New CBO Study Further Exposes Cap-and-Trade Flaws
February 14, 2008

CONTACT:

MARC MORANO 202-224-5762

marc_morano@epw.senate.gov

MATT DEMPSEY 202-224-9797

matthew_dempsey@epw.senate.gov

 

Link to CBO Report 

 New CBO Study Further Exposes Cap-and-Trade Flaws 

Washington D.C. - Senator James Inhofe (R-Okla.), Ranking Member of the Environment & Public Works Committee, commented today on the Congressional Budget Office (CBO) 42-page report released on February 13 showing that carbon taxes are the “most efficient” way to regulate CO2 emissions and “could offer significant advantages” over the cap-and-trade approach.  

“This groundbreaking CBO report validates what I have been saying all along: Cap-and-trade approaches are the wrong way to go,” Senator Inhofe said. “The report is unequivocal in finding that cap-and-trade approaches are inefficient compared to a straightforward tax. The report reveals that no matter how a cap-and-trade approach is modified, on a ton-for-ton basis of emission reductions, it is worse for the American economy. 

“In 2007, the EPW Committee conducted approximately 20 climate hearings on the alleged impacts of climate change and zero on examining which approach would least impact the American public financially. If we are going to impose enormous costs to our economy, a carbon tax would be a much more efficient and transparent approach. While I do not support either a tax or a cap-and-trade approach, I do strongly believe that we should be having an honest debate. 

“This CBO report is consistent with previous analysis stating that a cap-and-trade approach would be far more burdensome than a straight forward tax. A November 2007 report from the Energy Information Administration (EIA) revealed carbon mandates will further drive up energy costs for already overburdened consumers. A separate November 2007 report from the CBO warned energy "price increases would disproportionately affect people at the lower end of the income scale" and said a tax on emissions "is generally the more efficient approach" than a cap-and-trade system. (LINK 

Not only is the entire cap-and-trade approach fatally flawed, a cost-benefit analysis of the upcoming Lieberman-Warner cap-and-trade bill reveals it is simply all economic pain for no climate gain. Numerous analyses have placed the costs at trillions of dollars. Even if you accept the dire claims of man-made global warming, this bill would not have a measurable impact on the climate.” 

Key quotes from new CBO Report: “Policy Options for Reducing CO2 Emissions” (February 13, 2008)   

According to the CBO report, a carbon tax "would provide firms with an incentive to undertake more emission reductions when the cost of doing so was relatively low and allow them to reduce emissions less when the cost of doing so was particularly high."

The CBO report noted “a tax would keep the costs of emission reductions in balance with the anticipated benefits, whereas a cap would not.”

 

“A tax on emissions would be the most efficient incentive-based option for reducing emissions and could be relatively easy to implement.”

 

“A cap that is too tight will disproportionately increase costs over benefits and a cap that is not tight enough will disproportionately lower costs relative to benefits.  A tax, by contrast, will tend to hold the costs of emission reductions in line with the constant (although uncertain) expected benefits, encouraging greater emission reductions when costs are low and allowing more emissions when costs are high.”

 

“When analysts take into account the degree to which costs are likely to vary around a single best estimate, they conclude that a tax could offer much higher net benefits than a cap.  One study suggests that the net benefits of a worldwide tax on CO2 emissions in 2010 would be more than eight times larger than those of an equivalent inflexible cap.”

 

“Viewed another way, any long term emission-reduction target could be met by a tax at a fraction of the cost of an inflexible cap-and-trade program.”

 

“A tax would provide a steady, predictable price from emissions.  An inflexible cap, however, could result in volatile allowance prices, making a cap-and-trade program more disruptive to the economy than a tax would be.”

 

“Price volatility could be particularly problematic with CO2 allowances because fossil fuels play such an important role in the U.S. economy.  They accounted for 85 percent of the energy consumed in the United States in 2006.  CO2 allowance prices could affect energy prices, inflation rates, and the value of imports and exports. Volatile allowance prices could have disruptive effects on markets for energy and energy-intensive goods and services and make investment planning difficult. The smoother price path offered by a CO2 tax would better enable firms to plan for investments in capital equipment that would reduce CO2 emissions (for example, by increasing efficiency or using low-carbon fuels) and could provide a more certain price signal for firms considering investing in the development of new emission-reduction technologies.”

 

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