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Net benefits of the Clean Power Plan: The truth is out there

From the inbox (From: "The Hill" <newsletters@thehill.com>):

NEW COAL INDUSTRY REPORT SLAMS CLIMATE RULE: A new report commissioned by the coal industry says Obama's new climate rule for power plants will raise electricity prices in each state where it applies.

The report, completed by Nera Economic Consulting and commissioned by the American Coalition for Clean Coal Electricity, says the rule's costs will approach $300 billion without helping the climate. 

"This analysis makes it abundantly clear the president's power plan will result in higher electricity prices and delivers a sharp wake-up call to states and consumers," Mike Duncan, the group's president, said in a statement.

The Monday report is only the latest in harsh criticisms of the rule by the coal industry, which stands to lose greatly from its implementation.

It contrasts with the Environmental Protection Agency's analysis, which found that the benefits in energy efficiency, climate protection and health would far outweigh the costs.

Documentation released with the final rule estimated a cost of up to $8.4 billion and a benefit of up to $54 billion.

Comparing the numbers, NERA finds that the net benefits are negative $300 billion. The EPA finds that the net benefits are positive $45.6 billion. That is a big difference.

I've seen an EPA produced benefit-cost analysis that shows virtually zero net benefits (the smog rule) but I've never seen a coal industry funded benefit-cost analysis that found anything other than something that supported digging up coal (if you know of any counter examples, please let me know). I hate to be a jerk without reading the NERA report, but I suspect that NERA's analysis may be guilty of "confirmation" and/or "allegiance" biases (Ioannidis, John, and Chris Doucouliagos. "What's to know about the credibility of empirical economics?" Journal of Economic Surveys 27, no. 5 (2013): 997-1004.).

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  1. jroumasset Avatar
    jroumasset

    This might be one of the reasons for the difference:
    http://www.brookings.edu/research/papers/2014/06/04-determining-proper-scope-climate-change-benefits-gayer

    Reply
  2. libert Avatar
    libert

    On the contrary, NERA’s analysis seems to suggest that the CPP passes any reasonable cost benefit analysis (CBA).
    In particular, NERA finds NPV costs of $64 to $79 billion for the period 2022-2033 (see page 5 of http://www.americaspower.org/sites/default/files/NERA%20CPP%20Final%20Nov%207.pdf), while finding that annual average emissions will fall by at least 425 million tons per year in that time frame.
    Let us take the upper estimate of cots ($79b) and lower estimate of emissions impact (425 million tons). Let us further suppose all of those emission reductions occur at the end of the window, in 2033 so that so that the benefits are discounted as much as possible. Then 2033 emissions fall by 12425=5100 million tons. Then for a social cost of carbon of x per ton (in 2016 dollars), the NPV of benefits is x(5.1 billion tons)/((1.05^17
    )). The 17 is because 2033 is 17 years beyond the 2016 NPV year in NERA’s analysis and the 1.05 is because NERA assumes a 5% discount rate (sources: footnotes on page 6 of NERA).
    What level of the SCC would justify the policy using the high-end costs ($79b) and low-end benefits (5.1 b tons in 17 years)?
    NPV(Costs) < NPV(Benefits)
    $79b < x5.1b/(1.05^17)
    Or
    x > ($79b/5.1b)    1.05^15 = $35.5. This upper-bound is still below the majority of estimates of the SCC (http://news.stanford.edu/news/2015/january/emissions-social-costs-011215.html).
    Thus, NERA’s analysis suggests that in the worse-cast scenario the CPP nonetheless passes a cost-benefit analysis.

    Reply
  3. libert Avatar
    libert

    Note: the $300 billion figure comes from the point where the NERA report claims that “energy sector expenditures” will increase by $300 billion, which is obviously not a welfare effect because it (a) ignores offsetting changes in other sectors and (b) counts transfer payments as costs.
    For welfare, NERA cites as $64-$79 billion change in “losses to U.S. consumers”. This is closer to a welfare measure, but omits environmental benefits as well as effects on non-US consumers, and is therefore still an overstatement of costs.

    Reply
  4. John Whitehead Avatar
    John Whitehead

    Nevermind, I think I found the PPT via the website.

    Reply
  5. John Whitehead Avatar
    John Whitehead

    The lower end of Gayer/Viscusi benefit estimates match up with the $0 benefits from NERA. But, there is still a large difference in costs.

    Reply
  6. jroumasset Avatar
    jroumasset

    Stavins has another interesting take at http://www.huffingtonpost.com/robert-stavins/what-are-the-benefits-and_b_5656483.html
    The proposed EPA rule fails on cost vs. domestic carbon benefits, but benefits greatly exceed costs once you include domestic health benefits (esp. from particulate emissions). He also notes that succeeding on B/C grounds doesn’t make the rule optimal.

    Reply

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