A large body of academic studies suggest climate change policies have had only a very small impact on competitiveness
Posted on 7 Jun 2017 in Commentary
In his speech last week, President Trump claimed that the Paris Agreement on climate change “disadvantages the United States to the exclusive benefit of other countries, leaving American workers…and taxpayers to absorb the cost in terms of lost jobs, lower wages, shuttered factories, and vastly diminished economic production”.
But what are the likely impacts on the economy of the United States of abiding by the Paris Agreement? We recently reviewed the vast economic literature that looks at the evidence on the link between environmental policy and competitiveness. There is no denying that economic activity of some of the most polluting sectors will be hit in the cleaning up process. Yet contrary to the one misleading study quoted by President Trump, decades of research, including multiple studies based on data from the United States, have found that the cost burdens of environmental policies are very small, and narrowly focused on a small number of pollution-intensive sectors. Moreover, these are necessary costs which pay off in the long term, as the societal benefits of transitioning to cleaner industrial production far outweigh the costs.
For example, a recent study simulated the impacts of increased energy prices in the United States from a carbon price of $15 per short ton of carbon-dioxide-equivalent ($15/tCO2e), which is in line with expectations under various current and proposed emissions trading and carbon tax measures (for example the carbon price in California’s Cap-and-Trade Program has been around $12/tCO2e and a recent OECD report shows that the implicit price of carbon emissions in the United States is around $20/tCO2e in the transportation sector and $1/tCO2e in all other sectors). The study shows that a carbon price of $15/tCO2e for industry sectors including iron and steel, chemicals, paper, aluminium, cement, and bulk glass, results in only small increases in net imports to the United States, of 0.1-0.8%, not the drastic reduction in production that President Trump alleged in his speech.
Another study estimated that the output of companies in energy- and trade-intensive industries based in the United States and exposed to global competition would decline about 0.5-1.5% percent over the long run under a carbon price of $15/tCO2e. The study also found that the reduction in profits is substantially smaller in cases where firms can adjust output prices, and offsetting policies such as output-based rebates further reduce output and profit losses. To put things into perspective, energy-intensive industries represent around 3% of the GDP of the United States, so the temporary losses associated with a 1% decline in economic production in is of the order of magnitude of billions .
Even a carbon price that would enable the United States to far exceed emissions cuts pledged in its nationally determined contribution to the Paris Agreement would have a much smaller economic impact than President Trump contended. A bill launched by Senators Sheldon Whitehouse and Brian Schatz in 2015 proposed a carbon tax of $45/tCO2e in 2016 which would increase by 2 per cent per year to around $50/tCO2e by 2025. Modelling of this price showed that, by 2025, annual emissions of greenhouse gases in the United States would have reduced by 55% relative to 2005, considerably exceeding the 26 – 28% by 2025 compared to 2005 that was pledged in the nationally determined contribution. The expected cost of this carbon price to the economy (taking into account the modelled decline in energy-intensive industries and the proportion of GDP they represent) would still be of the magnitude of billions of dollars, not trillions.
President Trump’s assertions that the Paris Agreement would result in significant job losses in industry in the United States is also not backed up by the academic literature. The effects of high energy prices and environmental regulation on industrial employment have been found to be small and weakly statistically significant on average. A study (using data from between 1998 and 2009) found that implementing a $15/t CO2e price would likely lead to some employment loss in states with carbon-based electricity and higher shares in energy-intensive manufacturing jobs, such as Ohio, whereas only small effects on jobs would be felt in states such as California.
Moreover, a study of the employment effects of Phase I of the Title IV cap-and-trade program to cut sulphur dioxide emissions from fossil-fuel-fired power stations under the 1990 Clean Air Act Amendments showed that the impact of environmental regulations on employment are temporary – compared to unregulated companies, the regulated companies experienced a fall in employment but only in the first year of compliance.
Thus, the literature points to small and temporary effects of environmental regulations on competitiveness. Nevertheless, the design of existing environmental policies should take into account and address potentially negative impacts, for example by compensating regulated companies with output-based rebates (e.g. in the California Cap-and-Trade Program which regulates greenhouse gas emissions through a market-based mechanism). The revenues generated from pricing carbon can also be redistributed, allowing the reduction of income tax, for instance. Recent evidence shows that as a consequence, the carbon tax implemented in Canada’s British Columbia generated a 2 percent increase in employment relative to other (free of carbon tax) provinces over the 2007-2013 period.
President Trump’s arguments about competitiveness effects of the Paris Agreement are not supported by the bulk of academic research. There is ample evidence, however, to show that measures, such as carbon pricing, can boost competitiveness by encouraging the development of new low-carbon technologies. For example, an analysis showed that the European Union Emissions Trading System, which obliges 12,000 industrial facilities to purchase allowances to cover greenhouse gas emissions, led companies to file 30% more patents for low-carbon technologies, particularly in renewable energy, energy storage, energy efficiency and carbon sequestration. Adopting policies early can therefore help companies to become global leaders in low-carbon innovation. A report jointly published by the European Patent Office and the United Nations Environment Programme showed that the performance of inventors of low-carbon technologies in the United States has been declining since 1995.
Moreover, preventing pollution can have wider economic benefits for the country. Studies have shown that the benefits of environmental regulations, in particular in terms of improved health, can often vastly outweigh their costs.
Overall, more than 40 years of experience with environmental policy has shown that President Trump is wrong and that cutting pollution can improve both environmental and economic outcomes.