CBO Answers Big Climate Bill Question: Cost

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This summer, Congress will decide whether or not to pass a comprehensive climate bill in the form of the American Clean Energy and Security Act (ACES). Until now, one big question was unanswered: Will it be too expensive?

The non-partisan Congressional Budget Office has released its analysis, and the answer is no.

The CBO’s cost estimate projects that the climate bill would help reduce federal budget deficits by $24 billion over a decade.

ACES would raise $846 billion in its first decade, almost entirely through a cap-and-trade system for greenhouse gases intended to prompt companies to reduce their carbon emissions. During the same time period, the federal government would spend $821 billion through programs related to the bill.

The CBO report rebuts opponents of the bill who have claimed that it would be too costly.

“This certainly helps make the case for passage,” says Daniel J. Weiss, senior fellow and director of climate strategy at the Center for American Progress.

“It won’t all of a sudden convince someone who is opposed to support it. That doesn’t happen. But it does take away a very important opponents’ talking point – something that the American people care about – which is the deficit.”

The CBO analysis scrutinized the costs and revenues of all the components of the ACES climate bill proposed by Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.).

If passed, the bill would create two cap-and-trade programs – one for carbon dioxide and other common greenhouse gases and a separate market for hydrofluorocarbons (HFCs), the super GHGs used in refrigeration and air-conditioning. The allowances required for industries and power producers to emit those gases would partially be auctioned off to polluters by the federal government and partially given away.

The bill also includes tax credits to help low-income families offset the higher electricity bills they may face, as well as a renewable electricity standard requiring utilities to obtain a certain percentage of the electricity they sell from renewable sources, and other measures intended to increase energy efficiency and lower global warming emissions.

The government would raise revenues from the two cap-and-trade markets.

The CBO projected that annual revenues from both greenhouse gas auctions would total $38 billion in 2011 and then more than triple to $135 billion by 2019. The projections were based on the CBO’s estimate that greenhouse gas allowances would cost $16 a ton in 2012 and $26 a ton in 2019, and that an allowance for a ton of HFCs would cost $2 a ton in 2012 and $20 a ton in 2019.

On the expenditure side would be free allowances that the government would allocate to states, natural gas distributors and federal agencies for energy-efficiency programs and similar programs. Expenditures on these allowances would begin at $32 billion in 2011 and more than triple to $108 billion by 2019, according to the CBO analysis.

There would also be small costs for the tax credits and rebates for low-income families. Together, these two programs would cost less than $12 billion in 2013 and about $19 billion by 2019.

Despite the projected net gain for the government, opponents who had been clamoring for a CBO analysis remained unmoved.

Sen. James Inhofe (R-Okla.) released a statement echoing his usual refrain, calling the bill “the largest tax increase in history on consumers” and warning that it would “destroy American jobs.”

However, a study by Harvard professor of environmental economics Robert Stavins suggests that 80% of the allowances, if utilities properly pass on the savings, will benefit consumers and the public.

Weiss also notes that the CBO’s analysis does not take into account savings from averting climate change-related disasters, such as floods, droughts, storms and the spread of tropical diseases.

“None of these studies look at the economic benefits of action or the economic costs of inaction, because that is harder to measure than guesses on cleanup costs. One of the ways people will benefit the most is that they’re going to avoid the cost of unchecked global warming,” Weiss says.

The bill’s renewable electricity standard and grant programs would also create jobs in wind, solar, geothermal power and other new energy technologies, Weiss notes.

Another analysis of the energy efficiency elements of the bill, conducted by the American Council for an Energy-Efficient Economy (ACEEE), estimates that the savings from reduced energy use would spur local reinvestment and job growth, with 250,000 new jobs being created by 2020, and 650,000 jobs by 2030.

However promising these numbers look, ultimately, the estimates are based on assumptions that may or may not prove right. A. Siegel at Get Energy Smart! Now!!! points out that the CBO analysis does not take into account the increase in the federal government’s electricity and fuel costs:

“Somewhat simplistic discussion, but as way of thinking, if Federal government is roughly 20% of economy and W-M allocations value would be $100 billion/year, would there be $20 billion/year in increased costs for Federal operations — both in terms of direct and indirect spending impacts?”

On the other hand, he notes, energy efficiency gains could reduce energy use so much that they offset any increases in the prices of energy.

Indeed, in the past, the costs of government programs have been overestimated, as happened with the Clean Air Act.

In the Environmental Protection Agency’s own analysis of original Waxman-Markey draft, the agency concluding that the bill would have a “relatively modest impact” on consumers, cutting energy consumption by less than 1% compared to consumption without the bill. (Consumption would still increase, however, by up to 40% in 2030.)

As long as the revenues from the program would be returned to consumers, the report says, “the median household, and those living at lower ends of the income distribution, [would be] better off than they would be without the program.”