26 May 2009

Cost/Benefit of Waxman-Markey: It’s Not Pretty

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I actually spent a good portion of my holiday weekend researching for / writing this MasterResource post on Waxman-Markey. A juicy part:

Now we see the weakness in [relying on the “social cost of carbon”], when trying to assess the net benefits of unilateral climate policy. Once we take leakage into account, we see that the standard measure of SCC overstates (possibly grossly so) the true costs to society from an additional unit of emissions. In reality, there are two things going on: When a U.S. manufacturer produces more units of a carbon-intensive good, it is true that he emits more carbon dioxide into the atmosphere. This is what the SCC looks at, and judges him accordingly.

However, the U.S. manufacturer also pushes down the world price of the good in question, and that tends to cause other producers to emit less CO2. Thus, there is a positive externality laid on top of the negative externality. The greater the scope for leakage, the greater the positive externality. In the extreme, where U.S. operations would be completely outsourced to China (in terms of carbon emissions, if not output of final goods), then the correctly measured “social cost of carbon” for U.S. operations would be zero, in the context of a unilateral U.S. cap.

And the takehome messages:

(A) If the U.S. implements Waxman-Markey unilaterally, the environmental benefits will be even less than indicated by Chip Knappenberger’s pessimistic analysis.

(B) If the whole world implements Waxman-Markey, then the loss to economic output will far exceed the reduction in expected environmental damages.

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