Thursday, September 17, 2009

CBO estimates of the economy-wide impacts of climate change legislation

The Congressional Budget Office (CBO) has released a comprehensive analysis of The Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions. The analysis looks at the GDP impacts of climate change and of the pending Cap and Trade Bill (H.R. 2454). It also discusses some policy considerations.

The main points that the report makes are that

  • The expected harms to the U.S. economy over the next 40 years from unchecked climate change are likely to be very modest. Harms by 2100 are also likely to be relatively modest, perhaps in the range of 3 percent of GDP. However, harms become larger when non-economic outcomes are considered. Also, there are risks of catastrophic changes have to be considered.

  • The expected costs to the U.S. economy from H.R. 2454 are also likely to be modest, on the order of .25 to .75 percent of GDP by 2020 and 1 to 3.5 percent by 2050. While these amounts might appear to be, well, immodest, they have to be compared to the overall expected growth in GDP. For instance, the CBO projects that GDP will be 2 1/2 times larger in 2050 than it is now.

  • Considered just in terms of the measureable economic effects between now and 2050, climate change doesn't pass a cost-benefit test. However, the comparison becomes more favorable when non-economic harms and harms after 2050 are considered.
The report also points out that
  • "Climate change is an international problem." The harms extend beyond the U.S. so that policy changes here have benefits inside and outside the U.S. As importantly, however, the benefits of U.S. policy changes are constrained by the changes taken by other countries.

    This raises standard public goods problems. One the one hand, if other countries don't act, U.S. actions won't make an appreciable difference in climate change. Worse, a go-it-alone policy could exaccerbate the economic harms as carbon-intensive economic activity moves to less-regulated economies. On the other hand, if other countries do act, the U.S. could benefit without any changes on its own. Because of this, no country has incentives to act independently. A coordinated approach is needed.

  • A cap and trade policy is relatively efficient in terms of minimizing costs associated with reduction in greenhouse gases. However, a carbon tax policy could be more efficient still. Each type of policy involves certainties and uncertainties. The carbon tax leads to a predictable price change, but we can't be sure how much carbon output will respond. A cap and trade policy leads to more certainty about how much carbon output will change but less certainty about prices and costs. Given that climate change is a long-term problem, the costs of carbon output uncertainty are likely to be smaller than price uncertainty.
All in all, the report suggests several ways the H.R. 2454 can be improved. With the legislation still awaiting Senate action, there are also opportunities for improvement.