Guest blog: The CBO testimony non-story -- and the cost of inaction

Recent testimony by CBO chief Douglas Elmendorf has many environmental groups running for cover, for it claimed that climate legislation could slow economic growth. If we take a deep breath, however, and examine his claims in context, we can see that his comments are not really bad news after all.

First, there was no new analysis imbedded in the testimony. His testimony was based on an earlier CBO model, the results of which had already been released and had been vetted. The CBO results, then and now, are not shocking. The claim that serious climate policy could, at most, cost 1-3% of GDP is consistent with what the Intergovernmental Panel on Climate Change found with regards to its survey of mitigation costs, it is consistent with what Nicholas Stern found in his widely read Stern Review, and it is even consistent with what a recent meta-analysis by Economics for Equity and the Environment
(PDF) found with respect to the costs of achieving a far more ambitious emissions target aimed at 350 ppm atmospheric CO2 levels.

What is surprising about Elmendorf’s testimony is the over-reaction to it. Opponents of climate legislation are no doubt looking for any evidence of costs in order to defeat it, and so they have seized upon his testimony. But those of us who support climate legislation need to do a better job of explaining these costs in context and dispelling the fears that surround them. We can start by reminding everyone that these are estimates of the costs of mitigating climate and do not include any of the benefits. Estimates of the costs of inaction dwarf the 1-3% of GDP that Elmendorf (and others) cite.

The CBO statement doesn't factor in the huge costs associated with NOT fighting climate change. A recent study indicates that in less than 20 years the costs incurred by hurricane damages, real estate losses, energy-sector costs, and water costs caused by climate change will total approximately $271 billion dollars. CBO Director Douglas Elmendorf noted in his testimony that many economists believe the right response is to have some real insurance against the catastrophic costs associated with climate change.

Compared to the costs of inaction, even the most pessimistic estimates of the cost of preventing climate change amount to small change. This is why most economists will agree that spending 1-3% of global output is a reasonable premium to pay to insure our children against climate damages. As a nation we already spend more on insurance to protect ourselves from other calamities.

We can also clarify what these costs actually represent in terms of diminished living standards and incomes.As it turns out – not much at all. For example, let’s assume that the costs of climate protection turn out to be 2.5 percent of GDP. For an economy like ours that grows at 2.5% a year (in a good year), spending 2.5% of GDP on climate protection each year would be equivalent to skipping one year’s growth, and then resuming. Can anyone really identify a noticeable change in our standard of living from one year to the next? Put another way, if the costs were 2.5% of GDP, Americans in 2050 would have to wait one additional year, until 2051, to be as rich as they otherwise would have been had they not been steadily investing in the transition to clean energy. Lastly, we can point out that on the strength of a different narrative about threats to our well-being, we already divert more from consumption (4% of GDP) to pay for our military. And very few would argue that we should completely abandon military spending because it negatively impacts US living standards.

The bad news on the climate front is not that the costs of solving the climate problem are becoming too expensive; the bad news is that the costs of inaction are becoming unbearable. The good news is that estimates of the costs of preventing climate change have stayed relatively stable. Elmendorf’s testimony reminds us that this is still a crisis we can still afford to solve.

Guest blogger Kristen Sheeran is the director of the Economics for Equity and the Environment Network (E3). -- Luis