by Ross Eisenberg
 
On September 23, 2008, at a hearing of the Senate Environment & Public Works Committee on the subject of regulation of greenhouse gases under the Clean Air Act, Committee Chairman Barbara Boxer stated:

I want to make one last point in the time I have remaining.  We hear a lot about how this would be a disaster for the economy.  I want you to know that, in my home state, we are suffering from a horrific economic situation because we have the most mortgage foreclosures of any state.  We have more than 25% of all of the foreclosures.  And I will say this, our republican Governor, working with our democratic legislature, passed the toughest global warming legislation in the country.  And I am told unequivocally, by both sides of the aisle in my state, that were it not for this law, and the fact that 400 new companies have been set up – solar, wind, geothermal – and I visited many of these new start-ups, that without this, we would be in far worse shape than we are in.

The Chamber testified at that hearing, and did suggest that regulation of greenhouse gases under the Clean Air Act would be devastating to the American economy. In fact, the Chamber and others have said for years that domestic-only policies to reduce greenhouse gas emissions will cost a significant amount of money. This should be nothing new to policymakers.

However, the key to any economic study is the number and type of assumptions made by the economist who performed the analysis. For instance, how many nuclear plants will be built? How many windmills?  How much will they cost, and how much will our electric bills rise? This is why, for legislation like last year’s failed Lieberman-Warner climate bill, the range of projected costs varied widely, from completely devastating to moderately devastating to an absolute boon to the economy. The key is always in the assumptions that are made.

This discussion is important today because the state of California, which had previously predicted that the climate legislation referred to by Chairman Boxer above would actually increase gross state product by $4 billion, was panned by the six economists California commissioned to peer review its economic analysis.  These six economists—from widely respected institutions such as Harvard University and the Pew Center for Global Climate Change—found a multitude of flaws in the state’s analysis and assumptions, with several noting that California’s cost-benefit analysis of the law grossly underestimated its costs and overestimated its benefits. Their analyses can be found here. 

We are not talking about climate change detractors, either.  Peer reviewer Dr. Matthew Kahn of UCLA stated:

While I support the Governor’s broad AB32 goals, I am troubled by the economic modeling analysis that I have been asked to read.  AB32 is presented as a riskless "free lunch" for Californians.  These economic models predict that this regulation will offer us a "win-win" of much lower greenhouse gas emissions and increased economic growth.  According to my arithmetic and the information provided in Table I-2 of the Economic Evaluation Supplement, the 33% Renewable Portfolio Standard, the Pavley Light Truck regulations, the Low Carbon Fuel Standards and the building energy efficiency programs will together mitigate 95.6 MMTCO2 (57% of the AB32 2020 mitigation goal) at a net negative cost of $132 million per MMTCO2 per year.  This would be a large free lunch!  I would like to believe this claim but after reading through the Economic Analysis and the five appendices there are too many uncertainties and open microeconomic questions for me to believe this.

Similarly, Dr. Robert Stavins of Harvard University wrote:

The California Air Resources Board (CARB) merits credit for having provided an economic analysis of its "Draft Scoping Plan" for achieving AB 32's targets, but for the reasons I describe in this brief memo, I have come to the inescapable conclusion that the economic analysis is terribly deficient in critical ways and should not be used by the State government or the public for the purpose of assessing the likely costs of CARB’s plans.  I say this with some sadness, because I was hopeful that CARB would produce sensible policy proposals analyzed with sound scientific and economic analysis.

Later, Dr. Stavins states:

CARB develops a baseline for its analysis which is systematically biased (and remarkably, internally inconsistent) in ways which lead to potentially severe underestimates of costs.  In particular, CARB does not include in the baseline some very important existing policies that would be adopted whether or not AB 32 is implemented. One important example are the so-called Pavley standards.  Thus, the impacts of the Pavley standards are incorrectly attributed to CARB’s Scoping Plan, and the energy-efficiency gains that those standards are believed to yield constitute the vast majority of the net cost savings that CARB attributes to the Scoping Plan.

What good is an "objective" economic analysis of a bill if the assumptions made in that analysis lead to a conclusion that misleads the public? Clearly, the state of California decided that it had to show that AB 32 was good for its economy. But what good will California’s conclusions do if reality proves them wrong?

More troubling, however, is the fact that such skewed economic reports on the benefits of domestic-only climate policies proliferate, and are shaping the beliefs of our policymakers. Highly respected and accomplished lawmakers like Chairman Boxer and her colleagues presumably took California’s modeling of AB 32 at face value, and believed that the net effect of the law would be to help California’s economy.  They may be right. But the comments by Dr. Stavins, Dr. Kahn, and others suggest that AB 32 will hurt, not help, California.

As Congress considers climate legislation and other greenhouse gas policies in 2009, it is imperative that our elected officials be given an accurate set of economic projections for the bills they will vote on.  It is inevitable that the assumptions and conclusions in these economic studies will vary, but all must be considered.  To view climate policy only through rose-colored glasses would be a mistake the American economy may not be able to withstand.