Dr. Margo Thorning on the economic impact of the McCain-Lieberman Climate Stewardship Act

by William Yeatman on June 29, 2004

in Small business

Dr. Margo Thorning
American Council for Capital Formation

Dr. Margo Thorning is senior vice president and chief economist with the American Council for Capital Formation and director of research for its public policy think tank. Dr. Thorning also serves as the managing director of the International Council for Capital Formation. Thorning is an internationally recognized expert on tax, environmental, and competitiveness issues. She writes and lectures on tax and economic policy, is frequently quoted in publications such as the Financial Times, Suddeutsche Zeitung, New York Times, and Wall Street Journal, and has appeared internationally on public affairs news programs.

Dr. Thorning’s study on the economic impact of McCain/Lieberman on the U.S. and on several individual states is available at ACCF.org and UnitedForJobs2004.org.

Full Biography

The chat will begin at 2pm EDT on Wednesday, June 30.  You can send your questions now to chat@globalwarming.org .  Questions and answers will be posted as Dr. Thorning answers, beginning at 2pm.  Refresh your screen regularly to see questions and answers.

Moderator: Let me start by asking you, Dr. Thorning, to tell us a little bit about your study and summarize the results.

Dr. Thorning: The ACCF’s study (see www.accf.org) on the impact of the McCain/Lieberman legislation to reduce carbon emissions in the U.S. shows significant negative impacts on the U.S economy and on individual states.  As a result of higher prices for energy, job losses could  be as much as 610,000 by 2020 and low income and the elderly bear a larger burden than high income and younger individuals.

Moderator: Katherine in Maryland wants to know —
Why would policymakers support a bill that causes substantial job

Dr. Thorning: If policy makers have not seen credible estimates using appropriate economic models the lost GDP and reduced employment they might think that meeting the McCain-Lieberman carbon emission reduction targets is virtually costless.  

The new ACCF study demonstrates the high costs to the US and to individual states.
Another possibility is that Senators from states that do not use much fossil fuel for industry may hope to gain a competitive advantage if other states are forced to curb energy use and switch fuels.

Moderator: Arthur in Pennsylvania asks —
Munich Re, the world’s largest reinsurance company and second-largest insurance company, argues that, “Continued climate change will almost inevitably yield increasingly extreme natural events and large catastrophic losses.  This may make some vulnerable regions uninsurable.”  Even if most areas of the U.S. remain “insurable,” many risk management specialists have predicted that global warming
will cause significant increase in all types of insurance costs — disaster, auto, health.  Insurance prices are obviously just one area
in which global warming could impact the economy.  What studies have been conducted on climate change’s costs to businesses?  

Dr. Thorning: Tech Central Station has posted responses to the Munich Re study.  One criticism is that the study does adjust for the rising value and increased building along coastal areas so that the apparent increase in damages over time are biased upward.

Moderator: Lucas in Virginia asks —
With oil prices relatively high due to the international situation, would the McCain/Lieberman bill help us to be less reliant on foreign oil?

Dr. Thorning: Given the restrictions on oil and gas drilling in the U.S. both onshore and offshore, and slow progress on new pipelines, it is unlikely that M/L legislation would reduce imports significantly. We will still find foreign oil cheaper so will not likely reduce our imports. In fact, the US might increase oil imports since foreign producers won’t be saddled with the carbon taxes or permit fees  contained in McCain Lieberman approach.

Moderator: Judy from Virginia wonders —
Do you think policymakers know what economic costs would be incurred? 

Dr. Thorning: Many probably do not as there has not been much debate yet about what the different  credible models say about the economic burden of ML legislation. The new ACCF report helps close this gap.

Moderator: Bill in DC asks —
In your analysis, what data and assumptions did you make regarding energy efficiency potential in the end-use and power generation sectors, and what cost assumptions did you make for those resources?

Dr. Thorning: In the high cost case, backstop technology is assumed to decline over time from $300 per tonne to $100 per tonne by 2050; in the low cost case the cost stays at $300 per tonne permanently. There is more reliance on combined heat and power, more nuclear and other technological progress that reduces energy intensity.

Moderator: Another question about foreign oil, this from Brian in DC —
SA 2028 hopes to reduce our dependence on foreign oil.  Is this possible?  Is this desirable?

Dr. Thorning: S.2028 might well increase dependence on foreign oil since producing domestically will become even more costly due to the need for producers to pay for the right to emit carbon as they produce oil, gas and coal.

Moderator: Richard in West Virginia asks —
What inspired McCain and Lieberman to introduce this act?

Dr. Thorning: It is not clear.
Sen. McCain voted against a BTU energy tax in the early 1990’s and Arizona is a big user of coal to produce electricity. Arizona would be negatively affected by the bill. Sen. Lieberman’s state, Connecticut, would not be as hard hit as many other states because of its fuel mix so perhaps the incentive was to gain competitive advantage for Connecticut.

Moderator: Katrina wonders —
How do you reconcile your findings regarding McCain Lieberman with those of the Massachusetts Institute of Technology which states that there will be no negative employment effects and a reduction of natural gas demand and prices by 4 percent from reference case projections by 2020 due to incentives for greater energy efficiency?

Dr. Thorning: The MIT model ignored the impact of “foresight” on investors decisions about where to invest when they realize that carbon reduction targets will be tightening as time goes on. MIT also assumed households would not reduce the amount of labor supplied once they realize their real wages are falling.  Thus, MIT results understate the loss in GDP, investment and jobs compared to the model used in the ACCF analysis. See “Comparison of Models” at  www.accf.org for more details .

Moderator: Fran from Louisiana wants to know —
In which states will consumers be hit the hardest?

Dr. Thorning: Louisiana is one of the hardest hit, households lose as much as $2800 annually in 2020 under the tighter target case.

Moderator: Bill in DC has another question —
In other US cap and trade programs, such as the Acid Rain program, compliance costs on a per-ton basis fell rapidly below pre-program estimates.  In your analysis, have you run any scenarios that model such declines in the cost of emission reductions?

Dr. Thorning: The simulations assume an efficient trading system where the marginal cost of reducing emissions is the same across all sectors of the economy.

The analysis shows carbon taxes or the cost of permits rising as targets get harder and harder to achieve with growth in the economy and in population.

Moderator: Thomas from New York asks —
Would the bill hurt U.S. international competitiveness or would vulnerable sectors be excluded?

Dr. Thorning: About 85 percent of U.S. emissions are covered. Agriculture receives special treatment but would still face higher fuel cost.

U.S. competitiveness is affected due to higher prices for U.S. goods and services stemming from increased fuel and electricity costs.

Moderator: Thanks to everyone for their questions; that will conclude today’s live chat.  Check back regularly at www.globalwarming.org to find out about our next event.

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