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Carbon Pricing Alarmists Disproven by the Reality of RGGI

Posted on 12 June 2012 by dana1981

A little over a year ago we reported on the success of the the Regional Greenhouse Gas Initiative (RGGI), which is a carbon cap and trade system implemented by ten northeastern states in the USA (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont; New Jersey has since dropped out) which set the goal of reducing their carbon dioxide (CO2) emissions from the power sector by 10% by 2018.

Through the first two years of the system, the ten states had generated $789 million through the auctioning and direct sale of CO2 emissions allowances.  Each state developed its own plan for investing those funds, but overall, 52% was used for energy efficiency programs, 14% for energy bill payment assistance, including assistance to low-income ratepayers, and 11% to accelerate deployment of renewable energy technologies.  New York, New Hampshire, and New Jersey also diverted some of the funds to reduce their state budget deficits.

A year later, we have another RGGI update.  The states have far exceeded their emissions reduction target, with a 23% overall reduction in 2009-2011 power plant CO2 emissions as compared to the 2006-2008 average, already achieving more than twice the emissions reduction goal, six years ahead of schedule.  Low natural gas prices have helped the power plants transition away from coal combustion, thus helping them surpass the RGGI targets.  RGGI states have also cut emissions at a rate approximately 20% faster than non-RGGI states.

But at What Cost?

However, when I attended Christopher Monckton's presentation to California policymakers in my hometown, I was assured that carbon cap and trade systems would absolutely cripple the economy.  Monckton told the audience that California's cap and trade system (whch to be fair, is more ambitious than RGGI) would cost the state hundreds of billions of dollars and drive businesses and jobs out of California.

The Koch-funded Americans for Prosperity similarly claimed that RGGI would lead to "higher taxes, lost jobs, and less freedom" in addition to a doubling of electric rates.

This is in fact the standard contrarian argument against carbon pricing systems - that they will cripple the economy, drive up electric rates, and scare businesses away.  If this argument is true, then more than three years after RGGI implementation, surely we should have seen these effects in play, with plummeting gross state product (GSP - the state equivalent of gross domestic product) and skyrocketing unemployment and electricity prices in the RGGI states.  So, how does the contrarian argument stack up against reality?

RGGI State Economies Fare Better than the National Average

One tricky aspect in evaluating the economic impact of the RGGI system is that it was implemented right at the start of the current major economic recession, in 2008-2009.  Thus GSP has fallen and unemployment has indeed risen in the RGGI states, but it has also risen all across the United States.  The easiest way to try and take the effects of the economic recession into account is to compare the average GSP and unemployment changes in the RGGI states vs. the average changes nationwide.

Table 1 examines unemployment data, Table 2 examines GSP, and Table 3 examines electricity rates for the RGGI states vs. the national average.

Table 1: January 2008 and December 2011 unemployment statistics.  Data from U.S Department of Commerce Bureau of Economic Analysis

State 2008
Unemployment
2011
Unemployment
Change
Connecticut 5% 7.6% 2.6%
Delaware 4% 7% 3.0%
Maine 5% 7% 2.0%
Maryland 4% 6.5% 2.5%
Massachusetts 5% 6.5% 1.5%
New Hampshire 4% 5% 1.0%
New York 5% 8% 3.0%
Rhode Island 6% 10.7% 4.7%
Vermont 4% 5% 1.0%
RGGI Avg 4.7% 7.2% 2.5%
USA Avg 5% 8.3% 3.3%

Table 2:  Average percent annual GSP growth from 1997 to 2007 (pre-RGGI and recession) and 2008-2011 (post-RGGI and recession).  Data from U.S. Bureau of Labor Statistics and available for plotting at Google Public Data.

State 1997-2007
GSP Growth
2008-2011
GSP Growth
Change
Connecticut 4.6% 1.8% -2.8%
Delaware 5.6% 4.4% -1.2%
Maine 4.7% 1.3% -3.4%
Maryland 5.8% 2.4% -3.4%
Massachusetts 4.3% 2.9% -1.4%
New Hampshire 4.5% 2.9% -1.6%
New York 4.7% 2.6% -1.6%
Rhode Island 5.4% 2.0% -3.4%
Vermont 4.7% 2.2% -2.5%
RGGI Avg 4.9% 2.5% -2.4%
USA Avg 5.1% 2.1% -3.0%

Table 3: Electricity rates (total price), average for 2005-2007 (pre RGGI) and 2008-2011 (post-RGGI).  Data from the U.S. Energy Information Administration.

