Oct 15, 2009

CBO - (H.R. 2454) Economic Effects of Legislation to Reduce CO2

Testimony before the Committee on Energy and Natural Resources, United States Senate
"...the Congressional Budget Office (CBO) concludes that the cap-andtrade 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. "

Spoiler Alert - if we plan on using 'future' budget projections they should be modeled on 'realistic' recovery scenarios and 'what ifs' to cover unforeseen issues and not wishful thinking. Not planning ahead is what got us into the 20 Trillion hole, over estimating our economic recovery will bury us.
And I love this - "price projections were measured in 2007 dollars" - Precious. If over 60% of our economy is 'consumer spending based... what does this do to the 'wishful growth' scenario?

(CBO) "a relatively pessimistic estimate for the loss in projected real gross domestic product is about 3 percent...
" purchasing power

Congressional Budget Office (CBO) 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, ...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.

Economywide Effects of the Cap-and-Trade Provisions of the ACESA

By gradually increasing the prices of fossil fuels and other goods and services associated with greenhouse-gas emissions, climate legislation—including the cap-and-trade provisions of H.R. 2454—would tend to reduce long-run risks from climate change. Such legislation would also reduce economic activity through a number of different channels, although the total effect would be modest compared with expected future growth in the economy.

The key channels are:
  • Shift production, investment, and employment away from industries involved in the production of carbon-based energy and energy-intensive goods and services and toward industries involved in the development and production of alternative energy sources and non-energy-intensive goods and services;
  • Reduce the productivity of existing capital and labor, which are currently geared to relatively inexpensive energy;
  • Reduce domestic households' income, thus tending to reduce domestic saving;
  • Discourage investment by increasing the costs of producing capital goods, which is a relatively energy-intensive process;
  • Reduce net inflows of capital from abroad (because lower productivity and higher production costs for capital goods in the United States would make it more attractive for investors to invest in other countries);
  • Reduce the total supply of labor by raising the prices of consumer goods and thus reducing workers' real wages; and
  • Interact with the distortions of economic behavior imposed by the existing tax system.
Taken together, those changes would affect the levels and composition of gross domestic product and employment and would thus influence households' economic

Congressional Budget Office (CBO) "...Households account for the bulk of total spending, and they would bear an estimated 87 percent of the compliance costs. Those costs were allocated among households on the basis of their consumption of those goods and services as reported in the Consumer Expenditure Survey from the Bureau of Labor Statistics."

CBO "The uncertainty about the effects of H.R. 2454 on GDP is probably even greater than is expressed by that projected range of effects, even though the studies reflect a wide range of assumptions about possible future technological developments that might decrease the cost of reducing emissions, and about the degree to which people would adjust their decisions about working, saving, and investing in response to the legislation."

Read full CBO report here (should be mandatory for all)

Quote by Gerard Jackson... utilities use grossly inefficient solar and wind power sources to generate 20 per cent of their power. This is the kind of insanity that raised California energy prices to nearly twice the national average and in doing so contributed mightily to the state's current economic crisis. Let's take a look at some figures. Average growth in GDP since 1970 has been about 3 per cent p. a. This means that GDP doubles roughly every 24 years. (I'm applying the banker's "doubling time" trick of dividing 72 by the annual rate of increase). At a cost of $9 trillion Obama's energy bill averages $0.237 trillion per year which would amount to $5.684 trillion in 2036. As GDP will have doubled to $28 trillion this means that Americans will be facing a totally unnecessary increase in energy prices of $5.684 trillion, which would be 20 per cent of GDP.