Martin Feldstein is a conservative economist — a long-time advocate of supply-side, trickle-down economic policy and a leading advocate for Social Security privatization — so it’s no great surprise that he has taken to the pages of the Washington Post to characterize the Waxman-Markey climate and energy bill as “All Cost, No Benefit.”
Feldstein has one good point: that it’s scandalous how many of the pollution permits are being given away instead of auctioned. And he has one argument so disingenuous I have a hard time believing it is made in good faith: that since a global agreement will be necessary to achieve the necessary reductions in CO2 emissions, we should wait until such an agreement is in place before passing a domestic law. (Since other nations insist that America demonstrate its commitment to climate action before they’ll sign on to a new international accord, Feldstein’s strategy would make an international bill impossible, so advocating for it is tantamount to arguing that the problem isn’t worth solving.)
But I want to focus on another point. Feldstein cites a CBO analysis showing that cap-and-trade (to reduce emissions by 15 percent by 2020) would cost the average American family $1,600. And he says that cost will rise as the cap on carbon declines.
A number of things could be said about the CBO’s work on climate, but the main point here is that Feldstein is using it in a highly deceptive way.
The $1,600 number is simply a calculation of how much prices would rise if current businesses are charged for carbon emissions. It leaves out three crucially important factors:
As current cap-and-trade systems are constructed, government collects carbon charges from businesses and redistributes the revenue. It does not, contrary to what you might think from reading conservative economists, light the money on fire. Under Waxman-Markey, the money is not returned directly to consumers, as Feldstein prefers. However, a huge chunk of the permit value finds its way to consumers, via regulated local electric distribution companies (LDCs), assistance to low-income consumers, money to keep trade-exposed industries from moving to China, and money to states to accelerate RD&D for clean energy technology. All that money eventually benefits consumers — that is to say, it all reduces that $1,600 figure.
2. Complementary policies
The CBO analysis looks purely at cap-and-trade. It doesn’t figure in the effect on consumers of the other provisions in the Waxman-Markey bill, which address clean energy, energy efficiency, the electric grid, green jobs, and more. All these complementary policies would accelerate and lower the cost of the transition from dirty to clean energy — that is to say, they would all reduce that $1,600 figure.
The costs that a carbon price will impose on consumers are determined by, in dork-speak, “elasticity of demand.” The question is, how easy is it for consumers to shift from increasingly costly carbon-intensive products and services? How easily available are alternatives? If it’s trivially easy to switch from product A to product B, which costs about the same, then the costs will be little-to-negligible. If there are no alternatives available (for example, no low-carbon electricity), then consumes have no choice but to pay the rising price, and costs will be high.
Conservative think tanks like the Heritage Foundation tell us that climate legislation will raise consumer prices by an average of a kabajillion dollars per defenseless elderly lady, but those claims assume zero elasticity of demand; their projections are based on the (bizarre) notion that when prices rise on a class of products and services, consumers will just … wince and pay, no matter how high the price goes.
It’s not just the conservatoids, either. It’s the nature of the econometric modeling beast. Most economic analyses are run based on current technology, current products and services. At best prices of alternatives decline along a gentle curve.
But think about it: why would that be true? If U.S. history shows anything, it’s that when the market is challenged it is capable of extraordinary innovation. That’s why the costs of regulation always end up being lower than economists predict — entrepreneurs develop new products and services and make them cost-effective. This kind of innovation can’t be predicted, so perhaps it’s legitimate the economists don’t incorporate it into models, but as a result their models are horrible predictors, as history has shown again and again.
Anyone with faith in the smarts and guts of American entrepreneurs (hello conservatives!) should believe that the same forces will be unleashed when it comes to carbon: Challenged by new regulations, entrepreneurs will find cost-effective ways of reducing energy demand and generating low-cost renewable energy. That will increase elasticity of demand and lower prices for consumers — that is to say, it will lower $1,600 figure.
So Feldstein’s use of the $1,600 figure in relation to Waxman-Markey is accurate (and honest) only insofar as he ignores the revenue used for consumer benefit, the complementary policies, and the capacity of markets for innovation. All these will lower the price for consumers.
I don’t mind if conservatives hate regulation. But it’s really deplorable how easily they resort to distortions and scare tactics. I would say that the WaPo editorial board should know better, but I guess that ship sailed long ago.