Cash register drawerAs the Senate takes up climate change legislation, there’s going to be a great deal of talk about its costs, its benefits, and how they stack up against each other. These are vexed conversations, plagued with technical complexity and hidden political agendas. We’ll get to to some of those complexities and agendas in a future post, but for now it’s worth laying out a few basic distinctions, the lay of the land.

When benefits are added up and costs are subtracted — basic cost-benefit analysis — the result is either a positive number (if benefits outweigh costs) or a negative number (if costs outweigh benefits). As shorthand we’ll call that number the “cost,” but it’s important to remember that costs can end up being negative; that is, the result can be a net benefit.

Another key thing to keep in mind is that when faced with a decision, the choice is not between acting, which imposes some cost, and doing nothing, which doesn’t. Time can’t be frozen. The costs of charting a new course are often more striking or salient to us, but every choice, even maintaining the status quo, carries its own costs. Take, for instance, the electrical grid. It’s easy to scare people by saying that creating a smart grid in the U.S. would cost a trillion dollars. A trillion! Eek! But if grid experts are right, simply maintaining and building out an old-fashioned grid would also cost about a trillion dollars. And doing nothing, allowing the grid to decay, would end up costing even more than that.

Or take climate/energy legislation. Imposing a cost on carbon and investing in clean energy would cost plenty of dough. But failing to take action, allowing fossil fuel prices to continue rising, allowing climate change to proceed unrestrained, would also cost. (Joe Romm makes the point well, noting that the Republicans’ Inaction Plan on energy itself represents “the most costly option.” We should call it the Inaction Tax.)

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Point is, beware of scary cost numbers, and always keep in mind that the choice is not costs or no costs but which costs.

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With that in mind we turn to the the first and most important question to answer with respect to any cost-benefit analysis: cost to whom? There are at least three ways to answer that for a given piece of clean energy legislation: the total cost to society, the total cost to GDP, and distributional (firm- or individual-level) costs. Much mischief or confusion can result when these distinctions are muddled. We’ll take them one at a time.

Total social cost: This is, or ought to be, the most important consideration: will the country as a whole be better off as a result of the legislation than it would be without it?

Doing such an analysis is extraordinarily difficult — impossible really, at least with any precision. Theoretically it’s the sum of all costs and benefits, direct and indirect, tangible and intangible, monetary and social. No two people will ever entirely agree. What’s the moral cost of a lost species? What’s the aesthetic cost of wind turbines on a mountain ridge? How should we value resilience and self-sufficiency relative to economic efficiency?

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The best we can hope for are directional answers. Whatever pretenses to objectivity cost-benefit analysis may have, there are irreducible elements of faith and fear, aspiration and anxiety in decisions of such magnitude.

GDP cost: Because questions of social cost are vexed, contested, and imprecise, the job of cost-benefit analysis gets handed over to economists, who analyze impacts on gross domestic product. This comfortingly quantitative analysis is accepted as a useful proxy for social welfare. (For a simple introduction to the subject of climate policy economics, check out these two Paul Krugman posts.) GDP-based analysis is firmly entrenched, but there are reasons to view it with suspicion.

First, GDP is a poor proxy for national welfare (see: Bobby Kennedy). It represents economic churn, but that can obscure as much as it reveals. If I give up my car and grow my own food in a community garden, I’ve improved my quality of life, strengthened my community, reduced my energy use, lowered my greenhouse gas emissions … and reduced GDP. Meanwhile, if I drive my car through the supermarket window, I increase GDP — think of all the money spent repairing the building.

Secondly, macroeconomic analyses tend to overstate costs and undercount benefits of environmental regulations, as demonstrated by decades of experience. The methods and constraints of mainstream economics bias analysis against strong government action.

For both reasons, analysis showing that legislation would lead to lower GDP growth shouldn’t be the end of the conversation. It’s at least possible that a world in which the U.S. experiences slightly lower GDP growth is a better world, all things considered.

Distributional (firm- or individual-level) costs: These calculations have to do with the distribution of costs and benefits rather than their sum total. Even if the overall cost of passing strong climate legislation is low (or negative), some regions, demographics, or income levels could pay more costs or receive fewer benefits than others. Therein lies many a moral and political conundrum.

Politicians from the South and Midwest are extremely concerned that fancy-pants coastal elites are going to reap disproportionate benefits from moving to a clean energy economy while they get stuck with a disproportionate share of the costs. After all, they use the cheapest, dirtiest energy, specifically power from grandfathered coal plants. Progressives are concerned that the burden of paying for the transition will fall on those who suffer most from the problem instead of those who created it. This is the origin of the “polluter pays” principle implicit in any carbon pricing system. It’s also what motivates the mechanisms in various bills that rebate pollution-allowance money to low-income consumers.

Republicans are concerned the burden will fall on U.S. heavy industry, which will respond by relocating to other countries. Evangelicals are concerned that developing countries receive aid for for adaptation. And so on. There are dozens of other distributional considerations. Every region, industry, demographic, and interest group will be jockeying for a piece of the pie.

When the Kerry-Boxer bill was introduced, its sponsors made it very clear that it is deficit-neutral. It pays for itself. There’s no aggregate cost to the U.S. budget. Nonetheless, the next day Republican senators were out talking about the huge costs. What they were really saying was, “it will impose huge costs on you, hard-working, salt-of-the-earth middle Americans, while liberal elites will reap all the benefits.” The elitism attack is all about distributional costs.

Many enviros seem willing to compromise on distributional costs in order to secure a bill. I’ve had enviros from big green groups tell me flat out that they don’t care how allowances are allocated, as long as the cap stays intact. But since every other progressive group is deeply invested in distributional issues, it’s not very good politics if greens ignore their concerns.

In conclusion!

Enough rambling on. As I said, these are fairly elementary distinctions, but they very often get blurred in public discussions about cost — sometimes deliberately and nefariously. Whenever talk about costs comes up and people start quoting numbers, it’s crucial to keep asking: costs to whom? And compared to what alternative?

In a future post, we’ll get into some of the specific mechanisms used to manage and control the cost of climate legislation. That will probably be even more fascinating and riveting, so, you know … mark your calendars!