The economic impacts of carbon pricing in the United States

Cost-Benefit Analyses: Carbon dioxide is clearly a pollutant since it contributes greatly to anthropogenic climate change. (1) In economic theory, pollution is considered a negative externality, and therefore results in a market failure. As one economic review concluded, climate change represents "the greatest example of market failure we have ever seen." (2) Despite the economic benefits of addressing this market failure, some argue that putting a price on carbon emissions will cripple the US economy. Such arguments usually focus solely on the costs associated with pricing carbon while entirely ignoring the benefits. However, when we examine both the costs and benefits of various carbon pricing proposals, we realize that the resolution in this debate is clearly valid. For example, let’s consider a cost-benefit analysis of H.R. 2454: the American Clean Energy and Security Act of 2009. This act would have reduced greenhouse gas emissions 17% below 2005 levels by 2020 and 83% by 2050. Before the House voted on H.R. 2454, two members of Congress sent letters asking the EPA for technical assistance to estimate the economic affects of the legislation. Unfortunately, the EPA interpreted these requests for economic analysis to apply only to the costs of such legislation. As the agency’s report clearly stated, “None of the models used in this analysis currently represent the benefits of climate change abatement.” Similarly, in a table presenting the economic affects of legislation, under the entry “Benefits from Reduced Climate Change,” the EPA simply wrote, “not estimated”. (3) The Institute for Policy Integrity at New York University felt that legislators needed to consider both the costs and benefits of carbon pricing. As such, they performed a thorough cost-benefit analysis of H.R. 2454. The Institute for Policy Integrity calculated the potential benefits by multiplying the "social cost of carbon" by the amount of greenhouse gas emissions that would have been avoided under the bill. The social cost of carbon (SCC) is essentially a measure of the direct effects of carbon emissions on the economy. It takes into consideration such factors as net agricultural productivity loss, negative human health effects, property damages from sea level rise, and changes in ecosystem services. SCC is very difficult to calculate. As a result, current estimates vary widely. The EPA found that the current SCC value is approximately $68 per ton of carbon dioxide emissions. Meanwhile, the Department of Energy has estimated this value at a much lower $19. (3) The Institute for Policy Integrity found that the benefits of H.R. 2454 would exceed its costs if SCC is currently greater than $9. (3) Therefore, at the SCC values preferred by the EPA, the direct benefits of the bill are nearly eight times greater than the costs. Meanwhile, at the more conservative SCC values used by the Department of Energy, the benefits of H.R. 2454 are still more than double the costs. These findings led the Institute for Policy Integrity to conclude that, “H.R. 2454 is cost‐benefit justified under most reasonable assumptions about the likely social cost of carbon.” The Institute for Policy Analysis is, of course, not the only group to have conducted a cost-benefit analysis of carbon pricing. There have been numerous other analyses conducted both in the USA and internationally. (4-5) For example, a report conducted by the German Institute of Economic Research concluded that, "If climate policy measures are not introduced, global climate change damages amounting to up to 20 trillion US dollars can be expected in the year 2100....The costs of an active climate protection policy implemented today would reach globally around 430 billion US dollars in 2050 and around 3 trillion US dollars in 2100." (4) Clearly, the global economy would be more prosperous if we enacted a carbon pricing system. The Overwhelming Majority of Economists Support Carbon Pricing: The New York University’s Institute for Policy Integrity also conducted a survey of the world’s leading economists with expertise on climate change. In one of the survey questions, experts were asked their opinion on the true SCC value. Although their answers varied greatly, more than 88% of the economic experts believed that SCC is greater than $9 per ton of carbon dioxide emitted. (6) As I established above, this is the approximate SCC value which would justify enacting climate legislation. Meanwhile, 94% of the survey respondents agreed that the United States should reduce it’s carbon dioxide emissions. Conclusion: Adapting a carbon pricing system would clearly benefit the US economy even if the social cost of carbon is much lower than current estimates. References: http://ipcc.ch... http://webarchive.nationalarchives.gov.uk... http://policyintegrity.org... http://www.diw.de... http://www.rggi.org... http://resources.ofdan.ca...