Economic consequences of Waxman-Markey

After a truncated debate and last-minute changes, the House of Representatives narrowly passed climate-change legislation on June 26, 2009, designed by Henry Waxman (D-CA) and Edward Markey (D-MA). The 1,427-page bill would restrict greenhouse gas emissions from industry, mainly carbon dioxide from the combustion of coal, oil, and natural gas.

Since energy is the lifeblood of the American economy, 85 percent of which comes from CO2-emitting fossil fuels, the Waxman-Markey bill represents an extraordinary level of economic interference by the federal government. For this reason, it is important for policymakers to have a sense of the economic impact that accompanies any environmental benefits.[1]

Analysis by The Heritage Foundation's Center for Data Analysis (CDA) makes clear that Waxman-Markey promises serious perils for the American economy for the years and decades ahead. Waxman-Markey requires arbitrary and severe restrictions on the current energy supply and infrastructure. These restrictions can be met only through large-scale deployment of still-undeveloped or uneconomical technologies and alternative energy sources. In addition to the direct impact on consumers' budgets through higher electric bills and gasoline prices, the resultant increase in energy costs will reverberate throughout the economy and inject unnecessary inefficiencies at virtually every stage of production. It would suppress economic activity and reduce employment, especially in the manufacturing sector. Virtually all costs would eventually filter down to the American people.

Waxman-Markey extracts trillions of dollars from the energy-using public and delivers this wealth to various groups--some of whom may be more deserving than others, and some who are simply better at lobbying. That could mean low-income households in an attempt to compensate them for sharply higher energy costs, or regulated industries that have effectively lobbied for compliance assistance. In any event, cap-and-trade allowances are a tax and would be the largest tax increase in recent history.

The recent experience with ethanol-use mandates illustrates the costs and unanticipated (at least by proponents) problems with a federal intervention in energy markets. However, Waxman-Markey represents a vastly more complex and comprehensive scheme, which suggests that the scope and intensity of unintended effects could be greater than either proponents or critics of Waxman-Markey currently anticipate. In addition, Europe's experience with climate-change laws similar to Waxman-Markey strongly suggests both high costs and uncertain emissions reductions.

Overview

Waxman-Markey imposes strict limits on the emissions of six greenhouse gases (GHGs) with the primary emphasis on carbon dioxide (CO2). The mechanism for capping these emissions requires regulated emitters to acquire federally created permits (allowances) for each ton emitted. The allowances have the economic effect of a tax--energy users will, of course, have to pay for the energy itself, and will also have to pay for the rights to use it if its production involved one of the regulated greenhouse gases. The increase in energy costs stemming from paying for these permits to emit creates correspondingly large transfers of income from private energy consumers to special interests: the federal government collects the revenues from the sale of the allowances and redistributes them to individuals and groups (businesses included) that are listed in the legislation.

Implementing the Waxman-Markey legislation will be very costly, even given the rather optimistic assumptions about how effective it will be in reducing CO2 emissions and how accommodating the economy will be to the added energy costs. The Heritage Foundation's dynamic analysis of these economic costs are summarized as follows (adjusted for inflation to 2009 dollars):

• Cumulative gross domestic product (GDP) losses are $9.4 trillion between 2012 and 2035;
• Single-year GDP losses reach $400 billion by 2025 and will ultimately exceed $700 billion;
• Net job losses approach 1.9 million in 2012 and could approach 2.5 million by 2035. Manufacturing loses 1.4 million jobs in 2035;
• The annual cost of emissions permits to energy users will be at least $100 billion by 2012 and could exceed $390 billion by 2035;
• A typical family of four will pay, on average, an additional $829 each year for energy-based utility costs; and
• Gasoline prices will rise by 58 percent ($1.38 more per gallon) and average household electric rates will increase by 90 percent.

This CDA analysis extends only to 2035, as this is the forecasting horizon for the macroeconomic model used to prepare these estimates. But it should be noted that the emissions reductions continue to tighten through 2050 and that model-based analysis by other groups whose models extend beyond 2035 shows increasing harm to the U.S. economy.

