A portfolio approach to climate change — a price on carbon coupled with a suite of complementary policies — can serve as a net economic boost. Put more simply: tackling climate change can help the economy. As I lamented yesterday, however, this fact tends to be obscured by the political establishment’s excess focus on carbon pricing alone.
Part of the blame for this state of affairs lies with mainstream economics. You see, carbon pricing is relatively easy to model. A portfolio approach is not. So economists just … don’t. Nine times out of ten, when economists talk about the economic effects of climate policy, they’re just talking about the effects of carbon pricing. Problem is, carbon pricing without those complementary policies produces a hit to GDP growth, so economists end up providing ammunition for those who want to block climate legislation altogether.
This week provided a crystal clear example of the dynamic at work. As The Hill reports, Rep. Chris Smith (R-N.J.) recently asked the Congressional Budget Office — the definitive authority on these matters — to estimate the year-to-year household impacts of the Waxman-Markey (ACES) climate/energy bill. passed by the House last summer. It’s pretty obvious what Smith is after: he wants a number he can use to bash climate legislation during the upcoming midterm elections.
Now CBO chief Doug Elmendorf has written Smith back [PDF]. Using the CBO’s standard modeling, the agency determined that ACES will cost the average household $90 worth of purchasing power in 2012. By 2030, that figure rises to $550 a year, and by 2050, $930.
Now, relative to the enormous growth in GDP and average household incomes these models assume, that amount of money is peanuts. (The program would shave 0.8 percent off GDP growth by 2050 — by contrast, the recent financial crisis knocked off something like 5 percent in one fell swoop.) But still, Smith and the Republicans have gotten their ammo. “During the recession, with Americans hurting, the Democrats want to pass a bill that will hit every family squarely in the pocketbook, starting with $90 and rising every year!”
Dems’ only response will be, “Hey, $90 isn’t that much!” That’s not exactly a political winner.
But here’s the thing: the CBO is only modeling the cap-and-trade program in ACES — i.e., the carbon pricing system. What about the other two-thirds of the bill? There’s a whole efficiency title, which is quite strong (much stronger than the craptastic provisions in the Senate bill). There are electric car provisions, grid provisions, renewable energy provisions. These complementary policies serve to reduce per-capita energy use and stimulate innovation in clean industries; that is to say, they serve to drive down the cost of compliance with the cap.
What would happen if these policies were integrated into the economic modeling used by the CBO? I suspect that the outcome would be much more favorable.
Now, of course there’s a reason CBO doesn’t model the portfolio approach. It’s difficult to model how multiple policies interact. Economists are uncomfortable with that kind of uncertainty; they like statistical precision; they don’t like putting their professional credibility behind what amounts to a series of educated guesses. If you asked, Elmendorf would probably say that he is being up-front about what the CBO is doing and it’s up to policy makers what use they make of it.
But I don’t buy that. The CBO is perpetuating the myth that climate policy is all cost — a myth that makes decent climate policy less likely. It’s contributing to the surreal atmosphere in which the entire media and political elite act like nothing but carbon pricing exists. Somebody’s got to take responsibility for that sorry state of affairs. Somebody’s got to change it. It’s not going to help to have climate campaigners (and DFH bloggers) protesting it. Nobody in the Village takes them seriously. Economists need to step up.