Thinking About Cap And Trade

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by Patrick Appel

Jim Manzi makes a strong case against the Waxman bill (read his whole post):

Climatologist Chip Knappenberger has applied standard climate models to project that, under the scenario for global economic and population growth referenced above (A1B), Waxman-Markey’s emissions reductions would have the net effect of lowering global temperatures by about 0.1°C by 2100. Remember that the estimated cost of a 4°C increase in temperature (40 times this amount) is about 3 percent of global economic output.

Assume for the moment that global warming has the same impact on the U.S. as a percentage of GDP as it does on the world as a whole (an assumption that almost certainly exaggerates the impact on the U.S.). A crude estimate of the U.S. economic costs that Waxman-Markey would avoid sometime later than 2100 would then be about one-fortieth of 3 percent, or about 0.08 percent of economic output. This number is one-tenth of 0.8 percent, the EPA’s estimate of consumption loss from Waxman-Markey by 2050. To repeat: The costs would be more than ten times the benefits, even under extremely unrealistic assumptions of low costs and high benefits. More realistic assumptions would make for a comparison far less favorable to the bill.

I’ve had to rely on informal studies and back-of-envelope calculations to do this cost/benefit analysis. Why haven’t advocates and sponsors of the proposal done their own? Why are they urging Congress to make an incredible commitment of resources without even cursory analysis of the net economic consequences? The answer should be obvious: This is a terrible deal for American taxpayers.

I don't expect a carbon emissions bill to save money, but I've always known Jim Manzi to be intellectually honest and his back-of-envelope calculations are discouraging. While global warming is a fact, the extent of the damage it will inflict is harder to calculate. I've been leaning toward supporting the Waxman bill because of some of these more difficult to price costs of warming. The recent CBO study makes note of some of them. I also worry that the unequal distribution of global warming consequences will cause wars and international strife that will hurt us militarily and economically  – that we will get hit by climate change indirectly. Additionally, I'm worried about Obama's deficits. If Waxman doesn't pass but Obama rams through the rest of his agenda, those future deficits are going to look even uglier (provided the revenue raised by C&T is greater than the revenue lost by regulation). That could create another systemic crisis. And any of these concerns could spark traumatic low-probability events that would impact the US and world economy. They are also extremely difficult to price into cost-benefit.

I fully admit that I am working with an incomplete data set and unknowns. I'm also not a scientist or an economist; just someone trying to muddle though the issue. And it's very difficult to shake off one's own bias and evaluate this topic with clear eyes. I hope my fears are misplaced. But if Jim is right, and "Waxman-Markey’s emissions reductions would have the net effect of lowering global temperatures by about 0.1°C by 2100," it doesn't sound like this bill is going to do much to prevent the catostrophic events that concern me most. I encourage readers, especially those with a scientific or economic backround, to write in and prove me (and Jim) wrong.

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