A key element in President Obama’s economic agenda is legislating limits on carbon dioxide emissions to combat the supposed threat of global warming. What have been given far less attention are the costs that will be imposed on the American people from implementing this policy – costs that potentially can be very high.

In his outlined budget for the government’s next fiscal year, the president has proposed a cap and trade policy that is claimed will reduce carbon emissions by 14 percent from their 2005 levels by 2020, and by 83 percent by 2050.

Under a cap and trade system, the government would assert ownership of the atmosphere over the United States and set a maximum number of permits that it would sell to private companies for the right to discharge carbon dioxide into the air. Over time, the government would decrease the number of permits and increase their price to meet the desired reduction in emission levels. Companies would decide which was cheaper: to buy a permit at the government-set price, or incur the expense to introduce technologies to diminish its carbon dioxide emissions.  

With the president’s plan, companies would pay $13 to $20 per ton of carbon that it wished to emit into the atmosphere. The Obama administration publicly estimated that selling such rights would generate nearly $650 billion in federal revenue between 2012 and 2019. However, Jason Furman, deputy director of the president's National Economic Council, told a bipartisan group of Congressional staff members February 26 that the White House believes that the sale of carbon emission permits, if priced at $20 a ton, will generate between $1.3 trillion and $1.9 trillion in additional government revenue in the period, 2012-2019.

Most of the these higher costs of doing business would be passed on to the consumers. According to current estimates, the price of gasoline will rise at least 12 cents a gallon, and the average electricity bill will go up 7 percent once the policy is implemented.

The full magnitude of these costs in the form of higher prices for various commodities and the resulting decline in the standard of living, have not been properly emphasized. One attempt to estimate the costs to consumers came out this month, published by the George C. Marshall Institute, a scientifically oriented and highly respected organization based in Washington, D.C.

In “The Cost of Climate Regulation for American Households,”  Professors Bryan Buckley and Sergey Mityakov of Clemson University analyze the results from seven earlier government and non-profit organization studies on the impact of a cap and trade policy, These studies were based on a legislative proposal submitted to the Congress last year by Senators Joe Lieberman and Mark Warner, which is very similar to the policy envisaged by the Obama Administration. 

The table below summarizes their estimate of the cost in decreased consumer income because of the higher costs that will result from the implementation of a cap and trade policy between 2008 and 2050. 

Source: George C. Marshall Institute, Washington, D.C.

The earlier studies that they draw upon offer differing estimates of the effect on production costs under a variety of alternative assumptions. But Buckley and Mityakov conclude that annual growth in Gross Domestic Produce (GDP) may be reduced by as much as 1 percent. They also conclude that an average four-person household would most likely experience a 1 percent annual lower level of consumption, because of  the higher prices for various consumer items, electricity, gasoline, and heating oil.   

This may seem like a small decline in the annual increase in people’s standard of living in order to significantly reduce carbon dioxide emissions. But the authors point out that for the average family, this represents a significant cumulative cost in material well-being.  

This would be equal to a $1,100 tax on such a four-person household at 2008 levels of income and consumption. By 2050, this would increase to an amount equal nearly to a $3,000 additional annual tax on such a household (in inflation-adjusted, real terms).

To bring this cost down to everyday comparisons, the authors point out that in 2008 this average four-person household spent about $2,500 on food, or about $208 per month. They also point out that the monthly payment on a purchased Honda Civic LX was around $190 a month. In other words, the cost of the cap and trade policy for this four-person household would be equivalent to around six months of their annual food bill, or almost half of the annual payments for this type of automobile.

But as the emission permits are reduced over the years and the cost of buying them was increased, the cost to consumers would rise to practically $3,000 annually for this household by 2050 (in real terms). Even though the U.S. economy will likely grow over the coming decades, even with a cap and trade policy in place, what it will mean is that GDP and consumer consumption spending will be noticeably lower than their potential levels without this restriction on carbon emissions. 

It will also mean that many jobs will be displaced in the most severely affected sectors of the economy. The Obama Administration insists that new jobs will be created in alternative energy and technology. However, these employment shifts won't be  reflecting changes market-based consumer patterns of demand. Rather, they will come about as results of manipulation of the costs of doing business through the government's cap and trade program. And there is no certainty that any such new employments will represent a gain in real consumer value.

It may be the case that many in the society might consider this a reasonable cost to bear, assuming that the carbon emissions actually were reduced by the amounts projected and that it had the impact on the environment that is claimed. But any serious public discussion about the benefits of implementing such a government intervention should at same time weigh carefully the cost on the standard of living of the American people. (See, AIER's volume on, The Global Warming Debate: Science, Economics, and Policy.)

This is especially important, given the current administration's plans for the revenues from the proposed cap and trade policy. Some have proposed returning most, if not all, of the $650 billion in revenues for the carbon permits to various segments of the population in the form of tax credits. The Obama administration, however, has suggested that it wishes to use a large proportion of these new revenues to finance an expansion of the government’s national health care system.

The White House is not only trying to manipulate the way we produce and consume. It also plans to generate a new stream of government revenue to implement the expansion of its welfare state, redistributive agenda.

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