State 2005-2007
Electricity Rates
(cents/kWh)
2008-2011
Electricity Rates
(cents/kWh)
Change
(cents/kWh)
Connecticut 14.5 17.4 2.9 (20%)
Delaware 9.8 12.0 2.2 (22%)
Maine 12.3 13.2 0.9 (7.3%)
Maryland 9.9 12.8 2.9 (29%)
Massachusetts 14.3 15.0 0.7 (4.9%)
New Hampshire 13.5 14.9 1.4 (8.1%)
New York 14.8 16.0 1.2 (8.1%)
Rhode Island 13.0 14.6 1.6 (12%)
Vermont 11.5 13.0 1.5 (13%)
RGGI Avg 12.6 14.3 1.7 (13%)
USA Avg 8.7 9.8 1.1 (13%)

As Tables 1 and 2 show, the RGGI states on average have weathered and begun recovering from the economic recession better and faster than the national average in terms of both GSP and unemployment.  In fact, the only RGGI state to fare worse than the national average in terms of unemployment is Rhode Island, and only Rhode Island, Maine, and Maryland have experienced larger GSP declines than the national average over the past three years.  67% of RGGI states have beat the national average in terms of GSP, and 89% have done better in terms of employment.

Table 3 shows that while there is a fairly wide variation between the various RGGI states, on average their electricity rates have not risen faster than the national average over the past three years.  In fact, the rates in only three of the nine RGGI states rose faster than the national average over this period.

There certainly has not been the predicted plummeting GSP or skyrocketing electricity prices or businesses and jobs fleeing the states participating in this carbon pricing system.  This real-world example shows that claims that carbon pricing systems will cripple the economy are unfounded alarmism.  In reality they are an economically effective way of reducing greenhouse gas emissions.

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Comments

Comments 1 to 22:

  1. I think the important thing we can take from this is that these data aren't enough to say whether the policy cost x% or had benefits of x%.

    the alarmist claims about demolishing economies are obviously far wrong.
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  2. In the US the fossil fuel lobby has been saying that any climate action would be too expensive and ruin the economy.

    Since the US was recently around 20 tons CO2 per person and European nations around 10 tons (France ~6 and UK ~10 iirc?) the argument from the lobbyists is basically 'America is so incompetent compared to Europe that if we gave ourselves 30 years to match what they're already doing, it would destroy America!'

    Which is ridiculous, America isn't the useless incompetent country that the lobbyists are trying to persuade the people & politicians it is. I'm surprised the American people aren't more insulted.
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  3. MarkR, I think I can safely say that most of the American people aren't paying enough attention to be insulted.

    Last year the GOP came out with a bit about half of all Americans paying no taxes (really income taxes, but they always seem to forget to include that word). It was a big deal with angry rants on major 'news' programs. I felt horribly embarrassed for the retirees brought on the shows to denounce these "filthy leeches"... not realizing that they constituted the majority of the people in question (i.e. they're retired... they have no income... ergo no income tax).

    The vast majority of Americans have no idea what is going on and just accept whatever their chosen party tells them... even when that is directly at odds with what the party was telling them last year.

    Thus, the fact that reality proves the 'carbon pricing will destroy the economy' claims to be complete nonsense doesn't really matter. A good deal of what the people who believe that hold to be true is complete nonsense. They aren't about to change now.
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  4. CB Dunkerson:

    In the US, retirement income, including social security, is subject to federal and state income taxes.

    In the US, the majority of adults do not belong to a political party.
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  5. John, technically yes... but in reality most retirees pay no income tax because the deductions are greater than the tax which would be due. The exceptions are usually cases where some other form of income is still coming in. Also, most states do not subject social security returns to income tax.
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  6. MarkR @1 - yes we certainly can't tease out the exact effects of the carbon pricing system on the RGGI states' economies. However, as noted in the post, the contrarians like Monckton and the Koch brothers have said that these types of systems will spell doom for the economies of whatever states and countries implement them. That is pure alarmism, as RGGI demonstrates.

    Of course as with all climate myths, the fact that it is disproven by reality won't stop the contrarians from continuing to make the argument.
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  7. Remember here in British Columbia we have had a carbon tax for the past several years. And if the economy was destroyed, I haven't noticed.

    I even write an article about it here as sks.
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  8. Dan Moutal its been over a year since your article - is an update in order?

    Using individual states and regions as a test case for the concept makes sense, and now that the data is coming in, at a minimum it proves the ideas work, and seem to provide some evidence for the case I have been making - the non-monetized benefits of renewables exceed any nominal cost, and indeed, renewables are, even at face value, cheaper than fossil alternatives.
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    Moderator Response: [DB] Changed ALL-CAPS to bold per Comments Policy.
  9. I'd like to see an update on how BC is doing with their carbon tax. The timing was about the same as the RGGI implementation.
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  10. Oh, boy. Be on the lookout for deniers cherrypicking data on this one. Delawarre and Maryland saw electricity bills increased by 22% and 29%. Also Rhode Island's unemployment rate increased by 4,7%, much more than the US average.
    Plenty of room for cherries.
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  11. @ actually thoughtful

    The update is that not much has changed. This year will see the last legislated increase in the rate of the carbon tax. The current political mode (in which the governing Liberals who introduced the tax find themselves in trouble for reasons unrelated to the tax) means that the tax will stay at its current level of $30/tonne for the foreseeable future. Or at least until the next election in 2013; one new political party has vowed to kill the tax if they get elected and there is a chance that might happen.

