• March 16, 2017

    The High Cost of Filling in the Obama Administration’s Paris Pledge “Gap”

    Stephen Eule

Meeting the commitments President Obama made as part of the Paris climate agreement could cost the U.S. economy $3 trillion and the industrial sector 6.5 million jobs by 2040, according to a comprehensive new study by NERA Economic Consulting commissioned by the American Council for Capital Formation with support from our Institute for 21st Century Energy.

In support of the Paris climate change accord agreed to in December 2015, the Obama administration released its Intended Nationally Determined Contribution, or INDC, setting a goal to cut U.S. net greenhouse gas emissions 26% to 28% from the 2005 level by 2025.

We here at the Energy Institute were among the first to point out that not only was this an unrealistic goal, but that the administration didn’t have the slightest semblance of a plan to achieve it. Indeed, our “gap” analysis—later confirmed by the administration itself—concluded that current policies would only get us about halfway to the needed goal. And that was before the Supreme Court put on hold the Environmental Protection Agency’s legally dubious Clean Power Plan, which widened the gap even further.

Conspicuous by its absence in the INDC was any reference to industrial sector emissions. Nevertheless, the Obama Administration recognized that the deep and rapid cuts in U.S. emissions on the scale envisaged in the INDC could occur without reductions from energy-intensive industrial sectors. EPA’s fiscal year 2015 budget proposal, for example, noted the agency intended to begin considering new GHG regulations on the refining, pulp and paper, iron and steel, livestock, and cement sectors. InsideEPA also reported that, privately, Obama White House officials were clear that industrial sector regulations were essential to closing the Paris gap:

“[S]ources familiar with the meeting say that administration officials were candid in their plans to regulate manufacturing GHGs to address an emissions "gap" between current and proposed climate rules and President Obama's INDC pledge to cut GHGs 26 to 28 percent from 2005 levels by 2025. White House and EPA spokespeople did not respond to requests for comment. The administration has not publicly stated it is developing manufacturing GHG rules . . .

. . . A second source familiar with the meeting says a White House official was frank about the need for new rules to meet the emissions gap, and that those rules will focus on industrial facilities.”

So how much would meeting the 26% to 28% target cost? Well, the Obama Administration’s failure to provide a clear roadmap for its INDC meant there was no basis on which to assess its cost or achievability of the 26% to 28% target. Until now.

The Energy Institute partnered with the American Council on Capital Formation to work with the well-respected firm NERA Consulting to do what the Obama Administration should have done but didn’t: model and analyze its INDC target. The resulting report released today, Impacts of Greenhouse Gas Regulations on the Industrial Sector, provides the first detailed analysis of the additional measures—including regulating industrial emissions and implementing the stayed Clean Power Plan—that would be needed to close the emissions pledge gap.

The report’s central scenario projects achieving the INDC would essentially surrender the competitive edge our industries enjoy thanks to the America’s energy revolution. Specifically, the report estimates that by 2025:

  • U.S. GDP would plunge by $250 billion;
  • the economy would shed 2.7 million jobs;
  • the industrial sector would lose 1.1 million jobs; and
  • average household income would drop $160.

The analysis finds that the cement, iron & steel, and petroleum refining sectors would suffer the biggest losses. Under the study’s core scenario, their 2025 output declines by about 21%, 20%, and 11%, respectively. Higher energy costs also hurt domestic demand and the international competitiveness of U.S. industry, leading to emissions “leakage” and a greater share of U.S. demand for industrial products being met by imports.

In addition to the analysis of the Paris pledge out to 2025, the study examines the potential longer-term impacts of placing U.S. emissions on a trajectory to achieve the Obama Administration’s long-term emissions goal of an 80% reduction by 2050. The study found that in 2040, the last year of the model run:

  • GDP would be cut by nearly $3 trillion;
  • industrial employment would fall by 6.5 million jobs; and
  • average household income would drop $7,000.

There’s a lot more in the study, including analyses of four other policy scenarios and state-level impacts for Ohio, Pennsylvania, Michigan, and Missouri. This and other information on the study can be found here.