July 1, 2010

Carbon Controls Fail Business Case Study

Cap-and-trade programs are featured in at least two U.S. legislative proposals to reduce carbon emissions, usually by around 80% by 2050 using a 2005 baseline. The benefits that accrue from the immense investment required to reach these goals are nebulous and don’t occur until decades after the investment. Based on my back-of-the-envelope analysis, the cost-benefit ratio of these proposals does not pass a cursory cost-benefit analysis.

I have searched the literature and found little published on cost-benefit analysis of the latest cap-and-trade proposals such as the ill-fated American Clean Energy and Security Act (aka Waxman-Markey). The recently unveiled American Power Act (APA) seems to have more utility executive support than Waxman-Markey but still proposes to reduce CO₂ by 80% over the same period.

Useful Financial Tool

A cost-benefit ratio is a simple financial tool, among many, used by prudent government managers to evaluate the beneficial impacts of environmental policies against project cost for a slate of alternatives. Often the analysis includes aspects of a project that are difficult to quantify, such as quality of life and expected health effects. Similar analyses were made prior to SO₂, NO_x, and other earlier pollutant reduction rulemaking. The results always found that the benefits for society far outweigh the costs.

What is the cost-benefit ratio for the proposed APA cap-and-trade regime? It’s time, as I have on several occasions in this column, to pull out my pen and envelope and run the numbers.