Estimating the Cost of
McCain-Lieberman:
A Futile Exercise

By Jay Lehr, Ph.D., and Joseph L. Bast

The Climate Stewardship Act (S.139 last year, now SA.2028), introduced by Senators McCain and Lieberman, would require mostly large industrial sources of greenhouse gases in the United States to curtail their emissions over the coming decades. Every economist and climatologist worth his or her reputation has jumped on the bandwagon to calculate the impacts.

This exercise is like determining how many angels can fit on the head of a pin. It assumes angels do indeed exist, otherwise how could one estimate their size?

Similarly, calculating the cost of McCain-Lieberman assumes it is possible to predict how a complex and increasingly global economy would respond to measures to make fossil fuels more expensive in one country. Calculating its impact on Earth's complex and probably chaotic climate assumes we can predict the effects on weather of tiny changes in the composition of Earth's atmosphere.

Fie, we say.

SA.2028 would cap major sources of greenhouse gas emissions at 2000 levels beginning in 2010. The principal non-agricultural source of greenhouse gases in the U.S. is the burning of fossil fuels. For households and industries to reduce their consumption of fossil fuels, their prices must rise.

As energy prices rise, industries substitute less energy-intensive production methods or use more expensive non-fossil sources of energy. Both forms of substitution require more capital investment, which leads to a lower level of consumption in the near-term and a reduced rate of return on investment, thereby reducing consumption in the future as well.

Because industries no longer would be as productive, their revenues would fall, leading to lower wages. Because of lower wages, labor supply is reduced, further trimming economic output and personal income. In sum, individuals would face a reduced ability to consume as a result of this policy.

All this is pretty well known, but how substantial would be the loss of consumption caused by SA.2028? Massachusetts Institute of Technology (MIT) analysts say it would be negligible. Charles River Associates (CRA) puts it at a very non-negligible $600 to $1,300 per household per year in 2010 and $1,000 to $2,300 by 2020. The Energy Information Administration comes down in between: about $253 per household by 2025.

(In case the EIA estimate sounds modest, consider that losses in GDP to the year 2025 would total $776 billion (in 1996 dollars), with a current discounted value of some $290 billion.)

How realistic are any of these estimates? All of them give too much credit to econometric models, which are remarkably like the models used by climatologists to attempt to predict future weather.

In both cases, the modelers disagree on the values of their unknown variables, or even the number of variables that must be considered. Many of the variables are totally unknown, so each economist and climatologist puts his or her best guesses into the pot and stirs. It is nearly statistically impossible for their results to agree.

Even the best econometric models cannot predict how entrepreneurship, global competition, technological change, and changing public policies will affect producer and consumer choices a few years from now, much less in 2020. Right now no one knows what the price of a barrel of oil will be next month or what the tax rate on dividends and capital gains will be after 2008.

Similarly, the best global climate models cannot predict tomorrow's weather, much less how a small reduction in greenhouse gas emissions from the U.S. might influence the climate of the entire planet some decades in the future. Just one example of the uncertainty suffices. Richard Lindzen, the Alfred P. Sloan Professor of Meteorology at MIT, has produced compelling evidence that the models fail to correctly model the behavior of clouds, so their predictions of higher temperatures may be three times too high.

On the other hand, in both economics and climatology there are some facts known with certainty. All economists know that rising energy costs in the past were closely associated with slower economic growth, and that if non-fossil fuels were competitive (in price and reliability) with fossil fuels, they already would be more widely used. There are no $20 bills lying on the ground waiting to be found. Reducing greenhouse gas emissions will be expensive, even if we can't predict the exact price.

Similarly, all atmospheric physicists know 90 percent of all greenhouse gases consist of water vapor evaporated from Earth's ubiquitous oceans. No more than 4 percent of Earth's greenhouse gas envelope is made up of carbon dioxide, and human emissions make up only a small percentage of carbon dioxide present in the atmosphere. Any impact on climate resulting from marginally reducing U.S. greenhouse gas emissions during the next twenty years would be too small to measure, if we accept the alarmist's assumptions, and nonexistent if we do not.

We do not need sophisticated econometric or global climate models to tell us that reducing greenhouse gas emissions will cost jobs and income and have no impact on Earth's climate. Why, then, are we continuing this exercise in futility?

# # #

Jay Lehr Ph.D. is science director and Joseph Bast is president of The Heartland Institute, a national nonprofit research organization based in Chicago. With James M. Taylor, they coauthored a study of the cost of greenhouse gas reduction programs in 2003.

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