least three ways: (1) it's a big tax, (2) it' a big investment, or (3) it's a big insurance policy against catastrophe. Most Republicans will use the CBO numbers to make the first case. I fall somewhere between two and three.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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