THE POTENTIAL CONSEQUENCES OF PROPOSED CLIMATE CHANGE REGULATION

Authors

Bradley Lubben, University of Nebraska-LincolnFollow
Eric Thompson, University of Nebraska-LincolnFollow

Date of this Version

2011

Citation

THE NEBRASKA ECONOMY: THE POTENTIAL CONSEQUENCES OF PROPOSED CLIMATE CHANGE REGULATION 2011

Comments

Copyright 2011 Lubben & Thompson

Abstract

This report summarizes key economic issues surrounding climate change legislation and regulation and considers potential implications for Nebraska, a state with a large agricultural sector and a focused manufacturing industry. The key findings are listed below.

• While economic theory supports the imposition of taxes or other costs on polluters, effective policy requires the choice of an appropriate tax. Choice of an appropriate tax can be difficult in the case of greenhouse gas emissions because there is uncertainty about the economic costs of these emissions. There are two sources of uncertainty. First, there is uncertainty about the magnitude of the manmade contribution to global warming. Second, there is uncertainty about the extent to which global warming will harm the economy.
• The public may still choose to regulate and reduce greenhouse gas emissions in order to reduce the risk of a severe economic outcome. However, when making such a decision, there is a need to understand the economic cost of climate change legislation or regulation.
• For our analysis, we used the example of two recent climate change bills in the United States House of Representatives (Waxman-Markey) and in the United States Senate (Kerry-Lieberman). Our review of literature and analysis found that these examples of cap and trade legislation would be most likely to lead to an approximate 2% reduction in U.S. GDP by the year 2030 relative to a reference scenario without climate change legislation. Losses in U.S. GDP may be less severe in the decades leading up to 2030, but would remain severe after 2030. The magnitude of the GDP loss could be less if there is a rapid adoption of new nuclear or renewable power capacity.
• Retail electric prices also are expected to rise by 30% to 70% by 2030 under climate change legislation. The manufacturing sector will be especially hard-hit, with a 5% to 7% decline in industrial output and manufacturing employment.
• The economic consequences may be more muted in Nebraska given that the state is less dependent on the type of energy-intensive, internationally competitive manufacturing sectors that are expected to be hardest hit by increases in energy prices. Nebraska also has a large agricultural sector that could be just lightly affected if it is exempted from regulation and would benefit from the opportunity to sell carbon offsets. However, it is uncertain as to whether these conditions would prevail.