My name is David Kreutzer. I am Research Fellow in Energy Economics and Climate Change at The Heritage Foundation. The views I express in this testimony are my own and should not be construed as representing any official position of The Heritage Foundation.

Energy and CO₂

Energy is the foundation of modern economies. This is as true now as it has ever been. Over the past 30 years, even as America switched economic emphasis from the production of energy-intensive commodities such as steel to services and high-tech production, our per-capita energy use has been essentially flat, and total energy use has grown along with population. In 2007, this per-capita consumption was the equivalent of nearly 60 barrels of petroleum per year.

The United States gets about 85 percent of its primary energy from fossil fuels, and carbon dioxide is an unavoidable product of fossil-fuel energy use. Cutting CO₂ emissions restricts energy use as well. Substitutes for fossil-fueled energy exist but are typically much more expensive.

Last year, the Center for Data Analysis at The Heritage Foundation compared the costs of wind and solar electricity to the cost of coal-fired electricity.[1] The figure below is taken from that report and shows that wind and solar power would be 80 percent to 280 percent more expensive than coal-fired electricity.

Though the costs of some renewables may decline, their ability to substitute for conventional fuels in significant scale is questionable. The Congressional Budget Office’s review of the American Clean Energy and Security Act of 2009—the Waxman–Markey cap-and-trade bill—noted: “Energy conservation and most renewable energy sources are projected to play relatively limited roles over the entire period, mainly because most kinds of renewable energy provide power intermittently.”[2]

Cutting CO₂

Whether CO₂ is restricted by levying a tax, by imposing caps, or by mandating regulations, the associated energy cuts will lead to lost economic activity. The resulting losses in national income will be similar for different approaches even though regulation may not generate government revenues.

Under a regime that taxes CO₂ directly, the transfer of revenue is not the immediate source of economic damage. The damage is a result of the behavioral changes brought about by the tax.

For instance, imagine that a $3 million-per-gallon excise tax on milk would limit consumption to one gallon per year for what we can assume would be one very rich milk lover. The tax revenue in this case would be $3 million per year. Rebating a penny to each of 300 million Americans would make this tax and rebate a revenue-neutral policy. However, the damage to the economy would be many times the $3 million. If milk consumption were forced down to one gallon per year, the dairy industry would be devastated. Milking parlors would be scrapped, herds would be slaughtered, and dairy processors would have to write off the value of their equipment and lay off workers. These would be the sources of the economic damage from our hypothetical tax on milk.

Regulations that would have the effect of reducing milk consumption to one gallon per year would have a similarly devastating impact on the dairy industry and our economy even though they generate no government revenue. In addition, for the same reduction in CO₂ emissions, regulations are likely to be even costlier than a tax or a cap-and-trade regime because such regulation reduces the market flexibility needed to achieve the targets most efficiently.

The Environmental Protection Agency’s proposal to “tailor” the Clean Air Act (CAA) exposes the significant administrative costs of the regulatory approach. The EPA estimates that the Clean Air Act would raise the number of entities needing Title V permits from the current level of about 15,000 to 6 million.[3]

Cost of CO₂ Cuts

When the Center for Data Analysis at The Heritage Foundation analyzed the economic impact of the Waxman–Markey cap-and-trade bill, it found that the legislation, if enacted, would have:

• Cut national income (gross domestic product, or GDP) by a cumulative total of $9.4 trillion between 2012 and 2035 and
• Reduced employment by nearly 2.5 million jobs by 2035.[4]

Even when using the Intergovernmental Panel on Climate Change’s estimates of the sensitivity of world temperature to CO₂ levels, the reductions in CO₂ wrought by Waxman–Markey would have moderated temperature increases by only thousandths of a degree by 2050 and a few tenths of a degree by 2100.

Another approach to restricting CO₂ emissions would be a renewable energy standard. A typical RES sets standards for minimum fractions of electricity that must be generated from renewable sources and ratchets up this minimum over time.

Last year, the Center for Data Analysis analyzed the economic impact of an RES that increased by 1.5 percentage points per year the fraction of electricity that must come from renewable sources starting in 2012 and going to 2035.[5] According to this analysis, such an RES would:

• Cause employment to track about 1 million jobs lower for the years 2016–2035,
• Reduce national income (GDP) by a cumulative $5.2 trillion from 2012–2035, and
• Add $10,000 to a family of four’s share of the national debt by 2035.

EPA Regulation of CO₂

The particular regulations of CO₂ under the Clean Air Act are still being developed by the EPA. However, if the cuts in CO₂ under the CAA are similar in magnitude to those targeted under Waxman–Markey or an RES, we could expect similar impacts on employment, income, and national debt.

Frequently, regulations are presented as efficiency improvements, implying that the regulation will cost little or may even save consumers more on their energy bills than the increased cost of the products. This reasoning implies that consumers are systematically wasting money.

Consumers already have a wide variety of products and services with different energy efficiencies. They can buy vehicles whose gas mileage varies from under 15 miles per gallon to over 50 miles per gallon. Someone who buys a 10,000-square-foot house could have purchased a 1,000-square-foot house instead. Anybody who has recently purchased an appliance will be familiar with the Energy Star ratings that clearly spell out expected energy costs for competing models and brands.

However, forcing people to buy the most energy-efficient model does not mean that everybody is better off. More efficient models usually cost more, may lack desired features, and can be less reliable. The relative valuation of the different characteristics varies from person to person and situation to situation. A single focus on watt-hours can blind regulators to other important features.

A personal example is a good illustration. My 1993 Maytag dishwasher used about nine gallons of hot water and took about an hour and 15 minutes to run a load. The current model uses seven gallons but takes at least an hour and 50 minutes to run a load. The cost of buying, heating, and disposing of those two gallons is less than 10 cents. Further, the old dishwasher already had a cycle that used seven gallons.

In other words, the efficiency mandates have reduced the options available to consumers and forced a trade-off of 35 minutes of time for less than a dime. In addition, the efficiency rules preclude the possibility of a firm’s developing a dishwasher that uses 10 gallons of hot water but takes only 20 minutes for an effective cycle.

Limiting choice does not make life easier or reduce costs for consumers or for businesses. However CO₂ cuts are imposed, they will reduce access to energy and reduce income and growth.

Endnotes

[1] David Kreutzer et al., “A Renewable Electricity Standard: What It Will Really Cost Americans,” Heritage Foundation Center for Data Analysis Report No. 10-03, May 5, 2010, at http://www.heritage.org/Research/Reports/2010/05/A-Renewable-Electricity-Standard-What-It-Will-Really-Cost-Americans.

[2] Congressional Budget Office, “The Costs of Reducing Greenhouse-Gas Emissions,” November 23, 2009, p. 10, at http://www.cbo.gov/ftpdocs/104xx/doc10458/11-23-GreenhouseGasEmissions_Brief.pdf (April 4, 2011).

[3] Robin Bravender, “EPA Issues Final ‘Tailoring’ Rule for Greenhouse Gas Emissions,” The New York Times, May 13, 2010, at http://www.nytimes.com/gwire/2010/05/13/13greenwire-epa-issues-final-tailoring-rule-for-greenhouse-32021.html (April 4, 2011).

[4] William Beach et al., “The Economic Impact of Waxman–Markey,” Heritage Foundation WebMemo No. 2438, May 13, 2009, at http://www.heritage.org/Research/Reports/2009/05/The-Economic-Impact-of-Waxman-Markey.

[5] Kreutzer et al., “A Renewable Electricity Standard.”