NoaIzumiCap and Trade: Where does the Money Go?
June 16th 2009 21:37
A lot has been written about the cost of the Waxman-Markey cap-and-trade plan currently making its way through Congress. The Heritage Foundation has the most often cited figure of $9.6 trillion dollars. That’s the total loss to United States GDP between now and 2035, as HF figures it.
Son of Waxman-Markey: More Politics makes for a Costlier Bill
There’s no real way to check this figure, as HF never shows its work. It’s the equivalent of a scientific paper without a Materials and Methods section. But we can learn some things from other figures given. For one thing, the paper claims that the average family’s yearly energy bill will increase by $1500. Let’s figure about 100 million families in this country, and rough math brings us to $1500 X 100 million X 25 years = $3750 billion, or $3.75 trillion. Of course, families will pay higher prices not just for energy, but for most everything that depends on energy, so if you take the high estimates every step of the way, a total amount of $9.6 trillion in increased prices is probably not completely off.
The problem I have is, does that automatically translate to a similar loss in GDP? The Heritage Foundation seems to assume that the extra money goes down a black hole somewhere, never to be seen again, but is that really true?
Answer: No, of course not. I’m not an economist, but it seems to me there are three ways that money can disappear from the GDP: it can go overseas, it can be used less efficiently, or it can be in the form of loans that are then defaulted on (like what happened in the recent housing crisis). Are any of those things happening here?
Let’s take the average American family. They open up the electricity bill to find it has increased, to the tune of $1500/year (another high estimate, I’m sure, BTW). They can do three things: They can pay the extra, they reduce energy usage, or they find alternative sources of energy. (In all likelihood, most families will do a mix of all three) If they reduce energy usage, depending on how they do it, there’s little or no extra payment, so there’s no difference in that family’s financial well-being or the overall cash flow. A family that reduces its energy use might be less efficient (it takes longer to walk somewhere than drive, for example), but certainly not by 100%. If they find alternative sources of energy, like solar or wind, then they do spend money on that, but where does the money go? Most likely to an American company that sells the windmills or the solar cells. If they simply pay the bill, that obviously goes to an American power company.
OK, what about your average American power company? As Waxman-Markey is currently written, most carbon credits will be given away rather than auctioned off, so the company will have enough credits to cover say 70% of its current emissions without spending a cent. It now has two choices: it can buy carbon credits for the other 30% from someone else, or it can cut emissions (again, the majority of companies will probably do a mix of both of these). If it cuts emissions, it will either be able to do it on its own or with some technology that it will have to pay for. The tech might be bought from a foreign company, but it’s just as likely that it will be from an American one. If the company chooses to buy carbon credits, it can buy them from domestic or foreign sources. If I remember correctly, Waxman-Markey encourages companies to use domestic sources, but there will be some flow to foreign markets, no question. But, again, not nearly 100%.
The average American business is in the same boat as the average American family. The businesses that can’t readily cut emissions and can’t easily pass their costs on to the consumer will be the worst off.
So there will be some loss to GDP as money goes overseas and less flexible businesses fail, but I have a very hard time believing HF’s claim. In addition, for every business that fails, there’s another one that benefits, and isn’t that what capitalism is all about? And the loss of money to foreign markets isn’t due to some fundamental feature in cap-and-trade, but to where the carbon credits can be bought from. If it really bothers you, the solution is to alter the bill, not scrap it entirely.
And we have test cases to look at. As part of the Kyoto Protocol (which included cap-and-trade), a number of countries, including Germany, France, the UK, and Denmark, cut carbon emissions substantially, and their GDPs seem just fine. In fact, during the years that the Kyoto Protocol was in effect, the GDP of the UK grew faster than that of the US.
Increase in Greenhouse Gas Emissions since 1990
List of Countries by GDP Growth
There may a convincing argument that cap-and-trade really damages the economy, but the Heritage Foundation’s say-so by itself isn’t it, no matter how many numbers they throw around.
Son of Waxman-Markey: More Politics makes for a Costlier Bill
There’s no real way to check this figure, as HF never shows its work. It’s the equivalent of a scientific paper without a Materials and Methods section. But we can learn some things from other figures given. For one thing, the paper claims that the average family’s yearly energy bill will increase by $1500. Let’s figure about 100 million families in this country, and rough math brings us to $1500 X 100 million X 25 years = $3750 billion, or $3.75 trillion. Of course, families will pay higher prices not just for energy, but for most everything that depends on energy, so if you take the high estimates every step of the way, a total amount of $9.6 trillion in increased prices is probably not completely off.
The problem I have is, does that automatically translate to a similar loss in GDP? The Heritage Foundation seems to assume that the extra money goes down a black hole somewhere, never to be seen again, but is that really true?
Answer: No, of course not. I’m not an economist, but it seems to me there are three ways that money can disappear from the GDP: it can go overseas, it can be used less efficiently, or it can be in the form of loans that are then defaulted on (like what happened in the recent housing crisis). Are any of those things happening here?
Let’s take the average American family. They open up the electricity bill to find it has increased, to the tune of $1500/year (another high estimate, I’m sure, BTW). They can do three things: They can pay the extra, they reduce energy usage, or they find alternative sources of energy. (In all likelihood, most families will do a mix of all three) If they reduce energy usage, depending on how they do it, there’s little or no extra payment, so there’s no difference in that family’s financial well-being or the overall cash flow. A family that reduces its energy use might be less efficient (it takes longer to walk somewhere than drive, for example), but certainly not by 100%. If they find alternative sources of energy, like solar or wind, then they do spend money on that, but where does the money go? Most likely to an American company that sells the windmills or the solar cells. If they simply pay the bill, that obviously goes to an American power company.
OK, what about your average American power company? As Waxman-Markey is currently written, most carbon credits will be given away rather than auctioned off, so the company will have enough credits to cover say 70% of its current emissions without spending a cent. It now has two choices: it can buy carbon credits for the other 30% from someone else, or it can cut emissions (again, the majority of companies will probably do a mix of both of these). If it cuts emissions, it will either be able to do it on its own or with some technology that it will have to pay for. The tech might be bought from a foreign company, but it’s just as likely that it will be from an American one. If the company chooses to buy carbon credits, it can buy them from domestic or foreign sources. If I remember correctly, Waxman-Markey encourages companies to use domestic sources, but there will be some flow to foreign markets, no question. But, again, not nearly 100%.
The average American business is in the same boat as the average American family. The businesses that can’t readily cut emissions and can’t easily pass their costs on to the consumer will be the worst off.
So there will be some loss to GDP as money goes overseas and less flexible businesses fail, but I have a very hard time believing HF’s claim. In addition, for every business that fails, there’s another one that benefits, and isn’t that what capitalism is all about? And the loss of money to foreign markets isn’t due to some fundamental feature in cap-and-trade, but to where the carbon credits can be bought from. If it really bothers you, the solution is to alter the bill, not scrap it entirely.
And we have test cases to look at. As part of the Kyoto Protocol (which included cap-and-trade), a number of countries, including Germany, France, the UK, and Denmark, cut carbon emissions substantially, and their GDPs seem just fine. In fact, during the years that the Kyoto Protocol was in effect, the GDP of the UK grew faster than that of the US.
Increase in Greenhouse Gas Emissions since 1990
List of Countries by GDP Growth
There may a convincing argument that cap-and-trade really damages the economy, but the Heritage Foundation’s say-so by itself isn’t it, no matter how many numbers they throw around.
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