02 Jun 2014

The US Chamber’s Analysis of (Hypothetical) Power Plant Rule

Climate Change, Shameless Self-Promotion 21 Comments

Last week the US Chamber of Commerce issued a report it had commissioned, which looked at the impact of a 40% reduction in US power plant emissions, relative to 2005 levels, by the year 2030. (That was a reasonable guess as to the Administration’s actual policy, which today was announced at 30%.)

In my latest IER post, I show that, if their analysis is correct, then the rule obviously fails a cost/benefit test, even using the Administration’s own “social cost of carbon” numbers. Of course, when Krugman saw the results, he told his readers that it showed just how cheap the policy was. An excerpt:

The crucial rhetorical trick here is that supporters of the power plant regulation focus on the total price tag, and utterly ignore what Americans supposedly get (in the form of reduced climate change)for this sacrifice. Imagine a wife looking over the monthly credit card statement and seeing that her husband has been going out to get sushi at lunch several times a week. When she complains that their food budget is really tight, the husband shoots back, “Hey! I only spend $60 a week on sushi. You spend way more than that at the grocery store. So you see, my food policy is incredibly cheap.”

That’s what’s going on here, with the Administration’s power plant regulations. For example, Krugman doesn’t actually quantify the benefits, in order to compare them with the quantified costs. Instead he just writes, “The Chamber’s supposed scare headline is that regulations would cost the US economy $50.2 billion per year…That’s for a plan to reduce GHG emissions 40 percent from their 2005 level, so it’s for real action.”

Does that sound like a proper cost/benefit analysis? In any other context, would it sound rigorous for a Nobel Prize-winning economist to contrast $50.2 billion in annual costs with benefits merely described as “real action”?

And my conclusion:

The U.S. Chamber study found that regulations imposing power plant emissions reductions would have enormous absolute impacts, to the tune of $50 billion in lost GDP per year. The supporters of the regulation (such as Paul Krugman) didn’tdispute the Chamber’s numbers; instead they tried to defend them as being “surprisingly small.” If we move beyond the absolute impact, and look instead at the cost relative to the ostensible climate benefit then things get even worse; on this score, the policy studied by the Chamber would have a relative cost almost 75% more than Waxman-Markey.

To add to the irony, the Chamber’s analysis shows that power plant regulations would fail the Obama Administration’s own cost/benefit criterion for climate regulations. The whole point of setting up a Working Group to issue estimates of the “social cost of carbon”—as dubious as this process is, as we’ve demonstrated here at IER—was to give federal agencies guidance when running cost/benefit analyses on their proposed regulations. Yet as this episode shows, nobody in Washington actually takes these SCC numbers seriously, if they get in the way of a pet policy.

21 Responses to “The US Chamber’s Analysis of (Hypothetical) Power Plant Rule”

  1. Matt M -Dude Where's My Freedom) says:

    I feel like people intuitively understand how trade-offs work, which is why they need four years of college and regular reminders from people like Krugman that we can’t trust our simple intuition. That we really CAN have our cake and eat it too. That some hypothetical policy (whichever one the administration is currently focused on at the time of his writing) represents low cost AND high benefits!

    Any “cheap” government intervention to reduce emissions, *by definition* provide very little in terms of benefits. That’s how it works!!!

    • Keshav Srinivasan says:

      “That some hypothetical policy (whichever one the administration is currently focused on at the time of his writing) represents low cost AND high benefits!

      Any “cheap” government intervention to reduce emissions, *by definition* provide very little in terms of benefits. That’s how it works!!!” Are you saying that it’s impossible to have a policy which has low costs and high benefits?

      • Matt M -Dude Where's My Freedom) says:

        Other than free markets, yeah, I am saying that’s impossible.

        Or, more accurately, I am saying that in the specific case of reducing carbon emissions, making it “cheaper” will, by definition, cause it to have lower benefits.

        Presumably, ordering coal plants to cut their emissions by 40% would be more expensive, but would provide greater climate change-related benefits than 20%. 60% moreso than 40%. You get the idea.

        If Krugman wants “cheap” then I’ve got a policy for him. How about a 0.01% reduction? Wouldn’t that be grand?

        • Keshav Srinivasan says:

          “Other than free markets, yeah, I am saying that’s impossible.” What does the qualifier “other than free markets” mean? Does it mean that the only things that can have high benefits and low costs are things that are compatible with the free market system? Or does it mean that the only policy that has high benefits and low costs is the institution of a free market? Does it mean something else?

          “Or, more accurately, I am saying that in the specific case of reducing carbon emissions, making it “cheaper” will, by definition, cause it to have lower benefits.” I don’t understand this at all. Are you saying that it’s impossible for there to be two policies A and B such that policy A reduces.carbon emissions more than policy B does, but policy A has lower costs than policy B?

          • Major-Freedom says:

            Costs are subjective.

            Forcing a person to do something they otherwise would not do, increases their costs, period.

            • Harold says:

              But maybe increases their benefits also, or maybe increases overall benefits. Any tragedy of the commons situation applies here. One way to solve such a problem is through ownership of the resource. Maybe a Rothbardian world would arrive at a solution, but since that is not going to happen, overall (and individual) benefit may be increased by regulating access to the common.

              It seems to me that the Montreal Protocol was such an example. Nobody has commented before when I mention this. Was this a successful world-wide treaty that solved a significant global problem? Or was it something else? It certainly had some costs, but the benefits appear to vastly outweigh those costs.

          • Matt M -Dude Where's My Freedom) says:

            Sure, it’s possible that some policies are more efficient than others. A policy of “require power plants to reduce their emissions” probably costs less AND provides more benefits than a policy of “collect all plastic bags in the world and set them on fire” would.

