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Keeping Score: Questions about CBO’s ACES Scoring

June 9th, 2009 · No Comments

Last Friday, the Congressional Budget Office (CBO) release their financial “scoring” of the draft Waxman-Markey American Clean Energy and Security (ACES) Act (note: pdf). CBO’s analysis projects, through its first decade, that the Federal Government will bring in $845.6 billion in revenue with $821.2 billion in additional expenditures, meaning that the US Treasury would see a net inflow of $24.4 billion (or about $2.44 billion per year).

Reading through the CBO scoring, there seem to be a range of inadequacies and gaps, in some cases quite straightforward and others quite complex. While the CBO operates under some rule sets that can lead to counter-intuitive results, some quite significant impacts of W-M ACES seem to have been left out of the analysis.

These are questions, perhaps due to a misread of the CBO work and perhaps due to expecting too much from a quick effort to deal with a very (VERY) complex set of interacting issues in “scoring” ACES.

Straightforward: Could the Cost of Federal Gov’t Doing Business go up?

The CBO does not seem to have considered the possibility (actually, fact) that Federal government operations will go up in cost with increased electricity and fuel costs.

Even if partially sheltered from cost impacts, there will be costs to Federal operations. The US military uses roughly 330,000 barrels / day of oil — largest single consumer in the globe. For every $1 barrel of fuel cost impacts, that is $120 million in additional costs per annum. That is, $120 million per year at a $1 per barrel impact just for the US military use of fuel. What will impact be, a decade, out on the price of a barrel of oil? $10 barrel? $20? $0?

In addition to the direct energy and fuel costs, the US government acquires things (from concrete for roads to steel for ships to …) that have high energy content. There will be cost impacts for these goods if, as projected, there will be a carbon cost associated with producing these goods and services. This seems almost certainly to be an impact of $billions, if not $10s of billions, each year. (Somewhat simplistic discussion, but as way of thinking, if Federal government is roughy 20% of economy and W-M allocations value would be $100 billion/year, would there be $20 billion/year in increased costs for Federal operations — both in terms of direct and indirect spending impacts?)

Looking at ACES in this way would have flipped the situation from the black to the red.

Yet, a more complex look might have it back in the black.

On the other hand, just to point to the complexity of this, there is the potential for actual reductions in the cost of doing business. Due to energy efficiency driving down total usage levels, the actual unit price of energy could actual fall by more than the increase due to carbon prices. This is a rarely calculated item in costing out government programs. For example, in the discussions of the recent deal to increase new vehicle fuel efficiency have simply left aside the reality that the reduced oil demand will contribute to reducing the price (or, in another fashion, moderating the price increases) of oil. That reduced price might, in fact, lead to even more cost savings for society than totaling the direct fuel savings benefit for the individual driver. A similar potential exists for Waxman-Markey, especially due to its strongest element: the driving of more serious energy efficiency standards through much of the economy.

Thus, if looking at solely the carbon cost as an additive on the cost of fossil fuel, the CBO should have scored (imo) the increased costs to government operations. If able to do a more complex, systems-of-systems look at secondary impacts, reduced demand (oil, coal, natural gas) could lead to price moderation that would offset any implications of that carbon bill.

Base auction price and federal treasuries

For pollution permits auctioned off by the US government (beginning at 15% of the total and then increasing in percentage), ACES sets a minimum price. And, that price is set to increase at the rate of inflation plus five percent. The logic: reduced polluting because polluting will be more expensive tomorrow than today … indefinitely. And, this encourages more serious pollution reduction investments because items ‘too expensive’ in the face of the early pollution permit costs will be cost-effective due to the power of compounding interest (5% per year + inflation guarantees that the base price will have a 100% real return over 14 years, minimum).

The placement of a minimum price, with a guarantee price increase of inflation plus 5%, creates a new financial vehicle in the US market. The US “I Bonds” are, right now, being sold for a rate of inflation + 5%. US 10 year treasury bonds are trading at about 3.88% (with no inflation factor) as of just a short time ago. The minimum price in the auction, with the inflation adjustment plus five percent, suggests that at least some share of investors will chose to move money into carbon permits rather than US treasury bonds. By simple definition, this financial vehicle will reduce demand for US treasury bonds and, seems likely, municipal and even private bonds. That reduced demand, by definition, will drive lower auction prices for bond sales and thus create higher interest rates.

This is a complicated set of calculations, with a range of somewhat known elements (annual US treasury bond sales), somewhat unclear elements (overall bond market, size of carbon allocations that could actually end up in a financial derivatives market space, traders’ confidence / belief of value of these permits, etc …), and rather unknown (just how successful will the reductions be and what will the actual trading price range be, …). Even with these complexities, there is no legitimate economic calculation that would leave this at a zero dollar implication for the US treasury. My ‘back of the envelope’ (with having talked to several economists) is that the impact could be on the range of $5-10 billion / year several years into the program due to higher interest payments on the US debt. (But the confidence range is quite broad: impact could be an order of magnitude+ lower or several times (unlikely order of magnitude) higher. It is hard to see how this ends up as increasing the price (lower the interest rate) on federal bonds, but perhaps that “hard to see” simply reflects a lack of imagination.)

Positive impacts

Lets highlight, for a moment, that so many of the “financial valuing” of action on energy efficiency, clean energy, and general climate change mitigation leave out off the table the most important elements.

For example, in this case the CBO does not seem to have scored any form of actual benefit from the programs, such as the potential that clean energy / energy efficiency investments would spark exports / employment / tax revenue.

In a far more complicated caculation / consideration, what is the possibility that reduced pollution will contribute to improve health and reduced (or moderated growth of) federal health care expenditures?

Nor is there any value associated with muting (mitigating) climate change impacts and the use of adaptation resources for preventive action that will mute the costs of disaster/emergency response.

These “positives” are even tougher calculations than bond impact but are at the core of “value” from climate legislation. And, these positives likely overwhelm any “costs” of serious energy and climate action.

Continuing to scratch the head

The CBO’s scoring provides a complex picture of ACES, ending up with a result showing that it is likely to have a (small) positive impact on the federal budget. On examination, however, the CBO’s scoring might merit a score of “incomplete” as quite important arenas with financial implications for the Federal budget seem left out of their scoring process.

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Tags: analysis · cap and trade · Congress · emissions · environmental · Global Warming