After making changes to draft legislation of the Waxman-Markey cap and trade climate legislation, the economic impact of the new draft (the Son of Waxman-Markey) varies from that of the original draft in several major ways:
• Compared to no cap and trade, real GDP losses increase an additional $2 trillion, from $7.4 trillion under the original draft to $9.4 trillion under the new draft;
• Compared to no cap and trade, average unemployment increases to 1,145,000 lost jobs under the new draft; and
• Peak-year unemployment losses rise by 500,000 jobs, from 2 million under the original draft to 2.5 million under the new draft.
• Our original economic analysis had the government auctioning off the allowances (rights to emit) carbon dioxide. The auction revenue, the equivalent of tax revenue, went into the hands of the government, which in turn created more government jobs. In the second version of the bill, the government distributed allowances to various businesses in an attempt to mitigate the near-term economic damage done by the bill. As a result, jobs in the private sector fell less than the original but the government jobs decreased more because the government did not receive the allowance revenue from the auction. Overall employment fell.
• Think of the allowances given away as subsidies to businesses. When these subsidies stop and allowances begin to be auctioned off, the economy is again “shocked” with higher indirect taxes and businesses must make costly adjustments to this new economic condition.
• Real GDP losses increase an additional $2 trillion from the bill because investment for businesses is worse under the new bill. Again, the government is not auctioning off the rights for businesses to emit carbon dioxide; they are giving them away in the near-term. These giveaways add to the national debt, crowd out private sector investment and drive up interest rates. Increased interest rates further drive up the debt. This creates a vicious cycle in which businesses significantly reduce their investment. The lack of investment (that drives the overall economy) produces higher real GDP losses and lowers the potential of the overall economy.
The attempt to reduce costs on businesses and thereby trickle-down to consumers does ease some of the near term pain. The decrease in personal consumption expenditure (what people spend on goods and services), for example, is not large in the Son of Waxman-Markey as it is in the original. Unfortunately the slight benefits of the short-term easing of pain is swamped by the real economic costs of the targeted mandates. In an attempt to mitigate the near-term economic pain inflicted by a cap and trade bill, the government is simply pushing the burden on future generations by blowing a hole in the long-term economy.
Karen Campbell, Policy Analyst in Macroecomomics for the Center for Data Analysis, co-authored this post.