Guest blog: CBS's Declan McCullough flunks ECON 101

From guest blogger Kristen Sheeran, director of the Economics for Equity and the Environment Network (E3). -- Luis

With an assist from the Competitive Enterprise Institute, CBS’s Declan McCullough is trying to scare us, claiming that the Obama administration’s own analysis of the costs of a federal clean energy program predict doom and gloom for American households.

The source of their data is an internal Treasury Department memo drafted ninth months ago, long before the provisions of the current clean energy legislation (ACES) were finalized. The memo estimates that a (hypothetical) cap-and-trade program would generate federal receipts of $100 to $200 billion annually. From this, McCullough performs a smoke and mirrors act and provides his own estimate of the costs of cap-and-trade: $1,761 per household. The fact that this estimate appears nowhere in the actual memo, or that there isn’t a single credible analysis performed by actual economists that arrives at a figure that resembles it, does not phase him. Apparently, even a pundit can be an economist.

I’ve built my career on making economics more accessible to non-economists, and I applaud anyone who makes an earnest attempt to engage what is, no-doubt, a complex subject. But I also spend time grading the college papers of budding new economists, and it is amazing how McCullough’s analysis fails to make the grade at even an introductory level. So, for those who are honestly trying to understand the economics of climate policy, let’s review a few of the basics that McCullough apparently misunderstood:

1. There is an important difference between a “cost” and a “transfer”. The higher prices that come from pricing carbon under a cap-and-trade program transfer money from some to others and do not represent new costs to the economy as a whole.
2. The memo’s hypothetical estimate of $100-$200 billion in federal receipts from cap-and-trade represent a transfer of money from carbon emitters to the public, not a cost to the economy or a tax on American households.
3. The actual net impact of cap-and-trade on households will depend on the specifics of the policy design; namely, how the carbon revenues are distributed.

Luckily, we don’t have to rely on McCullough’s back-of-the envelope calculations of the impacts of hypothetical legislation. Economists at the non-partisan Congressional Budget Office, for example, modeled the impacts of ACES and its provisions for offsetting price increases for households and found that the net benefit to the poorest 20% of households would be $40 per year. The net annual costs to highest income households would be $245.

Isn’t it amazing how different the estimates based on real legislation and real economics can be?