    As for what the tax has achieved, that is harder to say. The last BC GHG inventory only has data for 2009 and earlier. The next report to be released some time in 2012 will cover emissions from 1990-2010. The inventory report does show a slight drop but that could easily be due to the global recession.

    On the plus side BC's gasoline consumption has dropped by three per cent compared to the rest of Canada. This could reasonably be attributed to the carbon tax

    But like I said in the original article the tax is still too small to have any real effect on emissions, but there is only so much a single jurisdictional can do to price carbon before it begins to export industries that have high emissions (which doesn't do anything to lower global emissions).

    What the BC carbon tax has demonstrated is that properly designed and implemented revenue neutral carbon tax doesn't in fact hurt the economy, despite what some critics would have you believe.
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  12. I'd also point out that Norway has had a carbon tax since 1991.

    Apparently it's made a difference relative to business as usual, of up to ~10%. But its emissions still increased: this could be due to sheer wealth or due to the parts of the economy that aren't included.

    Norwegian GDP has increased ~200% since the carbon tax was introduced.
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  13. So the Monckton 'Misinformation' tour pops up in yet another part of the world. I wonder how many of his adoring fans notice what an exciting life he leads and thus how unlikely it is that he would change his mind, and thus have to give that up, no matter how blatant the facts were that he was wrong.

    For my part, seeing as he cannot answer Peter Hadfield's points in his debate on WUWT, I suspect that he knows full well that he is wrong and is deliberately not going to put his good life at risk by being forced into admitting it. Seeing as Climate Change will harm his country, I wonder where that leaves him with the authorities seeing as he clearly does not want any action to combat it. In the U.K. had a banker who was so well respected that he was knighted, but then made one mistake and was subsequently stripped of his title. Why Monckton is still a peer is a mystery to me. Though why he was made a peer in first place is an even bigger one. We do live in the 21st century, after all and hereditary peerages should surely be a thing of the dim, distant past.
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  14. funglestrumpet @13 - to be fair, the 'carbon pricing will destroy the economy' myth was pervasive before Monckton took it up. I do agree it's rather ridiculous that anybody still takes Monckton seriously on climate issues, but he's only one of many propagating this particular myth.
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  15. Unlike the RGGI, the Australian Carbon Tax ($23/tonne) is far more pervasive, affecting all parts of the economy and comes into effect on 1 July, 2012.

    The relevant legislation was strenuously opposed by the Liberal-Country Party Opposition Leader, Tony Abbott. every step of the way. Its application continues to be bitterly opposed by him and his Party with dire warnings of economic doom, loss of export markets, food prices escalating, entire towns being wiped off the map, industries closing, mass unemployment, the nation being driven into poverty.

    Unprecedented drivel coming from a supposedly responsible politician who aspires to become Australia’s next Prime Minister. The present Prime Minister, Julia Gillard, is of course rubbing her hands with glee, knowing full well that none of these outcomes will result from introduction of the carbon tax, a tax which is levied on the 500 or so largest GHG emitters, not on individuals.

    The Australian price on carbon is much higher than that levied by other countries and, unlike the RGGI has far wider coverage and applies nation-wide, so it will be the one to watch over the next year or so. Its effects on the economy are predicted to be zilch and that being the case, we may see Tony Abbott loose his position as Opposition Leader and prospective Prime Minister. Where global warming and its effects are concerned, Abbott makes the Tea Party look moderate!
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  16. @funglestrumpet: This sort of thing is why the skeptics claim that they are being silenced; because people such as yourself are actively wishing for them to be silenced, and others who happen to be in higher places are [snip]!

    if they're wrong, they don't need to be silenced, just shown to be wrong.
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    Moderator Response: TC: All caps snipped. Please review the comments policy and ensure your posts comply with it to avoid moderation.
  17. I would not be such an opponent of the carbon trading schemes if [snipped accusations of dishonesty]
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    Moderator Response: TC: Posting at Skeptical Science is a privilege, not a right. Please review the comments policy and ensure your posts comply so the privilege is not withdrawn.
  18. This post is missing a critical piece of information.

    It states:

    The [RGGI] states have far exceeded their emissions reduction target, with a 23% overall reduction in 2009-2011 power plant CO2 emissions as compared to the 2006-2008

    How does that compare to the non-RGGI states, whose emissions have also reduced? Without that context, the above isn't all that meaningful.
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  19. Tristan - it's not easy to find state-by-state CO2 emissions data. However, that's not really the point of the post. The point of the post is to debunk the myth that carbon pricing will cripple the economy. Obviously the RGGI carbon pricing system has not.
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  20. "How does that compare to the non-RGGI states, whose emissions have also reduced?"

    Well these two items are showing the RGGI states reducing CO2 emissions 20% faster than the other states. Not only that, they're increasing GDP faster as well.

    Much happiness all round.
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  21. Thanks adelady, that's useful information.
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  22. Thank you very much Adelady :)
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