Waxman-Markey and Cost-Benefit Analysis

I just got around to reading the Institute for Policy Integrity's new report (PDF) that does a cost-benefit analysis of the Waxman-Markey climate bill, with an eye toward emphasizing the benefits of the legislation as much as the costs. To date, the major studies of W-M, including those from the CBO, EPA, and EIA, have shown that the costs of reducing carbon emissions under the bill would be eminently affordable, with the average cost per household being in the range of less than a hundred to a couple hundred dollars per year. Even so, those studies haven't included the benefits of reducing carbon emissions -- that is, the value that less global warming would have for Americans and for the world. This is what the IPI report does include, working from a federal interagency task force's estimate that the social cost of carbon (SCC), or the marginal benefit to reducing emissions, is about $19/tCO₂. From this, the IPI report shows that W-M would produce about $1.5 trillion in benefits from 2012 to 2050, while costing about $660 billion over the same period; in other words, it would produce $2.27 in benefits for every dollar spent.

It's an excellent report, one that addresses a critical, and much under-discussed, aspect of dealing with climate change. At the same time, as I was reading it, I was reminded that cost-benefit analysis (CBA) is an incredibly difficult task, as one's choice of assumptions can produce vastly different results. For example, simply changing the discount rate used in IPI's analysis can change the benefits of W-M from as low as $400 billion to as high as $5.5 trillion.¹ The SCC, meanwhile, is based on a global estimate of the benefits of carbon emissions reductions, while the costs of W-M are strictly national in scope. There are also several benefits not counted, including improved health and energy security. Each of these elements is, suffice to say, controversial, and CBA doesn't provide us with a tool for figuring out where to come down on these controversies: Often it's simply a matter of what can measured in monetary terms, regardless of its importance to the problem at hand.

In one sense, though, the debate over climate legislation boils down to dueling cost-benefit analyses: We must believe that decarbonizing our economy will make us better off than any other alternative; else why would we bother about climate change? And although CBA tends to be disparaged by environmentalists (often with good reason), it's an essential tool to making the case that climate legislation will be good for all of us; as Mark Kleiman recently said, all policy analysis is a kind of cost-benefit analysis.

If nothing else, knowing CBA will be useful in smacking down dishonest numbers from right-wing ideologues. Case in point: Declan McCullagh's breathless assertion that the Obama administration has "privately concluded" that cap-and-trade would cost each American household $1,761 a year. In reality, the Competitive Enterprise Institute (the folks who brought you "They call it pollution. We call it life") got hold of a US Treasury document that mentioned that the administration's proposed cap-and-trade plan would net $100-$200 billion a year in revenue from auctioning off all of its pollution permits. You'll recall that the administration also proposed rebating most of that revenue to taxpayers, in the form of the Making Work Pay tax credit. More importantly, you'll also recall that the Obama administration's plan isn't on the table anymore; Waxman-Markey is, and it only auctions off a small percentage of permits.

Facts, however, are stupid things, so McCullagh just takes the $200 billion number, divides it by the number of households in the US (roughly 113 million), and voila! A $1,761 a year tax hike, a new scary number to be endlessly repeated by the likes of John Boehner and Glenn Beck. I must say, it's pretty easy to do cost-benefit analysis if you just add up the costs; even easier if you grossly misrepresent one policy proposal in order to smear a completely different policy proposal. In such an environment, it's good to know that several reputable organizations have done more honest assessments, even if they aren't perfect.

Next up on my reading list: the new Congressional Research Service paper on the costs of climate legislation.

¹ At some point in the future, I need to write about the philosophical arguments contained in CBA: How what one's choice of discount rate says about one's view of intergenerational justice, that sort of thing. The more I get into the weeds of CBA, the more I realize that there's a stronger connection between my undergraduate education and my graduate education than even I had previously known.