Global Warming and the Global Economy Global Warming and the Global Economy
"Will The Global Warming Bill Cool The Global Economy?
Nouriel Roubini, 07.02.09, 12:01 AM ET
How the Bill Works
At the heart of the bill is a cap-and-trade system, a market-based system that caps emissions at a certain level and allows large emitters to buy permits for additional emissions from other companies that emit less than the upper limit. The legislation calls for the number of permits to be reduced over time to encourage lower emissions. In practice, establishing a market for these permits will increase the cost of using carbon-based energy (especially electricity from coal), which will in turn reduce demand.
The revenue earned through auctioning would be distributed among households to offset the negative effect on their purchasing power from the higher cost of energy. Initial plans called for all, or at least a majority, of the permits to be auctioned, but the vote-getting process increased the number allocated. The bill passed by the House calls for 85% to be allocated and 15% to be auctioned. Some of the allocated permits will go to utility companies, the idea being that they will either invest the proceeds in renewable fuels or temper price increases for consumers. This change reduces the potential revenue generation of the policy and runs the risk that low electricity costs could actually encourage greater usage.
Estimates of the total economic costs of the U.S. cap-and-trade program have varied widely. According to the Congressional Budget Office (CBO), the net annual economic cost of the program in 2020 would be $22 billion--or about $175 per household. Analysis of the CBO results suggests that the implicit tax is relatively progressive. While this estimate has been accused of being understated (and it is worth noting that the Environmental Protection Agency came to an even lower estimate), it presented a baseline for analysis.
Other estimates put the ultimate cost much higher. An analysis from the Heritage Foundation concludes that the cap-and-trade system described in the bill would cost the economy $161 billion by 2020--or about $1,870 per household. Such estimates do not necessarily account for changes in the price of energy that would occur naturally as a lack of investment limits production of fossil-fuel-based energy.
Furthermore, they may not fully include the technological and efficiency gains that the current legislation hopes to encourage. For example, some of the allocations to utilities are granted with the expectation that they will be auctioned off and the proceeds will be used to fund renewable energy development. It's worth noting, however, that there's no guarantee the utilities will do this in practice. ****Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.
(Analysts at RGE Monitor assisted in the research and writing of this piece.)"
It's progress that the government is more interested and more willing to do something about global warming and climate change. But there's something that can render worries about cap 'n trade null: an emissions-free energy that's renewable and less expensive to run. For more information, please see www.terrahumanafoundation.org.