By Stephen D. Eule
A few months ago, the Energy Institute partnered with the American Council for Capital Formation to work with NERA Economic Consulting on a report that 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. The report, Impacts of Greenhouse Gas Regulations on the Industrial Sector, examines the costs of filling the gap between what the U.S. committed to, and what the plans currently in place will actually accomplish.
Existing regulations fall well short of achieving President Obama’s 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. To meet President Obama’s goal, this gap between ambition and policy has to be filled.
Now, the World Resources Institute (WRI) has issued a critique of the report. We’ll take a look at the criticism and explain why it’s unwarranted.
First, WRI claims the report uses a highly unrealistic and unnecessarily expensive pathway to achieving the U.S. 2025 target. If this sounds familiar, it’s pretty much the same argument Natural Resource Defense Council (NRDC) tried to pass off, too (which we addressed in detail here).
WRI says, “Perhaps the most basic rule of cost-effective decarbonization is to first take advantage of the lowest-cost opportunities to reduce emissions, leaving the more expensive reductions for a later date, when technological advances may uncover more affordable opportunities.” This, it claims, means that we should be getting more reductions from the power sector, for example, before imposing major cuts on the industrial sector.
The problem with this criticism is that the NERA study took its lead from the regulatory approach the Obama Administration had set forth. It’s Clean Power Plan and increasingly stringent Corporate Average Fuel Economy standards for cars and heavy trucks were key pieces of this strategy, but they were just the beginning.
The Obama Administration’s fiscal year 2015 budget request for the Environmental Protection Agency included funding to develop exactly what the NERA study models—new greenhouse gas regulations on the refining, paper and allied products, iron and steel, livestock, and cement sectors—in other words, the industrial sector.
Furthermore, the Obama Administration later explicitly tied these regulatory ambitions to the Paris commitment. In late 2015, InsideEPA reported on White House meeting where, “administration officials were candid in their plans to regulate manufacturing GHGs to address an emissions ‘gap’ between current and proposed climate rules and President Obama's INDC pledge to cut GHGs 26 to 28 percent from 2005 levels by 2025.” So regulating the industrial sector wasn’t something simply invented by NERA.
After its lengthy critique of our core scenario, WRI, like NRDC before it, grudgingly recognizes that the NERA study does actually include a scenario that takes an approach (through an economy-wide price on carbon in addition to regulation) WRI finds more attractive. It’s also an approach that was (and remains) very unlikely to be implemented anytime soon unless Congress unexpectedly passes new and comprehensive climate change legislation or a future administration chooses to test the extreme outer reaches of current Environmental Protection Agency authorities.
Regardless, even though WRI finds our Scenario 5 much more to its liking, it can’t bring itself to report accurately the economic hit this scenario produces. It avers, for example, that the half of a percentage point drop in GDP in 2025 is “equivalent to a change in the GDP growth rate from 2.5 percent to 2.44 percent per year.” No big deal, right? What WRI won’t tell you is that the 0.06 percentage point drop in the GDP growth rate it describes would, from 2017 to 2025, translate into a cumulative economic hit of half a trillion dollars. Seemingly little things really do mean a lot. WRI also neglects to mention that under NERA’s Scenario 5, the economy still sheds 2.7 million jobs by 2025. These impacts may not sound like a lot to WRI, but to the rest of us, they represent real money and real livelihoods.
WRI also argues that “If NERA had assumed a more productive use of revenue from the carbon price, and had not assumed a considerable slowdown in clean energy innovation . . . economic outcomes could improve further.” The problem is, groups like WRI want—indeed, expect—to implement a policy where everything runs perfectly: technologies perform as expected and at affordable costs, the pace of innovation is rapid across all sectors, the use of revenue is the most efficient and productive possible, siting and permitting rules function with alacrity . . . you name it. The real world’s a lot messier than a computer model.
Its final complaint is that the “NERA study fails to account for a realistic pace of clean energy innovation.” NERA’s assumptions were based on data from the Energy Information Administration Annual Energy Outlook. NERA uses EIA because it produces an internally consistent set of outlooks and is a reputable source. If WRI has an issue with EIA’s approach, it should take it up with the experts at EIA.
When all is said and done, WRI’s argument really boils down to this single quip: “The Chamber Energy Institute’s claims are akin to chartering a helicopter for your morning commute and then complaining about how expensive it is to get to work.”
We agree. Once regulatory agencies begin to mandate helicopters and show every intention of mandating even more helicopters, we’re going to analyze just how much it costs to commute by helicopter.