In addition to burdening households, the high energy prices weaken the production side of the economy. Contrary to the claims of an economic boost from "green" investment as firms undertake the changes to reduce emissions and increased employment as so-called green jobs are created to do this work, Waxman-Markey would be a significant net drain on GDP and employment.

Description of the Legislation

Waxman-Markey is a cap-and-trade bill. It caps greenhouse gas emissions from regulated entities beginning in 2012. At first, each power plant, factory, refinery, and other regulated entity will either be allocated allowances (rights to emit) for six greenhouse gases, or be made to purchase these allowances, or some combination of the two. In the early years, most of the allowances will be given away. Perhaps one result of the ill-conceived last-minute changes is that for some years there are promises to distribute more than 100 percent of the available allowances to various interest groups. However, Heritage analysts assume, as do the bill writers, that most emitters will need to purchase at least some allowances. Note that whether allowances are sold or given away had no effect on the energy cost increases, which are caused by the constraint on supply.

Emitters who reduce their emissions below their annual allotment can sell their excess allowances to those who do not--the trade part of cap and trade. Over time, the cap is ratcheted from a 3 percent reduction of 2005 levels (the base year for measuring and mandating future GHG reductions) by 2012 to an 83 percent reduction by 2050.

Effects on Industry

Waxman-Markey affects some industries more than others. Some industries are undoubtedly more energy-intensive and thus hit harder by higher energy prices. Particularly alarming is the damage that Waxman-Markey inflicts on America's manufacturing base. By 2035, the last year of the simulation, durable manufacturing employment will have lost 1.17 million jobs. Nondurable manufacturing losses reach almost 210,000 jobs by 2035. Combined, manufacturing employment averages 389,000 less than the baseline between 2012 and 2035, hitting a high of 1.38 million lost jobs in 2035. [1]

Other industries experience the effects of higher energy prices as well. The fabricated-metal industry will see jobs drop by an average of more than 51,000 below the baseline and 216,000 below by 2035. The machinery industry will shed 263,000 jobs by 2035. Plastic and rubber products employment falls 33,000 jobs below the baseline on average as a result of Waxman-Markey and is 80,000 below business-as-usual in 2035, the last year of the simulation. The employment-services industry faces substantial losses, reaching 428,000 in 2035 and averaging 93,000 fewer jobs than the baseline from 2012 to 2035.

Two other industries adversely affected by this cap-and-trade legislation are transportation and trade. With cap-and-trade regulation, retail-trade unemployment increases by 276,000 in 2035, with a yearly average loss of 78,000, while wholesale trade unemployment increases by 400,000 in 2035, and 191,000 on average each year. The trade, transportation, and utilities sector losses reach 1.1 million jobs by 2035 and 441,000 for the yearly average. Transportation and warehousing employment drops 383,000 by 2035 and has an average yearly loss of 175,000 jobs.

Because agriculture is energy intensive, it would be disproportionately burdened by Waxman-Markey. Higher gasoline and diesel fuel prices, higher electricity costs, and higher natural-gas-derived fertilizer costs all erode farm profits, which are expected to decline by 28 percent in 2012 and average 57 percent lower through 2035.
Also noteworthy are the effects on gas stations, which tend to be small businesses. Employment in the gas station industry is an average 33,000 jobs below the baseline every year from 2012 through 2035.

The model also includes an industry-production index. An industry-production index is a composite measure of the output produced by each of the companies within an industry. Roughly, the index is created by a weighted average of the total output by each company within an industry divided by the base year's weighted average total.[2] The index is based on a common year and, therefore, provides a comparable measure of increases or decreases in an industry's output over time.
Of all the industries modeled, only a handful showed increases in output under Waxman-Markey.[3] Most decreased, and the set of industries whose output fell the most include:

• durable goods,
• railroad equipment,
• miscellaneous manufacturers,
• motor vehicles and parts,
• light truck and utility vehicles,
• electrical equipment, appliances, and components,
• communications equipment, computers, and electronics,
• engines and turbines,
• metalworking machinery,
• construction,
• agricultural equipment,
• glass and glass products,
• rubber and plastic products,
• medical equipment and supplies, and
• mining and its support activities.