Critique of the CRA Analysis of Lieberman-McCain Climate Stewardship Act (S.139)

Critique of the Charles River Associates Cost Projections of S.139 (as offered in 10/03)

On Wednesday morning, October 29, 2003, Tech Central Station released a Charles River Associates (CRA) analysis purported to analyze the version of the Lieberman-McCain Climate Stewardship Act (S. 139) to be voted on by the Senate on October 30. The CRA analysis has neither gone through peer review nor been revised after comment and debate. Among the most dubious aspects of the CRA analysis is that it projects a price per ton of greenhouse gas (GHG) emissions similar to that projected by the MIT model¹ while projecting a much higher impact on GDP and household consumption.

This is in part because CRA has not actually modeled the bill as it is being offered today. In particular:

The CRA results are largely driven by an assumed hike in personal income taxes not included in the bill.

The CRA model does not include reductions of the five GHGs besides carbon dioxide covered by the bill² which offer low-cost reduction opportunities.

In addition, the CRA analysis incorporates assumptions that further skew its cost estimates upwards.

The CRA analysis assumes, as the business-as-usual baseline, massive growth over the next 70 years in carbon-intensive fuels and activities. This extrapolation exaggerates the reductions needed to meet the long-term targets imposed by their analysis.
The CRA analysis assumes that long-term technological change will be limited, ignoring U.S. industry’s long history of innovation in meeting major policy goals, whether related to defense, health, energy or environmental protection.

The CRA analysis assumes that the lower economic growth they project will lead to reduced tax revenue and result in other taxes being raised. But increasing personal income tax leads to greater distortions in the economy, resulting in a vicious cycle: the more the price of energy goes up, the less is consumed, so the personal tax burden is further increased, so less energy is consumed, etc.

Without assumptions that are not reflective of the bill as written, CRA’s results become more comparable to MIT’s results³. In CRA’s words, “When all three of these changes [foresight, future policy assumptions, and tax distortions] are combined, we are able to project consumption losses in the range of less than 0.06% or less than $70 per household per year.”

¹ CRA projects carbon prices of $27/TC ($7/TCO₂) in 2010 and $44/TC in 2020 ($12/TCO₂), compared to $31/TC and $52/TC in the MIT study.
http://web.mit.edu/globalchange/www/abstracts.html#a97 [1]
² The six greenhouse gases addressed by S.139 are carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF₆).
³ MIT projects a 0.02% effect on consumption at an annual cost of roughly $15 per household.