Past View: Studies Find Carbon Caps are Very Expensive (2007)

Two new reports released in April, one by the Massachusetts Institute of Technology (MIT) and another by the Congressional Budget Office (CBO), conclude caps on carbon dioxide emissions would be tremendously costly to American consumers.

MIT: Human Welfare Losses

The MIT study calculated the cost of carbon emission caps in terms of welfare costs. Welfare costs--essentially, reductions in our well-being--are described as aggregate market consumption and effects on leisure time. According to MIT, carbon caps in a scenario where the United States matches the carbon reductions of other developed nations will cost 1.45 percent of total U.S. well-being by 2050.

A more aggressive strategy of carbon emissions caps, where the United States takes on more of the burden--a scenario that has been demanded under the Kyoto Protocol, for example--would cost 1.79 percent of total U.S. welfare by 2050. For this cost, less than 0.5º Celsius of warming would be mitigated.

Sen. James Inhofe (R-OK) explained the costs in tangible terms. "A new MIT study concludes that the Sanders-Boxer approach would impose a tax-equivalent of $366 billion annually, or more than $4,500 per family of four, by 2015. And the annual costs will grow after 2015.

"The Lieberman-McCain bill is not much better," Inhofe said, "imposing more than $3,500 on families each year."

CBO: Even Modest Cuts Costly

The CBO study similarly reported that capping carbon dioxide emissions would impose tremendous costs on the economy.

"Most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline. Those price increases would be regressive in that poorer households would bear a larger burden relative to their income than wealthier households would," the study reported.

Even a very modest 15 percent cut in carbon dioxide emissions--far less than what is being sought by global warming alarmists--would impose substantial economic costs on American consumers. "A 15 percent cut in CO2 emissions would cost the average household in the lowest one-fifth (quintile) of the income distribution about 3.3 percent of its average income," CBO observed.

Multitude of Economic Harms

A cap on carbon dioxide emissions would harm the economy, and American citizens, in many different ways, both studies found.

"Any policy that reduced U.S. emissions of carbon dioxide would inevitably create costs for existing workers. Job losses could occur throughout the economy," the CBO study noted.

Moreover, "A CO2 cap would worsen the negative effects" of "existing taxes that dampen economic activity--primarily taxes on labor, capital, or personal income, such as payroll taxes and individual or corporate income taxes," CBO reported. "The higher prices caused by the cap would lower real (inflation-adjusted) wages and real returns on capital, indirectly raising marginal tax rates on those sources of income."

Local, state, and federal governments would also suffer a revenue crunch.

"A cap-and-trade program for CO2 emissions would tend to increase government spending and decrease revenues," the CBO study observed. "Like other consumers, the government would face higher prices for energy and other carbon-intensive goods and services. In addition, by leading to a decline in the production of goods and services, the cap would cause a decline in the taxes collected on corporate profits."

The CBO study also refuted assertions that the economic harm would be merely temporary until advances in renewable energy technology are realized. "The price increases resulting from a cap on CO2 emissions would persist as long as the cap remained in place, affecting both current and future consumers," concluded the study.