CBO Testimony On The Economic Effects Of Legislation To Reduce Greenhouse-Gas Emissions

CBO Director Douglas W. Elmendorf's testimony on the "Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions" before the Committee on Energy and Natural Resources United States Senate 0n October 14, 2009.

Elmendorf makes the following key points:

• Climate change is an international problem. The economic impacts of climate change are extremely uncertain and will vary globally. Impacts in the United States over the next 100 years are most likely to be modestly negative in the absence of policies to reduce greenhouse gases, but there is a risk that they could be severe. Impacts are almost certain to be serious in at least some parts of the world.


• The economic impact of a policy to ameliorate that risk would depend importantly on the design of the policy. Decisions about whether to reduce greenhouse gases primarily through market-based systems (such as taxes or a cap-and-trade program) or primarily through traditional regulatory approaches that specify performance or technology standards would influence the total cost of reducing those emissions and the distribution of those costs in the economy. The cost of a policy to reduce greenhouse gases would also depend on the stringency of the policy; whether other countries also imposed similar policies; the amount of flexibility about when, where, and how emissions would be reduced; and the allocation of allowances if a cap-and-trade system was used.


• Reducing the risk of climate change would come at some cost to the economy. For example, the Congressional Budget Office (CBO) concludes that the cap-and-trade provisions of H.R. 2454, the American Clean Energy and Security Act of 2009 (ACESA), if implemented, would reduce gross domestic product (GDP)below what it would otherwise have been—by roughly ¼ percent to ¾ percent in 2020 and by between 1 percent and 3½ percent in 2050. By way of comparison, CBO projects that real (inflation-adjusted) GDP will be roughly two and a half times as large in 2050 as it is today, so those changes would be comparatively modest. In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP. Projected GDP impacts include declines in investment, which only gradually translate into reduced household consumption. Also, the effect on households’ well-being of the reduction in output as measured by GDP (which reflects the market value of goods and services) would be offset in part by the effect of more time spent in nonmarket activities, such as childrearing, caring for the home, and leisure. Moreover, these measures of potential costs imposed by the policy do not include any benefits of averting climate change.


• Climate legislation would cause permanent shifts in production and employment away from industries focused on the production of carbon-based energy and energy-intensive goods and services and toward the production of alternative energy sources and less-energy-intensive goods and services. While those shifts were occurring, total employment would probably be reduced a little compared with what it would have been without a comparably stringent policy to reduce carbon emissions because labor markets would most likely not adjust as quickly as would the composition of demand for different outputs.


• CBO has estimated the loss in purchasing power that would result from the primary cap-and-trade program that would be established by the ACESA. CBO’s measure reflects the higher prices that households would face as a result of the policy and the compensation that households would receive, primarily through the allocation of allowances or the proceeds from their sale. The loss in purchasing power would be modest and would rise over time as the cap became more stringent and larger amounts of resources were dedicated to cutting emissions, accounting for 0.2 percent of after-tax income in 2020 and 1.2 percent in 2050.


• The expected distribution of the loss in purchasing power across households depends importantly on policymakers’ decisions about how to allocate the allowances. The allocation of allowances specified in H.R. 2454 would impose the largest loss in purchasing power on households near the middle of the income distribution. Which categories of households would ultimately benefit from the allocation of allowances is more uncertain in 2020 than in 2050. A large fraction of the allowances in 2020 would be distributed to households via private entities, and the distribution of the allowance value would depend on whether those entities passed the value on to customers, workers, or shareholders. In contrast, most of the value of allowances in 2050 would flow to households directly.

Read the entire testimony here.