[Congressional Record (Bound Edition), Volume 155 (2009), Part 8]
[Extensions of Remarks]
[Pages 10243-10244]
[From the U.S. Government Publishing Office, www.gpo.gov]




      AN ACCURATE ESTIMATE OF THE COST OF A CAP AND TRADE PROGRAM-

                                 ______
                                 

                         HON. ROBERT E. ANDREWS

                             of new jersey

                    in the house of representatives

                        Tuesday, April 21, 2009

  Mr. ANDREWS. Madam Speaker, I would like to bring attention to a 
letter sent by John M. Reilly, of the MIT Joint Program on the Science 
and Policy of Global Change, to Minority Leader John Boehner. During 
the debate on the FY10 Budget Resolution, the cost of a cap and trade 
program became a major point of contention. Mr. Reilly, in this letter, 
clearly explains the methodology used by MIT to determine the 
approximate cost to an average family of a cap and trade proposal. As 
the letter makes evident, the actual cost to the average American 
family will likely be far less than estimated by our friends on the 
other side of aisle.

         Joint Program on the Science and Policy of Global Change, 
           Massachusetts Institute of Technology,
                                     Cambridge, MA, April 1, 2009.
     Representative John Boehner (R-OH),
     Office of the House Republican Leader, Washington, DC.
       It has come to my attention that an analysis we conducted 
     examining proposals to reduce greenhouse gas emissions, 
     Report No. 146, Assessment of U.S. Cap-and-Trade Proposals, 
     has been misrepresented in recent press releases distributed 
     by the National Republican Congressional Committee. The press 
     release claims our report estimates an average cost per 
     family of a carbon cap and trade program that would meet 
     targets now being discussed in Congress to be over $3,000, 
     but that is nearly 10 times the correct estimate which is 
     approximately $340. Since the issue of legislation to control 
     greenhouse gases is now under consideration, I wanted to take 
     an opportunity to clear up any misunderstanding created by 
     this press release and to avoid further confusion.
       Why is this amount so different? As far as I can tell the 
     $3,000+ is based on the potential auction revenue the 
     government could collect by auctioning the allowances over 
     the period through 2050 where a simple average over all years 
     from 2015 to 2050 was computed. The tax revenue collected 
     through such an auction, the costs of reducing greenhouse gas 
     emissions, and the average impact on a household are very 
     different concepts. Thus, there are several things wrong with 
     this calculation. First, the auction revenue is determined by 
     the CO2 price and how many allowances are issued--
     allowances tell us how many tons of CO2 (or more 
     broadly greenhouse gases) will continue to be emitted. The 
     cost of reducing emissions depends on how much emissions are 
     reduced not on how much continues to be emitted. Second, the 
     CO2 price reflects the cost of the last ton of 
     emissions reduced but there are many options that cost much 
     less than avoiding the last ton and so using the 
     CO2 price multiplied by the number of tons (either 
     reduced or emitted) is also wrong. Third, the average cost to 
     a household depends on how allowances or the allowance 
     revenues are distributed. Fourth, the costs are borne over 
     time

[[Page 10244]]

     and it is wrong to produce a simple average of such costs as 
     that does not take account of the time value of money.
       We assumed in the analysis we did that the revenue is 
     returned to households. From data in the report we can 
     calculate the economic cost in each year (percentage loss 
     times the base welfare level in each year), and divide this 
     by the U.S. population, and then multiply this amount by four 
     to estimate the cost for a representative family of four. We 
     further apply an economic discount rate of 4 percent to get 
     the Net Present Value (NPV) cost in each year in the future. 
     Doing this we find that the NPV cost per family of four 
     starts at about $75 in 2015, rises to nearly $510 by 2025, 
     and then falls to $205 by 2050. We can calculate the average 
     annual NPV cost per family by summing over all years and 
     dividing by the number of years, and this shows the average 
     annual net present value cost to be about $340--only a part 
     of which would be actual energy bill increases. This $340 
     includes the direct effects of higher energy prices, the cost 
     of measures to reduce energy use such as adding insulation to 
     homes, the higher price of goods that are produced using 
     energy, and impacts on wages and returns on capital. The cost 
     per household will vary from our hypothetical average family 
     of four depending on the household's circumstances. Those 
     households with large heating and cooling bills because of 
     the climate in which they live or who drive more than average 
     will face higher costs. Those with smaller homes who live in 
     benign climates will have lower costs. The higher energy 
     prices encourage reductions in energy use by increasing the 
     payback on improvements in energy efficiency, and through 
     such investments households can avoid paying more for energy. 
     Jobs and wages in fossil fuel industries are likely to 
     decline but job opportunities will increase in industries 
     that produce alternative energy sources or that provide ways 
     to save energy.
       While the $340 average annual cost we estimate for a family 
     is just one tenth of the $3000+ cited in the misleading press 
     release, Congress should address the costs of this transition 
     for middle and lower income families while developing Cap-
     and-Trade legislation. In another paper (Report 160, Analysis 
     of U.S. Greenhouse Gas Tax Proposals) we make some 
     calculations on the burdens of a GHG tax on families at 
     different income levels. Our Report 160 shows that the costs 
     on lower and middle income households can be completely 
     offset by returning allowance revenue to these households.
       Climate change poses severe risks for the U.S. and the 
     world. It will take efforts in the U.S. and abroad to reduce 
     emissions substantially to avoid the most serious risks of 
     climate change. One of the perplexing aspects of the problem 
     is that the solution involves using cleaner energy sources 
     that are more costly then conventional fossil fuels. And the 
     higher energy prices needed to cover the higher costs will 
     fall disproportionately on the poorer members of society in 
     the U.S. and in the world. However, the less wealthy members 
     of our economy also stand to suffer most from climate 
     change--whether it is through the risks of increased food 
     prices if climate change disrupts crops, the lack of access 
     to air conditioning under extreme heat, or vulnerability to 
     other extreme weather and storm events such as hurricanes 
     which may increase with climate change. Many of the proposals 
     currently being considered by Congress and as proposed by the 
     Administration have been designed to offset the energy cost 
     impacts on middle and lower income households and so it is 
     simplistic and misleading to only look at the impact on 
     energy prices of these proposals as a measure of their impact 
     on the average household. Concern about the cost impacts on 
     middle and low income families needs to be focused on making 
     sure allowance or tax revenue is used to offset cost impacts 
     on these households rather than as an excuse for not 
     proceeding with measures that would help avert dangerous 
     climate change.
           Sincerely,
     John M. Reilly.

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