Timetable for Cutting U.S. Greenhouse Gas Emissions Will Slow Growth Says Industry Group

April 30, 2009
MAPI says large price increases for carbon fuels will be necessary to meet the Administration's ambitious timetable.

To address the risk of global warming, the Obama Administration proposes to cut U.S. greenhouse gas (GHG) emissions 83% below 2005 levels by 2050, with an intermediate goal of cutting GHG emissions 14% below 2005 levels by 2020. A Manufacturers Alliance/MAPI analysis finds that, under the Administration's current timetable, the average American in 2050 would emit fewer GHGs than those during the Administration of George Washington.

The MAPI study estimates the negative impact of the cap-and-trade plan on economic growth, with a focus on the manufacturing industry. It finds finds that large price increases for carbon fuels will be necessary to meet the Administration's ambitious timetable. It also finds it unlikely that the timetable can be met by additions to energy production by so-called "alternative" energy sources.

In his Budget Blueprint released on February 26, 2009, the Administration proposed a cap-and-trade program whereby major emitters of GHGs would need to begin purchasing permits in 2012 within the context of "transforming our energy supply." The program would target energy-related emissions of carbon dioxide (CO2), the single most important GHG emitted by humans, primarily from the use of fossil fuels: coal, oil, and natural gas. Fossil fuels currently provide approximately 85% of U.S. energy consumption. By functioning as a tax on the fuels' carbon content, the cap-and-trade program would encourage alternative fuels such as biomass, wind, and solar to replace most fossil fuels by 2050.

To set a benchmark for his report, MAPI economist Garrett Vaughn assumes that Congress will enact a cap-and-trade program that will auction all permits as outlined in the Budget Blueprint and limit the total number of permits for energy-related CO2 emissions in accordance with the Administration's timetable. He concludes that the permit prices -- and Americans' energy costs -- will depend on how rapidly the U.S. economy is able to grow. In particular, if, as the Budget Blueprint projects, the U.S. economy attempts to grow at a robust 4.6% annual rate in 2012, the demand for energy would commensurately increase. He estimates this would likely push up permit prices that could easily add $1 to $2 per gallon of gasoline. Such price "spikes" would keep future U.S. economic growth below the rates projected by the Administration.

"A rapidly growing economy increases demand for labor, capital, and energy," he said. "The proposed cap-and-trade program would deny the energy needed for rapid economic growth through a series of self-imposed energy embargoes."

The economic losses to Americans would be greater still if countries such as China and India do not take similar measures. A U.S. cap-and-trade program would then stimulate the relocation of energy-intensive industries outside of the United States, the group reports.

By eliminating most fossil fuels from the total U.S. energy supply, the Administration's timetable for reducing GHG emissions effectively requires the development of alternative fuels at historically unprecedented rates -- rates that cannot possibly be achieved at acceptable cost, according to Vaugh. He points out that in the 38 years between 1970-2008, total energy use increased at an average annual rate of 1%, while inflation-adjusted gross domestic product (GDP) grew at 3%. His research finds that a repeat of those growth rates over the 38 years of 2012-2050 would require alternative fuel supplies to grow at an average annual rate of 24% between 2012 and 2020 and then by more than 5% between 2020 and 2050.

"In the likely event that the demand for energy is not sufficiently counterbalanced by a nearly six-fold increase in alternative fuel supplies by 2020," he warned,"cap-and-trade permit prices will reach heights that will cause politically unacceptable losses to production and income."

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