Climate Change Likely to Cost U.S. Economy Billions

Global warming will take a toll on U.S. businesses and consumers whether or not the government acts to curb greenhouse gas emissions. Either federal regulations will raise the costs of doing business or, unchecked, the climate trend will boost prices for health care, food and insurance.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

July 30, 2008

Climate change will cost the U.S. economy billions every year, starting within a decade and increasing over time. The initial impact of likely new government regulations will be modest -- perhaps cutting only a tenth of a percentage point from annual gross domestic growth (GDP) growth. But by 2030, efforts to control climate change will trim about one point per year from growth. That's slightly more than the economic cost of all environmental regulations combined now. The result will be a price tag that is large but manageable.

"What would be expensive would be insisting on large cuts [in greenhouse gas emissions] very rapidly," says Michael Toman, director of the Rand Corporation's Environment, Energy and Economic Development Program. "If we [treat] this as a long-term path on which each step is a measured step but points to dramatic long-term cuts and emissions, we could get to where we want environmentally without an economic train wreck."

Both Sens. Barack Obama and John McCain want to cut greenhouse gas emissions, backing legislation similar to the Lieberman-Warner bill (S. 2191), which is currently stalled in the Senate. At its heart: a cap-and-trade scheme, which would set progressively tighter limits on annual greenhouse gas emissions, paired with saleable credits for companies that voluntarily make even deeper reductions in emissions. To comply, companies could either make the emissions cuts themselves or purchase credits from companies that earn them. In addition, the government would auction off additional credits, using the revenue to help offset any economic pain the caps cause businesses or consumers.

"This is not a commodity market. It's a compliance market," explains Janet Peace, director of markets and business strategy for the Pew Center on Climate Change. "You have to balance off the idea of a completely open market with the idea that you have an end product that's required."

The candidates differ, though, on the degree of reductions needed and on whether industries hard-pressed by competition from overseas should get a pass or at least extra help. Obama wants emissions cut to 80% below 1990 levels, with companies required to purchase any credits they don't earn through their own efforts at decreasing or offsetting emissions. McCain aims at a reduction of 60% below 1990 levels. He proposes to also give some credits to firms already under pressure from foreign competition.

A Democratic Congress makes an OK certain by 2010. Odds are, regs will kick in within six years. But the costs will start climbing before then, as firms make investment decisions based on what's coming.

Hit first and hardest: Coal producers and users. Coal burning power plants will be retired early, and utilities will shift wherever possible to natural gas, nuclear and renewable fuels. Even development of technology to capture and sequester CO2 won't save power plant coal consumption from a 60%-90% drop over two decades. Electric bills will go up for everyone, most steeply for factories and consumers in the East and Midwest, served mainly by coal burning plants. Rates will rise more modestly in the West, with its host of natural gas and hydroelectric plants, and for those areas served by nuclear power.

Also socked especially hard: Metals manufacturers, particularly steel and aluminum producers. In addition to their heavy energy use, such firms are battling competition from lower-cost rivals in China, Japan, South Korea and Russia. That leaves them little room to pass on higher costs to their customers. Firms such as integrated steel mills and primary aluminum producers will lose market share to those that recycle scrap, as recycling uses less energy and produces fewer greenhouse gas emissions. This will likely prompt even greater consolidation in the American steel industry.

Expect a wallop, too, for aviation, even if U.S. climate legislation lets it slide, because the European Union (EU) will include aircraft in its emissions trading scheme. Any U.S. carriers that land at or take off from EU airports will be roped in. The troubled airlines will howl at the extra expense, coming on top of stiff increases in the cost of jet fuel, and will push the next U.S. administration to bring a World Trade Organization case challenging EU regulations. Meanwhile, climate change controls will increase cost pressures on carriers, and more will go bankrupt.

For chemical makers, caps spell both bad and good news. They'll face increased costs to cut or offset emissions of a wide variety of greenhouse gases created in production. But they'll also gain from other industries' drive for energy efficiency: more demand for photovoltaic cells, more replacement of metals with plastics in autos and aircraft to reduce weight and fuel consumption and so on.

For financial services: a silver lining. A brisk new line of business in trading emissions credits will likely offset any loss from the drag on the economy.

Capital goods sales will boom, as firms that supply plants and equipment to the power sector see large new orders of everything from natural gas turbines to utility scale fuel cells. The need to cut buildings' emissions will hike sales of energy efficient HVAC systems and less energy intensive construction materials. The oil, gas and coal sectors will buy more energy efficient drilling and extraction gear, though sales will wane over the longer term as emissions caps tighten and prompt cuts in fossil fuel use.

Note that even if the government doesn't step in to limit greenhouse gas emissions, the U.S. economy won't escape the costs of climate change. Extreme weather will become more frequent and more destructive. In coastal regions and along rivers, that spells increased flooding, and the combined effect of flooding in some U.S. farm regions and droughts in others will bring lower crop yields and increased food costs.

Health costs will grow as well, as flooding increases the risk of cholera and warmer temperatures expand the risk of mosquito-borne diseases such as malaria and West Nile virus. The incidence of respiratory illnesses, ranging from ragweed allergies to asthma and bronchitis, will also go up. The cost of insurance -- for property, life, health and so on -- will rise. In the end, the economic price of controlling global warming is likely to be -- at most -- the same as the price of ignoring it.

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