Tuesday, March 11, 2008

Be Wary of the Agenda Behind Flawed Cost Projections

We've all seen the damage that can come from "studies" that are designed to achieve a given result rather than truly examining the potential cost, impacts or benefits of a given issue. It is often hard to judge the veracity of studies -- which is why it is absolutely critical that the assumptions used are transparent and reasonable -- so as to prove there is no hidden agenda being served.

The latest round of fliers and "fact sheets" being pushed by the Chamber of Commerce is unfortunately relying on a very flawed and secretive analysis done by Charles River Associates (CRA) and paid for by the electric industry group, Edison Electric Institute. The study was so flawed that many of the EEI members have called for it to be re-done using more plausible assumptions. Below is a great analysis of the many flaws of the CRA economic projections -- and why folks need to be careful before believing the cost projections of Lieberman-Warner from groups that clearly have an agenda that is not good for agriculture (i.e favoring a carbon tax instead of a carbon market).

Environmental Defense Fund

The CRA Climate Analysis: Extreme Again

America’s Climate Security Act of 2007 [S. 2191) is a bipartisan bill that would create a cap and trade program to cut greenhouse gas emissions in the U.S. The Edison Electric Institute, a trade organization representing electric utilities, recently paid consulting firm Charles River Associates International (CRA) to assess the possible economic impacts of the legislation. An assessment of CRA’s analysis using accepted academic modeling reaches the following conclusions:

· CRA has a history of presenting extreme views for its industry clients. For example, CRA’s
analysis in 2003 of the McCain-Lieberman Climate Stewardship Act projected household costs that were three to four times higher than the upper range of results in an MIT study, and 10 to 14 times higher than MIT’s lower range.

· CRA’s results are dramatically different than economic assessments by researchers in
academia and government. For example, CRA’s estimates for the impact of the bill in 2015 on
greenhouse gas emission allowance prices, economic output (GDP), and electricity prices are 75%
300% higher than those found by a study performed by researchers at Duke University and Research Triangle Institute.

· Determining exactly why CRA’s numbers are so high is difficult, both because of how CRA
reports their results and because the CRA model remains a “black box” to outsiders. Although
CRA released some information in a response to a request from Senator Lieberman, they have never fully opened up their model to outside peer review, so key assumptions remain hidden. Moreover, CRA lumps together results from various scenarios without specifying which scenarios lead to which results. One reason for the divergence from other models, however, appears to be that CRA ignores the role of international credits, which under the Lieberman-Warner bill could meet up to 15% of compliance obligations. In addition, their analysis assumes high costs for new coal-fired power plants with carbon capture and sequestration technology, and imposes artificial constraints on how widely that technology is used.

· Like most economic forecasting models, CRA’s analysis considers only one side of the ledger:
it considers the costs of reducing emissions, but fails to examine the costs of inaction.

· No single model should be relied upon for policy making. Instead, policy makers should look to
the full range of economic models for guidance on the possible impacts of climate policy. And when confronted with a range of numbers, a common rule of thumb is to throw out the lowest and highest numbers, and concentrate on the middle of the range. Former Federal Reserve Chairman Paul Volcker summarized the economic situation best: “If you don't
take action on climate change, you can be sure that our economies will go down the drain in the
next 30 years. What may happen to the dollar, and what may happen to growth in China or
whatever, will pale into insignificance compared with the question of what happens to this planet
over the next 30 or 40 years if no action is taken."

Our analysis is based on testimony by CRA, documentation supporting that testimony, CRA’s recent update to their analysis, and economic models by researchers at MIT, Research Triangle Institute, and the Department of Energy.

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