Wisconsin’s Misguided Greenhouse Gas Efforts

Published September 28, 2007

I submit these comments in response to your written request. The Heartland Institute is a 23-year-old nonprofit research and education organization, based in Chicago but national in scope. My testimony is based on research conducted by The Heartland Institute in its mission to discover, develop, and disseminate free-market solutions for social and economic problems. The opinions in this testimony are my own.

Wisconsin citizens will suffer substantial, tangible, negative impacts on their standard of living as a result of Senate Bill 81, according to the consensus of numerous objective economic analyses.

According to the most conservative economic models, SB 81 is likely to cause an 18 percent rise in electricity prices, a 32 percent rise in gasoline prices, and a $1,200 per year reduction in the standard of living of the average Wisconsin household.

The consensus of economic models puts the costs much higher. Electricity prices are likely to rise by more than 40 percent, gasoline prices are likely to rise by close to 50 percent, and Wisconsin households are likely to see a reduced standard of living totaling $2,000 to $5,000 per year.

A wide array of economists and economic studies contributed to these conclusions. Among others, these include the Congressional Budget Office, the U.S. Energy Information Administration, and the Massachusetts Institute of Technology. A summary of each study is provided below.

All studies reached essentially the same conclusion: that mandatory greenhouse gas reductions will have negative and substantial economic consequences. They only varied, by a very moderate degree, regarding the extent of the expected negative economic consequences. And it should be noted that according to the U.S. Energy Information Administration (EIA), Wisconsin already has the 15th highest residential electricity prices in the nation.

SB 81 will particularly punish Wisconsin agriculture. State farmers can expect a 2 percent to 9 percent decline in agricultural production as a result of mandatory greenhouse gas restrictions. Any effort to extend the restrictions beyond 2020 will produce still further agricultural decline.

Importantly, few if any measurable benefits will accrue as a result of such a substantial reduction in the Wisconsin standard of living. Scientists agree that even if the entire industrialized world required reductions in greenhouse gas emissions similar to those envisioned in SB 81, there would be little measurable impact on global temperatures.

Moreover, economists observe that, much like what occurred during the twentieth century, the benefits of moderately warming temperatures will exceed the harms of moderately warming temperatures for many decades to come. Not until temperatures reach at least 2.5º Celsius–a scenario not expected to occur before the end of the twenty-first century, at the earliest–will the harms of global warming outweigh the benefits of increased crop production, expanding forests, and other warming benefits.

If, nevertheless, Wisconsin were to choose to reduce its greenhouse gas emissions, economists tell us such reductions should be gradual. Near-term reductions should be minimal and should target low-hanging fruit until technology catches up with desired emissions parameters. Substantial near-term reductions like those sought under SB 81 will come at a much higher price, and provide fewer long-term benefits, than similar greenhouse gas reductions a few decades from now when technology makes such reductions substantially more cost-effective.

2007 Congressional Budget Office Study

According to a 2007 study conducted by the Congressional Budget Office (CBO) (http://www.cbo.gov/ftpdocs/80xx/doc8027/04-25-Cap_Trade.pdf), reducing greenhouse gas emissions by a mere 15 percent would cost the average household nearly 3 percent of its income. A family making $50,000 per year would be forced to pay an extra $1,400 every year for the same goods and services it purchases today.

“Most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline. Those price increases would be regressive in that poorer households would bear a larger burden relative to their income than wealthier households would,” CBO determined.

Moreover, “A CO2 cap would worsen the negative effects” of “existing taxes that dampen economic activity–primarily taxes on labor, capital, or personal income, such as payroll taxes and individual or corporate income taxes,” CBO reported. “The higher prices caused by the cap would lower real (inflation-adjusted) wages and real returns on capital, indirectly raising marginal tax rates on those sources of income.”

2007 MIT Study

A 2007 study by the Massachusetts Institute of Technology (MIT) reached similar conclusions. According to the MIT study (http://web.mit.edu/globalchange/www/MITJPSPGC_Rpt146.pdf), mandatory greenhouse gas reduction schemes similar to SB 81 would cost typical families of four close to $5,000 each and every year.

2007 Charles River Associates Study

A 2007 study by Charles Rivers Associates (http://www.crai.com/pubs/pub_7285.pdf) examined how the exact same greenhouse gas reductions mandated by SB 81 would impact California. According to the study, agricultural production will decline by 2 percent to 9 percent by 2020. If the greenhouse gas reductions were mandated to continue at the same pace after 2020, as many proponents of SB 81 are on record supporting, the agricultural decline will be even more steep in subsequent years.

Additionally, real wages and the demand for labor will fall dramatically.

