The Faulty Economics of Climate Policy Modeling

Even as nearly every industrialized nation has adopted greenhouse gas emissions policies and regulations in some form, the United States has steadfastly maintained its role as a laggard in helping to mitigate the worst effects of climate change. Now, with an Administration that recognizes the gravity of the issue and a Congress that largely supports measures to address it in some manner, the tide has turned in favor of legislation that will prompt us to play a role in an international response to an international threat.

However, even with a large Democratic majority in the House and Senate, legislation that would sufficiently contribute to mitigation to reduce some of the most catastrophic effects of climate change—according to the Intergovernmental Panel on Climate Change—have proved very difficult to garner widespread Congressional support.

More moderate to conservative House Democrats have already succeeded in watering down the American Clean Energy and Security Act, a bill co-sponsored by Reps. Waxman and Markey. And while the bill has passed through the Energy and Commerce Committee, it still faces scrutiny and further dilution from other House committees, and eventually from the House at large. Meanwhile, a notably weaker bill will undoubtedly spawn from the Senate in the coming months.

With such a serious crisis threatening our planet, and widespread scientific consensus calling for a comprehensive international response, it is sometimes baffling to consider that so many decision-makers remain opposed to action. Why did all but one Republican on the Energy and Commerce Committee vote against the bill, and why is it so difficult for more conservative Democrats to sign on?

Conservative politicians cite projections of economic cost as the major barrier to passing bold legislation. Many Republicans have repeatedly informed the public that the Waxman-Markey bill amounts to an energy tax. And this tax, like any other, they say, will distort the natural incentives that guide the American economy, resulting in decreased GDP growth and shrunken consumer pocketbooks, at a time when our economy cannot afford further contraction.

However, the economic models used by the Environmental Protection Agency (EPA), the Energy Information Administration, and prestigious universities worldwide almost invariably predict that a comprehensive climate change policy will damage the economy, not because it will, but because of how the models are designed. They invariably assume our economy is already operating at its most efficient state, so any deviation is perceived as harmful.

On the other side of the analytical divide are the models of the climate and energy NGO community and a handful of government entities and universities that make an effort to accurately model the benefits of climate policy in terms of jobs, economic growth, and consumer savings, as well as the avoided costs of inaction. These models are no less rigorous in quality of data and technical methodology than those of conventional economists, yet they have comparably little influence on climate change policy debate.

Beyond the technicalities of their models, the entire institution of modern economics is bridled by its evolution. Historically, modern economists arrived on the scene at the same time as early industrial capitalists who sought to justify and promote the increased role of commerce in society. They served a valuable social function at a time when powerful landed interests threatened critical capital formation. In the context of climate change, however, the circumstances have changed: it is now a lack of timely cap and trade legislation that is the greatest threat to social welfare. Yet many influential economists continue to present analyses that repudiate aggressive climate legislation.

The EPA's ongoing efforts to quantify the economic benefits, as well as the costs, of the Waxman-Markey bill are commendable, but not sufficient. The benefits calculated in their models will be just a narrow subset of all probable benefits, and will provide little extra impetus for essential legislative action. Until the discipline of economics undergoes a fundamental reorientation, policymakers and the public must take economic estimates of the costs of energy and environmental policy with many grains of salt, and should be ready to proceed with or without their approval.

The United States needs to take bold action as soon as possible to begin to address climate change. And such action will indeed require a great deal of federal spending on tax incentives, research and development, and subsidization of certain emerging green technologies, among other programs. But when accurately accounting for the economic and social benefits of such legislation, it becomes abundantly clear that it is in our nation's best interest to act, and act now.

Special thanks to Chris Knight for contributing to this post.

Images: Climate pollution (treehugger.com), Reps. Henry Waxman and Ed Markey (New York Times), Partisanship (globalwarmingisreal.com), Adam Smith (Wikipedia)