            But I’m assuming we are only referring to realistic and plausible solutions. As I said, at the same level of efficiency, the greater the cost, the less the benefit. So for Krugman to say “This policy is really cheap!” without either discussing the benefits OR comparing it to other policies is entirely meaningless.

            • Harold says:

              Yes, the word “cheap” suggests some comparison. If he is using as a comparitor the alarmist suggestions that “warmists” are proposing policies that will dramatically reduce quality of life or result in crippling the economy, he has a point.

              Using the sushi example, it is like the wife suggested that the husbands sushi spending was causing a dramatic reduction in their lifestyle. The husband then points out that in fact his sushi $60 sushi spending is only a tiny fraction of their spending of $30,000 per week. “Thats cheap,” he may respond. “Why are you focussing on that tiny expenditure?”

      • Tel says:

        Are you saying that it’s impossible to have a policy which has low costs and high benefits?

        It isn’t impossible, but think of the implications if such a policy came along tomorrow. Through all the years of human history, no one figured out that there was this incredibly easy thing that fixed a lot of stuff, cost very little and had no unexpected side effects… and now suddenly you are proposing just the very thing!

        It could happen. Just count me amongst those miracle deniers.

  2. Silas Barta says:

    Imagine a wife looking over the monthly credit card statement and seeing that her husband has been going out to get sushi at lunch several times a week. When she complains that their food budget is really tight, the husband shoots back, “Hey! I only spend $60 a week on sushi. You spend way more than that at the grocery store. So you see, my food policy is incredibly cheap.”

    I wish he would make this point when it comes to stimulus: “well, yeah, consumer spending went up, but people were buying that stuff only because you were pushing them for saving so it was stuff they didn’t really want to buy all that bad”.

  3. Bogart says:

    The entire argument is silly on both sides. Obama and his ilk want to divert scarce resources to improving power delivery? The reality has already been mentioned that no one knows how much power can be delivered at what expense of carbon. Then instead of pointing this obvious thing out that no one can know the future well enough to direct these resources, the US Chamber of Commerce gets into a contest of accountants.

    Does anyone every ask the question: Could those resources be better utilized in developing something that really saves power like an E-book. Or how about a more efficient solar cell? Or how about a better tire? Or how about a better aircraft? Or a better airline? How about a generator that runs on an oxygen-methane fuel cell that is as large as a refrigerator that will run on a fraction of the energy required to send the power from the power plant to the home because there is zero line loss? How about a big one that can run an automobile manufacturing facility?

    More over, the largest polluter and probably the largest user of carbon in the world is by far the US Military. Simply cut back on that institution and you will save far more carbon and society will be much better off.

  4. Tew says:

    I wonder if there’s a difference between the cost-benefit analysis of policy and politics. This policy doesn’t make any sense, but hypothetically, what are the political benefits? What if this keeps the green left placated for awhile? What about the benefits of reducing regime uncertainty? I’d say by now that the energy industry knows the government wants them to reduce CO2, and that switching from coal to natural gas is the way to do it.

    These are vague benefits that we probably can’t measure, but let’s say you could – isn’t it possible that the political benefits of the power plant rule outweigh the policy costs?

  5. andrew' says:

    $50 billion list GDP?

    Go right now to the clean coal wikipedia page.

    The top estimate for carbon capture and sequestered coal is $40 billion iirc.

  6. Some Guy says:

    Bob, with all respect, could you try and use italics less (for stressing particular words like ‘couldn’t’)? It comes across as a bit patronising and amateurish.

    • Bob Murphy says:

      I was trying to see why it bothered you so much, but did I italicize “couldn’t” in this post? I couldn’t find it (for real).

      • Some Guy says:

        I didn’t mean that word in particular, just in words like that to make your point (should, wouldn’t, unless). Your style is clear enough not to need them and it seems you’re worrying that people will misunderstand you. Again, don’t take it too hard, it just bugs me.

  7. Harold says:

    You say “fans of regulation did not dispute the figure. ” Well Krugman said “the real costs will almost certainly be smaller.” I think that counts as disputing the figure. Maybe Krugman is not a fan of regulation.

    Lets put this in perspective. Two recent comments here, which are not that uncommon: Guest: I mean, it’s not like Global Warming worriers aren’t willing to economically cripple people, and to reduce population, in pursuit of “saving the planet”
    MattM “Most other scientific disciplines don’t lead people to call for me to dramatically reduce my quality of life in order to help children in Bangladesh 100 years from now.”

    Now Krugman points out that this cost is only one-fifth of one percent of GDP. “That’s cheap!” he says. Which it is in comparison to economic crippling and drastically reduced quality of life. On wonders who are really the alarmists.

    Whether this is worth it is still unanswered, but the fact that it may only cost 25 times as much as cleaning up chewing gum means we should not get too het up about it. Even if it is all a mistake, it won’t make that much difference.

    However, as I said, the question of whether this is worth it is not answered by pointing out that the cost is relatively small. Even small costs should not be borne unnecessarily. The key figure I think is cost per tonne of carbon. The report suggests that this is twice as high as cap-and-trade. So if we applied a more sensible policy across the whole economy, we could achieve the same result with only $25 billion a year! And that is ignoring any innovation that people will come up with as a response – maybe $15 billion a year would be a good estimate. Now that is starting to look cheap, if only as a PR exercise for USA.

    • Andrew' says:

      See my comment.

      Not apples and oranges, but that figure is in the ballpark of something that actually solves the problem instead of just making life more costly.

      • Andrew' says:

        (and at this point I assume Krugman is wrong when he says something will cost less or more)

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