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  An Introduction to Climate Change Legislation


Table of Contents | Foreword | Preface | Executive Summary | Overview | Contributors | Participants and Staff

Assessing the Costs of Regulatory Proposals for Reducing U.S. Greenhouse Gas Emissions

Joseph E. Aldy


Reducing greenhouse gas (GHG) emissions requires costly changes in behavior for firms and individuals. Various ways exist to measure these costs, but most economic analyses focus on changes in gross domestic product (GDP), prices, employment, and sometimes disaggregated impacts on particular sectors. Two recent studies by the Energy Information Administration (EIA) and the Massachusetts Institute of Technology (MIT) provide insights into the range of costs associated with recent proposals for limiting U.S. GHG emissions over the next several decades.1 This issue brief further emphasizes impacts in 2015 both because nearer-term modeling results are more reliable, and hence more informative, and because this timeframe is most relevant for the current policy debate.

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Assessing the Costs of Regulatory Proposals for Reducing U.S. Greenhouse Gas Emissions

  • A single measure of program stringency - average annual emissions allowed over the 2010-2030 timeframe - is used to facilitate comparisons across different regulatory scenarios. The studies reviewed here consider regulatory proposals that would limit average annual GHG emissions over the 20-year modeling period to actual emissions in the years 1992 and 1996 and forecast emissions for the years 2007, 2008, and 2015. To estimate costs for achieving these emissions limits, all of the studies assume a perfectly efficient, economy-wide cap-and-trade program.

  • The carbon dioxide (CO2)-equivalent price associated with GHG allowances increases over time in all analyses. In 2015, carbon prices are estimated at $10 per metric ton CO2 for the least stringent target and $50 per metric ton for the most stringent target. By 2030, the least stringent target yields a carbon price of $15 per metric ton, and the most stringent target $100 per metric ton.2

  • Energy prices increase along with CO2 prices. Electricity prices increase 6-32 percent in 2015 relative to projected business-as-usual electricity prices for that year.

  • The near-term GDP and employment impacts of the regulatory scenarios analyzed are modest. Modeled energy price increases are estimated to reduce overall economic output in 2015 by three-tenths to seven-tenths of 1 percent below the business-as-usual GDP forecast. Under the 2007 and 2015 average annual emissions cases, manufacturing employment is estimated to be 0.6-1.0 percent less than the business-as-usual employment forecast. This occurs against a backdrop of 2.9 percent annual growth in GDP and a baseline annual rate of decline in manufacturing employment of one-half of 1 percent over the same period.

The modeling analyses reviewed here show that the United States will bear costs in mitigating GHG emissions, but that these aggregate costs will be small in the context of overall trends. It is worth noting, however, that all of these analyses assume a regulatory approach that produces cost-effective, economy-wide emissions abatement. Failure to promote least-cost abatement across all emissions sources could increase the costs of a domestic emissions mitigation policy.

1. Specifically, we discuss results for the period 2010-2030, because this timeframe matches the available data from EIA and because of the inherent difficulty and uncertainty associated with modeling economic impacts over longer time horizons. This is in contrast to Issue Brief #2, where use of an extended (2010-2050) timeframe is appropriate in discussing longer-term environmental outcomes.

2. All price and GDP data in this issue brief are presented in year 2005 dollars.


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