Stephen D. Eule
April 4, 2017
The Natural Resources Defense Council (NRDC) recently published a critique of a recent report prepared by NERA Economic Consulting that the Energy Institute cosponsored along with American Council for Capital Formation. The report, Impacts of Greenhouse Gas Regulations on the Industrial Sector, explores several potential scenarios under which the United States could meet the Obama Administration’s international emissions pledge as part of the 2015 Paris Agreement on climate change.
It’s by now well established that existing regulations fall well short—by about half the needed reductions—of achieving the goal of a 26% to 28% reduction in net emissions from the 2005 level by 2025, not to mention the 80% reduction by 2050 also contemplated in the pledge.
The report contains multiple scenarios and provides mountains of data, but it didn’t pass muster with the NRDC. It’s no wonder the report wasn’t well received by the group—it demonstrates the staggering costs of meeting the 2025 goal, especially for the industrial sector. Let’s examine some of their criticisms.
NRDC claims we inflate costs by creating an unrealistic strawman. Their evidence? “This scenario [NERA’s core scenario] greatly exaggerates the likely costs of any future program to achieve the economy-wide reductions set forth in the Paris Agreement, because any real program to meet those goals would be designed with cost-saving flexibility the Chamber deliberately left out.”
What flexibility, and from where? First, the fact is the Obama Administration’s Paris pledge was issued without any input or backing from the Congress. None. What evidence is there that Congress has shown even the slightest interest in fulfilling the Obama Administration’s goal? There isn’t any.
So without new Congressional authority—and who knows if Congress would actually create the flexibility NRDC desires—what’s left? Well, there’s the piecemeal regulatory approach of the kind the Obama Administration embarked on with things like the Clean Power Plan, increasing the Corporate Average Fuel Economy standards for light and heavy duty vehicles, new performance standards for methane emissions at oil and gas facilities—on so on. And lest we forget, the Environmental Protection Agency’s fiscal year 2015 budget request included funding to begin considering new greenhouse gas regulations on the refining, paper and allied products, iron and steel, livestock, and cement sectors.
So the NERA report’s core scenario reflects the actual approach used by an actual administration, and probably would have been used by the Clinton Administration had Hillary Clinton won the election. Hardly a strawman.
NRDC grudgingly recognizes that our “Scenario 5” does include aspects, like carbon trading, that NRDC claims it supports. But even here, they complain that, “Although the study contained scenarios with some flexibility, it conveniently neglected to analyze the most flexible and efficient way of achieving the reductions, which would be an economy-wide limit on carbon pollution with full allowance trading (or an equivalent carbon price).”
Actually, what NERA modeled in its Scenario 5—direct measures (i.e., regulation) combined with trading—comes pretty close to what NRDC supports. Don’t believe me? When a group of Republican elder statesmen recently proposed instituting a revenue-neutral carbon tax and then getting rid of regulations rendered unnecessary by said carbon tax, NRDC emphatically said “yes” to the tax but “no” to the regulatory relief. So NRDC’s “cost-saving flexibility” rhetoric rings a bit hollow. It will never abandon regulation.
We’re also taken to task for relying on the Energy Information Administration’s (EIA) Annual Energy Outlook (AEO) 2016 for some baseline data, not the more recent AEO2017, which presumably would have lowered cost projections due to lower wind and solar prices.
As NRDC should know, it takes a very long time to design and execute a first-of-a-kind analysis like the one NERA delivered—and like the one the Obama Administration should have done in the first place. In short, we’re being faulted for not using a forecast that wasn’t even available at the time of the analysis. That’s a bit rich.
(Inherent in NRDC’s criticism is the assumption that using AEO2017 data would have resulted in lower costs. Maybe. Then again, why does the AEO2017 show the Clean Power Plan delivering a cumulative hit to GDP of $666 billion (in 2015$) over the 2022 to 2030 compliance period while the AEO2016 shows a significantly smaller (though still large) hit of $529 billion? Because other factors, besides the cost of renewables, also are at play.)
Next, NRDC downplays the “carbon leakage” that NERA’s model shows would occur as American industries moved production, and therefore emissions, overseas. The best argument it can muster is that our largest trading partners “have joined us” in taking on meaningful commitments.
Let’s take a closer look at those commitments, starting with China. It’s one of our largest trading partners, and it has committed to doing precisely nothing it wasn’t planning on doing anyway out to 2030, after which it may or may not do something else. We’ve gone over the Chinese pledge in detail elsewhere, but consider its central aspect: a 60% to 65% reduction in carbon dioxide emissions per unit of GDP (i.e., emissions intensity) from 2005 to 2030. Sounds impressive until you realize that, based on data from the International Energy Agency (IEA), during the preceding 25 years—that is, from 1980 to 2005—China’s emissions intensity fell by . . . 60%. In other words, China’s pledge, like those of other large emitters, amounts to little more than business as usual.
Indeed, an August 2016 article by Keigo Akimoto and others featured in the Evolutionary and Institutional Economic Review uses a least-cost approach to estimate the marginal abatement cost of a ton of carbon dioxide for the Paris pledges of selected countries. What it found is that meeting the Obama Administration’s goal would cost a very-high $85 per ton in 2025. In contrast, meeting both China’s and India’s goals would cost $0 per ton in 2030, while for Russia, it would cost $4 per ton. This analysis demonstrates that three of the top five emitting countries are basically sitting on their hands through 2030. That is not exactly joining us.
America is embarking on a manufacturing renaissance fueled by affordable energy. According to IEA, U.S. industries spend two to four times less for energy than industries in other developing countries. We need to think long and hard before surrendering this edge.
Finally, it’s a bit perplexing when NRDC says “we already have all of the tools and technologies needed to accomplish our goals.” EPA, for example, tried to mandate carbon capture and storage even though everyone knows the technology isn’t near being commercially ready.
At its most fundamental level, reducing carbon dioxide emissions from energy is a technology challenge, which is why we here at the Energy Institute put heavy emphasis on developing new technologies. We recognize that unless and until alternate technologies can compete with traditional fuels on cost, performance, and scalability, they will not be used commercially to a great degree. That’s why, unlike NRDC, we’ll continue to support policies designed to lower the cost of alternative energy rather than raising the cost of traditional energy.
We’ll also continue to look at the economic impacts of policy decisions being considered based on sound analysis, not wishful thinking.