Major EPA carbon emissions cuts: How they could affect the economy

New Obama administration rules designed to restrain carbon emissions from US power plants could also push up the price of electricity for American consumers.

The Environmental Protection Agency, which proposed the carbon reduction plan Monday, said the costs to the economy will be modest and will be far outweighed by the benefits of cleaner air. The EPA plan aims to bring US emissions of greenhouse gases 30 percent lower in 2030 from 2005 levels.

But the plan is touching off a storm of controversy, with some industry groups saying negative impacts on the economy will be significant.

A report released by the US Chamber of Commerce, for example, estimates that reduced emissions will cost about $50 billion a year. And on Twitter, the business-funded Partnership for a Better Energy Future is warning of more higher electric bills for consumers and manufacturers.

Where does the truth lie on the economics of carbon reductions? Here’s a six-point guide.

All in all, the costs aren’t that high. The EPA estimates its plan would result in compliance costs of about $7.3 billion to $8.8 billion a year nationwide (up to the 2030 deadline for achieving the 30-percent emissions cut). The Chamber of Commerce study, one of the most detailed estimates so far from outside government, pegs the total compliance costs at $478 billion, which would approach $30 billion per year.

Either way, the costs can be viewed as small relative to the overall economy. Using $30 billion, the annual costs would be a fraction of 1 percent of America’s $17 trillion in economic output (a bit less than 0.2 percent, to be precise).

Liberal economist Paul Krugman, opining in The New York Times, summarized his view of the Chamber of Commerce study this way: “I was ready to come down hard on the Chamber's bad economics; but what they've actually just shown is that even when they're paying for the study, the economics of climate protection look quite easy.”

Some regions are hit harder than others. The US has already made progress toward the Obama administration’s target of reducing carbon emissions by 30 percent. That’s in part due to the recession’s impact on energy demand and in part because of the ongoing shift toward more natural gas and renewable sources in the energy mix.

But there’s still a long way to go to hit the target, and energy experts say that getting there will be harder for some states than others. The plan sets targets for each state, and then gives them flexibility in how to reach them.

“The need to replace large portions of the coal generation fleet in the midcontinent … means that these regions will experience the bulk of the economic distress in the early years, followed by the South Atlantic in the latter years,” predicts the Chamber’s study, which drew on economic analysis by the forecasting firm IHS.

A caveat: Expect the question of how many coal fired plants will be replaced to be hotly debated in coming days. Critics of the Chamber study note that it was done before details of the EPA plan were known, and argue that it overestimates the need for new construction. (Some 70 percent of the compliance costs foreseen in the study are for power plant construction, as opposed to other things, such as efficiency measures to reduce demand on the grid.)

An elephant in the room is the ‘social cost of carbon.’ The rationale for the EPA to limit carbon emissions is that global warming (in some measure induced by human actions) is a threat to the climate and human health. That’s the view of many climate scientists, but this “social cost” of carbon emissions often goes unpriced or underpriced when people burn fossil fuels.

“It is clear that the monetized benefits of this proposal are substantial and far outweigh the costs,” the EPA said in issuing its plan. Measuring the value of cleaner air in units called the “social cost of carbon” (SCC), the EPA estimated that the carbon reductions “will lead to climate and health benefits worth an estimated $55 billion to $93 billion per year in 2030.”

Putting a dollar value on eliminating a ton of carbon emissions is inherently controversial, however – notably because it involves estimates of how severe the long-run impact of climate change will be.

“Estimates of the SCC are highly uncertain, and researchers have produced a wide range of values,” the nonpartisan Congressional Budget Office said in a report last year.

All carbon policy is still global. One criticism is that the US efforts will be swamped by expanded emissions overseas. The idea is that human-induced warming of the climate is a global phenomenon, so the US can’t save its climate through unilateral action if other nations aren’t taming their emissions.

This is an important point. But by itself, it’s not an argument against the EPA plan.

First, unilateral action by the US isn’t meaningless. On a per-person basis, the US is a far bigger contributor to global carbon emissions than emerging nations like China are. A sizable US reduction in greenhouse gases has some impact, even if the overall global trend in emissions is still upward.

Second, backers of the EPA say its plan shows the US is taking climate change seriously – and that may have some impact on international collaboration.

“The EPA’s rule increases the likelihood that a multilateral climate change agreement will be reached at the UN’s climate change conference in Paris next year,” writes Chris Lafakis, an economist at the forecasting firm Moody’s Analytics.

Electricity bills could rise modestly. In presenting the carbon reduction plan, EPA Administrator Gina McCarthy said that if the carbon policy pushes up electricity costs, the change will be small. She said it might be “about the price of a gallon of milk a month."

The EPA also assumes that “overall electric demand will decrease significantly” as states emphasize more efficient use of energy to hit the reduction targets.

On the positive side, Ms. McCarthy said that the agency’s action will make power blackouts less likely, because the status quo is on a path toward more extreme weather – with negative impacts on the electric grid as well as on other parts of the economy.

The states will lead the way. The EPA plan calls on states to work individually or with one another to get the job of carbon cuts done. One virtue of that approach is flexibility for innovation in one place to become a model for others, and for solutions to emerge that are suited to particular regions.

Some experts on climate policy argue that it would have been more effective to enact a nationwide “carbon tax” or “cap and trade” policy (allowing utilities to buy and sell emission permits). For now, those are the roads not taken.

Mark Muro, an expert on metro area policymaking at the Brookings Institution, lauds the shift toward state responsibility. “Whether it be pollution regulation, clean energy finance initiatives, or projects on the energy efficiency front, states and cities across America have been actively pursuing their own ‘bottom up’ self-help efforts” already, he writes.

Mr. Muro says the EPA plan, now open for a period of public comment and possible revision, "gets some big things right by moving the pollution effort from federal to 'federalist.​' "