Senator’s John Kerry (D-MA) and Joe Lieberman (I-CT) are set to release the Senate version of a cap and trade bill tomorrow that will call for a 17 percent cut in emissions below 2005 levels by 2020. But if cap and trade cannot garner enough support, Senator Harry Reid (D-NV) is prepared with a backup plan. Over the weekend Senator Reid told Spanish television network Univision, “I can do one this big because I have a couple of Republicans who would help me on that. But the big bill that we need to do, they are not helping us on that, but I can do a smaller energy bill.” The Hill reports that this could include a number of provisions, above all, a renewable electricity standard. This may be small in Senator Reid’s eyes, but the cost to American families and American businesses will be enormous according to a new study from The Heritage Foundation.
A renewable electricity standard (RES) mandates that a growing percentage of electricity would have to be produced by approved renewable energy sources, which means it will force costlier energy on the American people and consequently weaken the economy. After all, there’s a reason why wind and solar energy only supply a small fraction of America’s electricity demands: it’s too expensive to compete with more reliable sources. According to the Heritage study, “A Renewable Electricity Standard: What It Will Really Cost Americans,” household electricity prices will jump 36 percent by 2035.
For American businesses, the news is worse. Because the cost of generation is a bigger fraction of the industrial electricity price than of the residential electricity prices, the RES causes a bigger percentage increase in industrial electricity prices than in residential electricity prices. As electricity prices increase, the cost of producing goods for businesses increases and consumer demand falls for two reasons; price hikes on goods reduce demand and people have less disposable income because it is spent on their electricity bills. Higher energy prices force businesses to make production cuts and reduce labor. By 2017, employment falls 1,000,000 jobs below the baseline (if there were no RES in place) and at times employment is more than 1.2 million jobs below the baseline. It’s worth noting that these job losses occur after any green job creation.
As a result, the overall economy shrinks. The annual losses in economic activity (gross domestic product) reach $197 billion by 2020, $300 billion by 2030, and more than $325 billion by 2035. Summing up the impacts for 2012 to 2035 yields a total GDP loss of $5.2 trillion. That’s quite a hefty price tag for a “smaller” energy bill.
Proponents of carbon capping legislation may feel they are conceding by “settling” for an RES. Opponents may believe they’ve won if cap and trade does not become law. But there are no winners here. Just like cap and trade, an RES won’t have an impact on the earth’s temperature. And just like cap and trade, the economic costs will be devastating. Heritage analysis of cap-and-trade bills that impose economy-wide reductions in CO2 emissions shows overall losses to the economy of $5 trillion to nearly $10 trillion between 2012 and 2035. Though renewable energy standards apply only to the power sector (electricity generation), they provide less flexibility in meeting the goals than does cap-and-trade and can lead to losses of the same order of magnitude as the more comprehensive cap-and-trade regulations. Though the source of wind and solar energy is free, power delivered from these sources is very expensive.
Nicolas Loris is a Research Assistant at The Heritage Foundation’s Roe Institute for Economic Policy Studies. Loris studies energy, environment and regulation issues such as the economic impacts of climate change legislation, a free market approach to nuclear energy and the effects of environmental policy on energy prices and the economy.
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