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EPA Hides Costs of Its Carbon Plan

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EPA Hides Costs of Its Carbon Plan

June 15, 2016

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No other environmental issue today is the subject of more discussion, debate, and media coverage than human-induced climate change, which is supposedly caused by increasing emissions of carbon dioxide (CO2) from the combustion of fossil fuels. These debates cover everything from basic questions of physical measurement—such as how the earth’s climate has changed over time and how the climate may change in the future because of increased CO2 concentrations in the atmosphere—to how increased CO2 emissions will affect the economic well-being of future generations.

In August 2015 President Obama and U.S. Environmental Protection Agency Secretary Gina McCarthy announced the EPA’s new Clean Power Plan (CPP). This is supposed to reduce U.S. CO2 emissions from electric generation, particularly those from coal-fired power plants, 32 percent below their 2005 level, or, according to the EPA’s calculations, about 870 million short tons per year by 2030.

EPA estimated in its cost-benefit analysis that total benefits of the CPP would range between $34 billion and $54 billion per year by 2030, the year in which EPA assumes that the CPP will be fully implemented. The EPA estimated that the CPP would impose costs of less than $9 billion per year.

Estimates of future CO2 emissions, along with changes in those emissions, depend on numerous assumptions, especially future economic growth and the “carbon intensity” of the economy, i.e., the average amount of CO2 emitted for each dollar of world economic output. Because of the difficulties in forecasting the rate of technological change and future economic growth, long-term forecasts of CO2 emissions are highly uncertain—and that uncertainty increases over time.

Ultimately, however, EPA’s estimates of billions of dollars in annual benefits from CO2 emissions are unsupportable because the CPP will have no physically measurable effect on world climate. The total effect is estimated to be less than 0.01 degrees Celsius by the year 2100, using an EPA-sponsored climate model. Without any measurable effect on world climate, the CPP cannot provide any climate-related benefits.

Perhaps as a consequence of the CPP having no measurable effect on world climate, EPA also couches the benefits of the CPP in strategic terms: specifically, that the U.S. must lead if other countries, especially China and India, are to follow and enact their own CO2 emissions-reduction policies. This seems doubtful, for two reasons.

First, past experience with the 1998 Kyoto Protocol, which was also an agreement to reduce world CO2 emissions, suggests that this type of leader-follower strategy is unlikely to work. The greater the actions taken by leaders, the greater are the benefits of free-riding by potential followers. Second, compliance with the multinational climate agreement that was signed in Paris in December 2015  is strictly voluntary. It seems unlikely that developing nations, such as China and India, will restrict their domestic economic growth by imposing higher energy costs for the sake of uncertain climate-related benefits far into the future.

EPA also significantly understates CPP compliance costs for at least four reasons.

First, EPA’s modeling framework assumes that generation plant owners and investors have perfect knowledge about the future and will make generation plant investment and operation decisions accordingly. Clearly, that is not true. EPA’s assumption of perfect foresight does not reflect how generation plant owners and investors make decisions and likely caused EPA to overestimate investments in operating-efficiency improvements under the CPP.

Second, EPA annualized the actual costs that consumers will pay for energy-efficiency investments over those investments’ expected lifetimes, rather than accounting for the costs at the time of purchase.

Third, EPA relies on unsupported projections of increasing wind and solar plant output, combined with decreasing capital and operating costs.

Fourth, EPA ignores the additional costs associated with necessary upgrades to the U.S. high-voltage transmission system to accommodate a doubling of wind and solar capacity by 2030, as well as the additional costs of fossil-fuel generation needed to back up uncertain wind and solar generation production.

Finally, EPA’s cost-benefit analysis suffers from a fundamental flaw, in that the analysis compares estimates of world economic benefits against a subset of U.S.-only costs. EPA justifies the worldwide scope of benefits, not only because CO2 emissions affect global climate but also because the U.S. operates in a globally interconnected economy. However, on the cost side, EPA looked only at the change in cost to meet future U.S. electricity demand. EPA ignored the broader effects on the U.S. economy—notably, potential reductions in future U.S. GDP growth resulting from higher electric costs—and ignored the effect of changes in future U.S. economic growth on the world economy because of those same worldwide economic interconnections. This apples-to-oranges comparison of benefits and costs is a fundamental flaw of EPA’s cost-benefit analysis.

Jonathan Lesser is the president of Continental Economics.

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