Study: Cap and trade would hurt economy

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By Amanda DeBard

The Brookings Institution on Monday said cap-and-trade legislation to reduce carbon dioxide emissions would lower the nation's gross domestic product in 2050 by 2.5 percent, compared with levels it would reach if the legislation is not implemented.

A report issued by the left-leaning research organization said that if Congress passes something similar to President Obama's or the House's proposed plan, the economy would take the biggest hit around 2025. At that time, production at refineries and the use of coal and crude oil would decrease by 30 percent to 40 percent compared with what those levels could be in 2025.

About 35 percent of crude-oil-related jobs and 40 percent of coal-related jobs would be lost in 2025, according to the analysis. It assumes that the majority of workers would find new jobs, but the net job loss would be 0.5 percent over the first 10 years that the legislation is in effect.

The report doesn't focus on any particular piece of legislation, but rather tries to quantify the price of transitioning to a cleaner economy by using the cap-and-trade system. It shows that personal consumption would fall by as much as 0.5 percent, or $2 trillion, by 2050.

A cap-and-trade system would decrease the amount of carbon dioxide in the air to a level that researchers say is safe. Allowances equaling that level would be given or auctioned by the government to those who have historically emitted the pollutant. Emitters then would have to return to the government enough permits to cover their emissions every year. If they fall short of permits, emitters would have to buy them from those who have a surplus.

The Obama administration wants to reduce carbon dioxide emissions - also known as greenhouse gas emissions - by 83 percent by 2050 from 2005 levels. The cap-and-trade legislation now pending in the House of Representatives would cut greenhouse gas emissions by the same amount.

Production and employment at utilities also would take a hit, according to the Brookings report, but the analysis shows small impacts on utilities because they would be forced to purchase less electricity from fossil fuels and more from renewable sources by 2020 - at least under the pending House bill.

The study also concludes that the cap-and-trade plan would raise much more money for the federal government than the official congressional estimate. The government would raise about $1.5 trillion by 2020 if it sold all carbon emissions allowances, according to the Brookings analysis. The Congressional Budget Office (CBO) predicts that the House bill would raise $846 billion by selling or auctioning off carbon allowances by 2019.

One reason for the difference is that the Brookings analysis assumes polluters would have to obtain allowances each year. The House bill allows entities to bank or borrow allowances to avoid compliance fees, which would result in less revenue to the government each year.

Another reason is the price of allowances. Brookings estimates that the market could drive up the price of a carbon dioxide allowance to as much as $50 a ton by 2020. CBO estimates allowances would cost $26 a ton in 2019.