This week’s “Daily Journal” guest columnist is Roy Cordato, Vice President for Research and Resident Scholar at the John Locke Foundation.
While there is clearly a debate over the science of global warming, there is virtually no debate over the economics. It is difficult to find a study performed by reputable economists showing net benefits from policies meant to reduce global temperatures. Most of the analysis has focused on the economics of the United Nations’ Kyoto Protocol, a treaty that calls for a reduction in global carbon dioxide (CO2) emissions to 1990 levels. As a note, CO2 has no harmful effects on human beings and is as important as oxygen in supporting life on the planet. Part of its essential role is to trap the warmth from sunlight, preventing the earth from freezing. This is known as the greenhouse effect.
Even those who advocate the Kyoto treaty admit that there will be no impact on the climate for centuries. This was recently acknowledged by scientists on both sides of the scientific divide at a recent meeting of the N.C. Legislative Commission on Global Climate Change.
Given uncertainties of technological change and consumer preferences over such an extended time period, economic analysis of the benefits from lower temperatures would be meaningless. It would be similar to Adam Smith in the 1770s attempting to estimate the benefits of a policy change for those of us living today. Without knowledge of the technological breakthroughs or lifestyle changes that have occurred since the mid-18th century, any calculations would have been meaningless.
But economists have assessed economic impacts for the immediate future, and it is clear that for those people currently living and most likely for their children, grandchildren, and even great-grandchildren, policies like the Kyoto Protocol would have severe economic costs with no climate change benefits.
Two unchallenged studies done in 1998 by the U.S. Energy Information Agency (EIA) and what was then known as Wharton Econometric Forecasting Associates (WEFA), now known as Global Insight, examined the effects of the Kyoto Protocol. The EIA study found that implementation of Kyoto would cause an annual reduction in GDP of about 4 percent with an 83 percent increase in electricity prices, a 53 percent increase in gasoline prices, and a whopping 147 percent increase in natural gas prices. The WEFA study calculated that Kyoto on net would generate a loss of more than 2 million jobs nationally with more than 100 thousand of those in North Carolina.
But none of this has dissuaded advocacy groups from producing their own reports claiming great benefits from pursuing anti-global warming policies. And Environmental Defense (ED) recently published an example of this kind of “advocacy economics”. Like all advocacy analysis its conclusions were pre-ordained by its methodology. (It is noteworthy that there were no economists listed among the report’s authors.)
The ED report targets a CO2 trading scheme that has been implemented by some nations and several states to induce a switch to non-carbon based alternative energy sources. The report argues the scheme would create a net economic benefit to North Carolina. This is the same kind of plan analyzed in the studies cited above showing massive increases in energy prices and millions of job losses. These trading schemes are a hidden, regressive, across-the-board energy tax that will be born most heavily by low-income families and energy intensive industries, including most of North Carolina’s ailing manufacturing sector.
To implement such a plan the state government sets an overall cap on CO2 emissions with companies owning permits to emit at certain levels. This sets a cap on the amount of conventionally generated energy that companies can use. Businesses that need to use more energy will be forced to purchase additional emission permits for amounts above their allowance or switch to more expensive alternative forms of energy. The additional permits would be purchased from other businesses that do not need them. The cost of the permits or the additional cost of non-conventional forms of energy is equivalent to a tax. Industries would not be able to expand without facing this new global warming tax – a tax on economic growth.
How can ED analyze such a scheme and show economic benefits, while more rigorous analysis shows dramatic costs? ED’s report ignores the first principle of economic analysis: all actions, by individuals or government, have costs as well as benefits. A sound economic study would have to net out the costs from the benefits. In advocacy mode, ED’s analysis focused only on industries that would benefit from proposals to reduce CO2 and ignored industries or consumers that could be harmed. They conveniently ignored any costs associated with their policy proposals. Needless to say, analysis that focuses only on benefits will inevitably conclude that the policy proposal is beneficial. That is the hallmark of advocacy econom¬ics — analysis structured to reach a pre-ordained conclusion.
Most importantly ED offered no evidence that their policy proposals would have any effect on the climate, allegedly their ultimate goal. In fact, they freely admit “one state’s actions will not stop global temperatures from rising.” They then assert, without evidence, that “the collective actions of individual states will make a difference.” There is no scientific basis to this claim. An unchallenged study by Dr. Thomas Wigley, a scientist sympathetic to ED’s pessimistic position on climate change, concluded that even if the UN treaty were implemented with 100 percent compliance, global temperatures would be an undetectable 0.27 degrees (F) cooler in 100 years than they would be if nothing were done.
Depending on what they ultimately suggest, the N.C. Legislative Commission on Global Climate Change could pose a massive threat to economic growth and prosperity in the state. This is the real implication of what many members of this commission are advocating. The hard economic fact is that any policy North Carolina might implement would be all costs to the state and no benefits in terms of future climate change.