Cap-and-Trade Costs: Lessons from Europe

During the debate on the Waxman-Markey energy and climate legislation, the potential costs to consumers received considerable attention. Mitigating these increased costs was the main focus of the dealmaking that was done to get the bill passed. The focus on cost is not surprising. What is surprising is the range of cost estimates that emerged during the debate.

On the low end were estimates by the Environmental Protection Agency (EPA) and Congressional Budget Office (CBO). EPA estimated the cost of the legislation to be somewhere between $80 and $111 annually per household, while the CBO came in slightly higher at $175 in 2020. The new CBO estimate is much lower than an earlier estimate it did that pegged the cost of a 15% reduction in carbon dioxide at $1,600 per household. On the other end of the spectrum is an analysis by the Heritage Foundation that puts the increased cost at $2,979 per year.

The ultimate impact of a cap-and-trade system need not be hypothesized, so let’s move past the studies and look at a real world example: the European Union. The EU cap-and-trade program went into effect four years ago. Since that time they have seen significant energy price increases, while achieving minimal emission decreases. From 2004-2007, residential energy costs have increased by an average of 16% and industrial electricity rates have increased by 32%. Even in a good economy very few industries can afford a 32% increase in electricity rates. In this economy, it would spell the end for many manufacturers.

The climate bill is currently being debated in the Senate after being passed by the House of Representatives. Hopefully the Senate will have the sense to study the EU experience and reject these kinds of increased energy costs for U.S. businesses.

“Europe's Cap-And-Trade Scheme: A Cautionary Tale for the U.S.,” Investors Business Daily, June 8, 2009: http://www.investors.com/NewsAndAnalysis/Article.aspx?id=478980&Ntt=cap+and+trade