TCS Daily

Why Diamonds are Like Greenhouse Gases

By Joel Schwartz - April 19, 2005 12:00 AM

"Energy study finds greenhouse gas limits affordable" according to an Associated Press story on a new Energy Information Administration report.[1] The EIA analysis, performed at the request of Senator Jeff Bingaman (D-NM), assessed several greenhouse gas (GHG) reduction scenarios based on recommendations of the National Commission on Energy Policy. William K. Reilly, an NCEP co-chair and former EPA Administrator, lauded the EIA findings calling them "a reassuring set of conclusions." But by any reasonable measure the EIA report implies just the opposite. EIA's analysis shows that even attempting to slow the growth rate of GHG emissions would cost Americans hundreds of billions of dollars over the next 20 years. Attempting to freeze GHG emissions at current levels would likely cost trillions.

EIA modeled a number of different scenarios for future energy usage. The major scenarios include: (1) a "business-as-usual" baseline that assumes no change in current GHG policies; (2) a cap-and-trade GHG reduction program; and (3) the full suite of NCEP recommendations, including the cap-and-trade program, a 36 percent increase in average automobile fuel economy, and various incentives and subsidies to cap energy prices and encourage energy efficiency and alternative fuels. The GHG reduction scenarios assume implementation in 2010 and EIA projects results out to 2025.

Relative to business-as-usual, EIA projects the cap-and-trade program would reduce GHG emissions by 3.7 percent in 2015 and 7.1 percent in 2025.[2] The corresponding reductions for the NCEP scenario are 5.2 and 11 percent. Compared to today, GHG emissions would still rise substantially under either scenario. EIA predicts a baseline 38 percent increase in U.S. GHG emissions between 2005 and 2025. GHG emissions would increase by 29 percent under cap-and-trade, and 24 percent if all of the NCEP policy recommendations were implemented.

EIA estimates the cap-and-trade program alone would cost about $320 billion between 2010 and 2025, or a bit more than a 0.1 percent reduction in Gross National Product (GNP).[3] The full suite of NCEP recommendations would cost about $620 billion, or an average reduction in GNP of about 0.2 percent, though the reduction increases over time, to 0.4 percent by 2025. Annual costs rise with time, as implied by the GNP decrease. For example, in the NCEP scenario, costs rise from $10 billion in 2011 to $78 billion in 2025.

EIA thus concluded that if we do nothing, U.S. GHG emissions will rise 38 percent between now and 2025. We could spend $320 billion and emissions would grow by 29 percent. Or we could spend $620 billion and emissions would grow by 23 percent. AP claims the EIA report shows GHG reductions are "affordable." In fact, the report shows just the opposite. Even a modest reduction in the growth rate of GHG emissions will cost tens of billions of dollars per year. EIA's estimates imply that attempting to freeze GHG emissions at current levels by 2025 would cost well in excess of $125 billion per year, or trillions of dollars in total.[4] Diamonds are affordable -- if you buy only a tenth of a carat. Greenhouse gas reductions are affordable too -- but only if you buy a similarly useless amount.

The main justification for spending money on GHG reductions is that such reductions might improve future human health and welfare by slowing global warming. But even if we allow that the U.S. government should spend an additional $620 billion or more over the next 20 years to improve humanity's lot, greenhouse gas reductions would have to be near the bottom of the priority list. The EIA report and similar analyses show it would cost hundreds of billions and perhaps trillions of dollars per year worldwide to achieve the substantial reductions in GHG emissions necessary to stabilize or reduce atmospheric GHG levels. Yet it is not clear these stupendous expenditures would improve anyone's health and safety, first because harms from climate change might not materialize, and second because the costs of GHG reductions will impose harms of their own.

On the other hand, each year millions of people in less developed countries die from infectious diseases that the U.S. and other western countries wiped out decades ago. And this is just one among many pressing problems that make the lives of world's poorest people much shorter and less healthy and safe than those of Americans. Nevertheless, greenhouse gas reductions are the public health policy of choice among the rich world's governments and environmentalists.

Proponents of the NCEP recommendations believe GHG reductions are affordable because the cost would be a small fraction of total U.S. gross national product-only about 0.2 percent between 2010 and 2025. But by that measure the U.S. government could afford to spend tens of billions a year on almost anything, including having people dig holes and fill them up again. The real question is whether spending large sums of money on greenhouse gas reductions will actually improve people's overall welfare. Based on EIA's estimates, it appears the main thing Americans will gain from GHG reductions is higher energy bills.

The author is Visiting Fellow, American Enterprise Institute.

[1] J. Heilprin, "Energy Study Finds Greenhouse Gas Limits Affordable," Associated Press, April 15, 2005.
[2] GHG reduction estimates include all GHGs and are reported as carbon dioxide equivalents.
[3] All dollar values are in year 2000 dollars.

[4] EIA doesn't estimate what it would cost to freeze GHG emissions at current levels. But even assuming the incremental cost per ton of GHG reductions remains the same when going beyond the NCEP scenario, the cost of returning to 2005 emissions by 2025 would be nearly $2 trillion (assuming a linear decline in annual GHG emissions after 2010 to achieve the 2005 emissions level by 2025. The real cost would likely be much greater, because the incremental cost of GHG reductions will increase as the most cost effective opportunities are exploited. For example, compared with the cap-and-trade program alone, EIA's estimates imply that on average the additional measures in the NCEP scenario would cost 2.5 times as much for each unit of GHG reduction. Technological advancement will likely lower costs, but EIA's cost estimates already assume that GHG control costs will decline over time.


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