“The costs of GHG controls will worsen California’s terms of trade,” the study concludes. “For example, imposing GHG controls in California will increase in-state production costs thereby permitting out-of-state businesses to raise the prices that they charge California customers and still remain competitive. For California exporters, on the other hand, although GHG controls will increase their production costs, they will find it difficult to raise prices for their out-of-state customers, as long as their out-of-state competitors do not face the same policy-driven cost increases. These changes erode the purchasing power of Californians, which will decrease their consumption and economic well-being.”

By 2050, the greenhouse gas reductions are expected to cost Californians $500 billion in lost income.

2004 University of Colorado Study

Importantly, a 2004 study by economists with the U.S. International Trade Commission and the University of Colorado (http://www.mines.edu/~ebalistr/Papers/CO2004.pdf) found it would be more costly for Wisconsin residents to meet greenhouse gas restrictions than it would be for Californians. This is due in large part to the fact that California has more abundant and cost-effective solar, wind, hydro, and geothermal power resources than does Wisconsin.

2004 Charles River Associates Study

A 2004 study by Charles River Associates (http://www.crai.com/Showpubs.asp?Pubid=3694) concluded that reducing greenhouse gas emissions to 1990 levels would force electricity prices up by 18 to 24 percent, resulting in families with $200 per month electrical bills paying an extra $480 per year in electricity costs. The same study found that reducing greenhouse gas emissions to 1990 levels would force a 32 to 45 percent rise in gasoline prices, resulting in $3.00 per gallon gasoline being replaced by $4.00 to $5.40 per gallon gasoline.

The economy-wide effects of the mandatory greenhouse gas reductions would cost the average household $1,200 per year by 2020, according to the study.

2003 Energy Information Administration Study

A 2003 study by the U.S. Energy Information Administration (EIA) (http://www.eia.doe.gov/oiaf/servicerpt/ml/pdf/summary.pdf) found mandatory greenhouse gas reductions similar to those in SB 81 would result in a 27 percent increase in gasoline prices and a 46 percent rise in electricity prices.

2003 Heartland Institute Study

A 2003 state-specific analysis by The Heartland Institute (http://downloads.heartland.org/11133.pdf) found reducing greenhouse gas emissions to 1990 levels would cost the average Wisconsin household $4,781 each and every year.

2007 Nordhaus Study

In 2007, Yale University economics professor William Nordhaus conducted an analysis of numerous proposals to reduce greenhouse emissions (http://nordhaus.econ.yale.edu/dice_mss_072407_all.pdf). Nordhaus discovered that substantial near-term reductions in greenhouse gas emissions are extremely costly while achieving little measurable benefit. “Because the initial emissions reductions are so sharp in the ambitious proposals, they impose much higher costs than are required to attain the same environmental objective,” Nordhaus concluded.

Even assuming alarmist projections of 3º Celsius warming in the upcoming century, “Climate change is unlikely to be catastrophic in the near term, but it has the potential for serious damages in the long run.” As a result, “the best approach is one that gradually introduces restraints on carbon emissions.”

In more tangible terms, Nordhaus observed that the optimal method of reducing greenhouse gas emissions would require only a 25 percent reduction by 2050, with more stringent reductions required–and more readily achievable–after that time.

2007 Wake Forest Survey

In 2007, Wake Forest University Economics Department Chair Robert Whaples surveyed a random selection of American Economic Association Ph.D. economists. Whaples asked the economists what the impact of projected global warming will be on U.S. Gross Domestic Product by the end of the twenty-first century. Fully 59 percent projected that even 100 years from now global warming will have a neutral or positive impact on the U.S. economy

2004 Mendelsohn Study

In 2004, Yale University economics professor Robert Mendelsohn (http://www.copenhagenconsensus.com/Admin/Public/DWSDownload.aspx?File=Files%2FFiler%2FCC%2FPapers%2FOpponent+notes%2FOpponent_Note_-_Climate_Change_-_Mendelsohn.pdf) concluded the benefits of global warming will outweigh the harms until temperatures surpass 2.5º Celsius warmer than they are today. Scientists do not expect temperatures to surpass 2.5º Celsius warmer until at least the twenty-second century.

2007 IPCC Report

In 2007, the United Nations Intergovernmental Panel on Climate Change (http://www.ipcc.ch/WG1_SPM_17Apr07.pdf) analyzed agricultural output in a warming world and reached the same conclusion as Mendelsohn: Agricultural production in places such as Wisconsin should experience a net benefit from projected global warming for at least the next several decades. Efforts to reduce greenhouse gas emissions will not only cost Wisconsin farmers substantial money in out-of-pocket mitigation costs, but they will also cost Wisconsin farmers substantial money in reduced agricultural output.

James M. Taylor ([email protected]) is a senior fellow at The Heartland Institute and managing editor of Environment & Climate News. These are comments specific to Wisconsin Senate Bill 81, submitted at the request of a member of the Wisconsin Legislature. Nothing herein should be construed as an attempt by The Heartland Institute to aid or hinder the passage of pending legislation.