The American Clean Energy and Security Act that passed in the House and is awaiting approval in the Senate would be a sweeping and revolutionary change in environmental policy unlike anything we have seen since the Clean Air Act was passed in 1963. The bill is so broad and comprehensive in its applications that it has rendered most debates about its merits incomplete and ineffective, as if the two sides pitted against each other have merely been two ships passing. To simplify, the bill attempts to implement four principle policies:
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A cap and trade program in which companies in the heavy industry and energy sectors would be required to own permits for carbon emissions. 85 percent of the permits would be free, and the remaining 15 percent of permits would be auctioned off in order to provide revenue needed to execute other measures in the bill.
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A number of plans designed to mitigate the economic costs of lowering carbon emissions, including cash transfers to poor households whose energy costs will rise and unemployment benefits to those who will lose their jobs in affected industries.
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Efficiency requirements and funding for research and development to improve energy efficiency.
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A renewable energy requirement that forces large electricity providers to produce 20 percent of their output from renewable energy sources.
The above measures are designed in part to lower carbon emissions 17 percent by 2020 and 80 percent by 2050. Additionally, the bill hopes to invest in more efficient energy systems and in renewable energy sources.
That all said, the bill is overwhelming, which is why messages from pundits seem largely inconclusive and incoherent. I hope to clarify the confusion about the implications of the bill with the following two principles:
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Though investing in energy innovation could lower energy costs and prove economically beneficial in the long-term future, cutting emissions given current energy capital is economically costly in the short run.
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If the costs of the bill, in terms of transition programs and investment initiatives, exceed the revenue provided by the bill, then the bill will either fail to complete the transition programs and investment initiatives or the programs will demand outside funding from the government.
What do I mean by the first principle? Lowering emissions by 17 percent will be costly to industries who are being asked to lower the emissions. The increased costs of lowering emissions in the short run will be reflected in higher costs for all products that are in some way related to heavy industry and energy, which happens to be all products one can buy. The costs are passed to all manufacturers, sellers, and consumers, to a greater or lesser degree depending on their respective supply and demand elasticities, and the economy takes a hit. The economic damage of lowering carbon emissions by 17 percent in the short run is wholly unavoidable, no matter what the mechanism is for doing so. Until more efficient energy sources and systems are developed, the amount carbon emissions are reduced will be directly related to the amount the economy suffers. In this sense, lowering carbon emissions in the short run is a trade off that poses the following question: Do we value the lowering of emissions enough to spend the amount that doing so requires?
And the second principle? The bill spends a lot on transition programs to ease the economic costs of lowering emissions in the short run. The programs, in addition to investing in renewable energy and in efficiency-improving systems comprise a price tag much greater than the revenue that will be earned from auctioning off 15 percent of the pollution permits. For example, 15 percent of the 15 percent raised would be used to provide cash transfers to poor households whose energy costs will likely increase by at least 10 percent. Though it sounds nice to provide such transfers, the numbers do not add up: Roughly 2/15 of the cost hike will be accounted for by the cash transfers, leaving 13/15 of the cost hike for poor households to pay. To fully mitigate the costs would require outside funding, either from the government or from third-party non-government organizations. Again, there is a clear trade off and another question is posed: Do we value the transition programs to ease the economic burden and the investment initiatives to improve efficiency and the availability of renewable energy sources enough to spend the amount doing so requires?
My point is neither to oppose nor support the bill; I hope only to illuminate the true costs associated with its plans. It would wrong to think the bill will be self sufficient since the costs of the bill are far greater than the revenues provided. Furthermore, though investment in energy efficiency may lower costs in the long run, reducing emissions in the short run is a trade off, as doing so is costly to all corners of the economy. In an effort to avoid taking sides as so many pundits have, I will pose the questions that will need to be answered by those considering the bill: Are we willing to spend the amount the bill demands? Can we do so in the current economic climate? And do the long-term environmental benefits and potentially long-term economic benefits justify the short-run expenses?
