A wide body of research shows that well-designed policies achieve reductions in greenhouse gas emissions at reasonable costs. A recent article from the U.S. Chamber of Commerce’s Institute for 21st Century Energy (“Chamber Energy Institute”) uses a NERA Economic Consulting study as evidence that meeting U.S. climate change commitments under the Paris Agreement will cause economic hardship, particularly in the manufacturing sector. High-profile opponents of climate action— such as U.S. Sen John Barrasso — are using the results of this study to attempt to make a case for withdrawing the United States from the global climate accord.
As part of our ongoing effort to promote credible and independent economic modeling, WRI reviewed the Chamber Energy Institute’s article and the associated NERA study. We found that the Chamber’s conclusions are based on a decarbonization pathway that is unrealistic and unnecessarily costly. Rather than providing support for the Chamber Energy Institute’s claim, the NERA study in fact provides further evidence that a market-driven approach can enable the United States to achieve its emissions-reduction targets at a relatively low cost.
Here are three things you need to know:
1. The Chamber Energy Institute’s claims are based on a highly unrealistic and unnecessarily expensive pathway to achieving the U.S. 2025 target.
Perhaps the most basic rule of cost-effective decarbonization is to first take advantage of the lowest-cost opportunities to reduce emissions, leaving the more expensive reductions for a later date, when technological advances may uncover more affordable opportunities.
In the United States, the largest near-term opportunities for cost-effective emissions reductions include switching to cleaner electricity sources and improving energy efficiency in homes, businesses and vehicles. The lowest-cost pathways to the U.S. 2025 emissions target (reducing emissions 26 to 28 percent below 2005 levels by 2025) should therefore focus more on achieving emissions reductions from these cost-effective actions, and less on emissions reductions from other sources, such as the industrial sector.
In fact, a recent analysis by the non-partisan Resources for the Future (RFF) shows that the United States can meet its 2025 target with relatively modest emissions reductions from a growing industrial sector. The organization applied a carbon tax across all sectors at the level needed to achieve the country’s economy-wide target in 2025, and found that emissions reductions came disproportionately from electricity and transportation. Emissions from industry decreased by 14 percent between 2005 and 2025.
By contrast, the Chamber Energy Institute focuses on one scenario from the NERA study in which the industrial sector is forced to achieve emissions reductions of nearly 40 percent between 2005 and 2025. Achieving the economy-wide target by disproportionately focusing on industrial sector emissions reductions means ignoring cost-effective opportunities to reduce emissions in other sectors.
The Chamber Energy Institute’s claims are akin to chartering a helicopter for your morning commute and then complaining about how expensive it is to get to work.
2. The full NERA study shows that the United States can achieve its 2025 targets at a relatively low cost.
While the article by the Chamber Energy Institute focuses on one scenario from the NERA study, the full study also includes an alternative pathway to achieving the U.S. 2025 target that combines regulatory measures with a national carbon market. In contrast to the scenario described above that mandates in which sectors emissions reductions must occur, a carbon market encourages emissions reductions to take place whenever and wherever they can be achieved most cost-effectively.
Not surprisingly, NERA shows far superior economic outcomes for this scenario, with U.S. GDP decreasing by half of one percentage point compared to a no-policy scenario in 2025. That’s equivalent to a change in the GDP growth rate from 2.5 percent percent to 2.44 percent per year. If NERA had assumed a more productive use of revenue from the carbon price, and had not assumed a considerable slowdown in clean energy innovation (see point #3 below), economic outcomes could improve further. Most importantly, costs of this magnitude pale in comparison with the potential costs of inaction on climate change.
3. The NERA study assumes that innovation in clean energy slows considerably, which makes climate action appear artificially costly, particularly for 2040 results.
The pace of clean energy innovation is highly influential in determining the costs of climate action, because the shift away from fossil fuels becomes less expensive as the costs of low-carbon technologies fall. The past decade has seen dramatic advances in clean technologies, including reductions in solar energy costs of more than 10 percent per year. Strong action on climate change would create additional incentives for innovation as investors gain confidence in the future profitability of low-carbon solutions.
Yet the NERA study fails to account for a realistic pace of clean energy innovation. A recent Department of Energy (DOE) analysis showed decarbonization pathways for three levels of technological progress: two cases with plausible levels of innovation, and a third case with minimal innovation that, according to DOE, “may underestimate advances” but “provides a useful baseline…” All of NERA’s scenarios use only the lower innovation case, assuming only minimal advancements in existing clean technologies over the upcoming decades. NERA also rules out the emergence of new technologies like carbon capture and storage over the next 23 years because they are not cost competitive today.
NERA’s estimates of 2040 economic impacts apply only to a future in which businesses, entrepreneurs and scientists fail to innovate over the coming decades. If, instead, innovation continues at its recent pace or accelerates due to the additional incentives for clean energy innovation in a decarbonizing world, the economic benefits would be far better.