Pass the Cost/Benefit Test to Determine if the Price is Right

This week, National Journal posed the question about determining the right price for energy, whether it’s powering your car or house or weighing diverse issues like the renewable-fuel standard and forthcoming regulations controlling greenhouse-gas emissions from electric power plants.

My thoughts: cost/Benefit analysis should be the test by which policymakers craft sound energy policies.  Regulating GHGs through the Clean Air Act fails that standard. As I noted in my testimony before the Senate EPW Subcommittee on Clean Energy and Nuclear Safety, “In sharp contrast to EPA’s $2 trillion estimate of the ‘economic value’ of the CAAA, EPA’s own simulations with its macroeconomic model show that the CAAA has significant negative impacts on U.S. GDP growth over the 2010- 2020 period GDP declines by $79 billion in 2010 and by $110 billion in 2020 relative to the baseline forecast. In other words, the already implemented CAAA regulations have real, quantifiable costs to the economy.”

 Also failing the cost/benefit test is the use of tax credits and subsidies to promote the use of renewable and alternative energy in the U.S. This misguided policy adds costs to business, households and the government without delivering commensurate economic or environmental benefits. Data from DOE’s EIA show that new electric generating capacity using wind and solar power tends to be considerably more expensive than conventional, available and secure natural gas and coal resources. In 2012, an 81% of the $16.6 billion in federal tax incentives went to renewables for energy efficiency, conservation and for alternative technology vehicles.  Conversely, only 19% went to fossil fuels according to the Congressional Research Service (CRS). The tax credit structure is so lopsided that some renewable electricity sources enjoy negative tax rates: solar thermal’s effective tax rate is -245% and wind power’s is -164%.

Environmental regulations and policy guidelines such as the Social Cost of Carbon, the Renewable Fuel Standard and the regulation of GHGs under the Clean Air Act can raise the hurdle rate for new investment and slow new development and job growth just as can taxes. All regulations should be subject to a transparent cost/benefit analysis with broad stakeholder involvement and the market should determine energy prices.

Margo Thorning

Dr. Margo Thorning has frequently testified as an expert witness on capital formation, tax, energy and environmental policies before multiple U.S. congressional committees. She has also traveled coast to coast to present findings to state and local lawmakers, business organizations and the media on the economic impact of climate change policies on local job and economic growth.

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