Climate advocates sometimes get impatient with climate scientists for always hedging their statements. Just tell us, will the earth end by 2050 or not? But they need those hedges because there are so many variables and feedback loops. Even so, there are things they can say, and they have been saying it for over 20 years, and finally, in the last few months, Congress is listening. So now everyone wants to know how much will it cost to fix it.
Unfortunately, the economics of estimating how much climate policy might cost households has almost as many variables and feedback loops as climate science. Eventually you have to just make some assumptions, ignore some troublesome details, add a bunch of footnotes, and make your best guess. And everyone has their own favorite number. The State of California more of less said the cost is negative, and the benefits of new jobs and new technologies make the short term costs irrelevant. The Republicans are erroneously using $3,100 per household per year as an estimate of household carbon costs, while an author of an oft-cited MIT study said the actual costs are somewhere between $340 and $800.
The EPA analyzed the Waxman-Markey bill, and said that the costs would be somewhere around $98 to $140 per year. This depends a great deal on whether auction revenues are returned to households. The EPA warns costs could be higher if they are used in some other manner.
Of course, it's nice to have a single number that USA Today and CNN can broadcast nationally. But in reality, each state has its own electricity mix using different amounts of coal and fossil fuels. The weather varies across 3,000 miles, so households in some states have their air conditioning cranking, while others just open their window and feel the ocean breeze. And different states have taken different approaches to conservation. California has invested heavily over the past 25 years, while Wyoming has not. The result is that carbon costs will vary by state and region (and also by utility, but that's for a future posting). This is important because national climate legislation needs to pass the Senate, and for better or worse, Senators care most about their home state.
Comparing average household carbon costs in the 50 states happens to have been the topic of my UCLA Master's thesis that I recently finished. I hesitate to announce my findings in a blog, partly because there were about 15 pages of caveats and effects that I did not account for, and partly because I am not as good an economist as one of my role models, Dallas Burtraw. But I would like to discuss Ohio for a minute, in case Senator Sherrod Brown is in fact the bellwether for climate policy.
Ohio is not the worst carbon cost loser. That distinction belongs to North Dakota, followed by Wyoming, and then West Virginia. Why? Coal. And high per capita energy use. But Ohio still had 87% coal in its electricity mix in 2005, and it has benefited from cheap electricity, paying an average of just 8.51 cents per kilowatt hour, compared to California's 12.51 cents per kilowatt hour (note these numbers are all for 2005). Cheap electricity provides fewer incentives for conservation, and Ohio's average account holder uses 923 kwh/month, while the average California household uses only 572. For those and other reasons, when you add a $15/ton CO2 cost (in the range that the EPA predicts for Waxman-Markey) to household electricity bills, a household in Ohio could pay an extra $127/year for electricity, while a California household would pay between $21 and $38 extra, depending on how the out-of-state coal is treated. But even with a carbon cost, Ohioans would pay just 10 cents per kilowatt hour for their dirty electricity, while Californians pay 13 cents per kilowatt hour. Coal power is still cheaper. Is it fair? That's a different question.
Still, each Senator, including Sherrod Brown, will want to make sure their constituents are not too badly impacted, and the EPA's Waxman-Markey assessment agreed with the Congressional Budget Office that the least regressive way to do that is to return auction proceeds back to consumers.
Some people are starting to suggest modifications of the original Cap and per capita Dividend formula. Should the dividend only come from the portion of proceeds above $30/ton CO2, as Carl Pope has suggested? Or should dividends vary by regional contribution? There are many possible approaches to Dividend design, but the per capita formula is the simplest, and has the most democratic rallying call: "one person, one vote, one dividend" under all.