The following is the written testimony submitted by Eric Fruits regarding the costs of Oregon SB 80.

In September 2008, I co-authored a comprehensive analysis of the economic and fiscal impacts on Oregon of meeting the ambitious greenhouse gas reduction goals outlined in the proposed amendments to SB 80. In February 2009, I submitted testimony on the economic and fiscal impacts associated with the cap-and-trade scheme introduced in SB 80. I have attached my past testimony and the report I co-authored.

This letter summarizes my earlier testimony and presents new evidence of the substantial costs associated with trying to meet Oregon’s aggressive greenhouse gas emissions reduction goals.

• Oregon’s economic output would be $48.3 billion lower; 90,000 fewer people would be employed; and state and local government revenues would be $4.4 billion lower (Pozdena & Fruits, 2008).
• Subsequent independent research supports our findings: a 1 percent decline in carbon dioxide emissions is associated with a 0.74 percent decline in GDP (Annicchiarico, et al., 2009).
• Recent research calculates that for every “green” job created via subsidies and tax breaks, 2.2 jobs elsewhere in the economy are destroyed (Álvarez, 2009).

There is no avoiding the substantial costs of SB 80. Households, businesses, and the public sector will have steeper power bills and will pay more to engage in nearly every activity.

Today, businesses are shrinking, closing shop, or exiting the state. Oregon now has its highest unemployment in 25 years and one of the worst unemployment rates in the country. Higher energy prices under SB 80 will worsen an already dire economic situation.

It is now evident that hopes of creating new “green” jobs funded with tax credits and subsidies paid by existing Oregon businesses and consumers is a losing proposition where more jobs are lost than created. Projections of increased employment under SB 80 are built on unrealistic assumptions and flawed models that produce counterintuitive results that have been refuted by real world observations.

Sources cited:

Álvarez, G. C. (2009). Study of the effects on employment of public aid to renewable energy sources. King Juan Carlos University, Madrid, Spain.

Annicchiarico, B., Bennato, A. R., and Costa, A. (2009). Economic growth and carbon dioxide emissions in Italy, 1861-2003. MPRA Paper No. 12817.

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute. Portland, OR.

USA Today

Eric Fruits of Economics International in Portland, Ore., warns that stimulus spending may not revive the economy in the long run. “Borrowed money has to be repaid. A job today may come at the cost of someone not having a job in two or three years,” the economist says.

What makes Oregon different so that it always has high unemployment?

As with most economics issues, there is no single answer.  In Oregon, several factors combine to produce the state’s long-run high unemployment.

1. Unemployment benefits. The Economic Policy Institute in Washington, D.C., ranks Oregon as one of the more “generous” states for unemployment benefits. On one hand, unemployment benefits help to put food on the table. But overly generous benefits allow job seekers more leeway to hold out for higher wages than they would otherwise, thereby slowing their return to work.
2. Taxes and regulations. Taxes and regulations raise costs to firms offering employment. Rigidity in employment laws adds to a firm’s costs of growing its workforce. In addition, employer-provided health insurance in Oregon is expensive because of regulations mandating that insurers cover specific conditions, procedures or treatments. Such mandates raise the costs of adding and retaining employees.
3. Minimum wage. A binding minimum wage creates a surplus of unskilled labor. At $8.40 an hour, Oregon has one of the highest minimum wages in the country. This has the effect of decreasing the amount of labor demanded by Oregon businesses and increasing the amount of labor supplied by Oregon workers. On the upside, owners can be choosy about who they hire. But, this puts the unskilled in a Catch-22: Their inexperience makes them unemployable at the high minimum wage so they cannot get experience to justify the wage.
4. Migration. If people are moving to the state faster than jobs are being created, higher unemployment results. Oregon has a well-deserved reputation for livability. As a result, people from outside of Oregon are attracted to the state and people who are here already are hesitant to leave: Some people would rather be unemployed in Oregon than find work out of state.

Is there a solution?

On the public spending side, many Oregonians are hopeful that an injection of state and federal infrastructure spending will pull people off the unemployment line and onto construction crews. However, by the time projects are funded, requests for bids are issued, contractors are in place and workers are hired, we may already be six months into a recovery.

On the private side, investments by businesses produce the gains in productivity that fuel future production and consumption. Broad-based investment tax credits and similar investment incentives are not as alluring as large-scale spending programs and showpiece infrastructure projects. On the other hand, much of the blame for the current recession has been placed on the credit crunch and the resulting decline in private investment. Broad-based investment incentives would mitigate some of the crunch and encourage firms to begin spending and hiring again.

In the past year, a variety of studies by organizations supportive of aggressive climate change policies have attempted to calculate the additional annual expenditures in renewable energy generation and energy efficiency necessary to meet greenhouse gas reduction goals.

One problem: No one knows how much spending is needed

And the guesses are all over the place.

In the past year, four separate studies came up with a wide range of cost estimates for climate policies. Most recently, a report issued by the World Economic Forum in Davos, Switzerland summarizes three studies. The Forum says between $150 billion and $313 billion in additional spending is needed each year between now and 2030 too reduce carbon emissions to levels deemed sustainable by the Intergovernmental Panel on Climate Change (IPCC).

Earlier this month McKinsey & Company said the additional costs would range begin at $475 billion a year and rise to $1.2 trillion a year through 2030, with an average additional cost of $846 billion a year.

A range as big as the Dutch economy

No wonder policy makers are confused. The additional costs across four studies range from $150 billion a year to $846 billion a year.  That is a $696 billion range.  That is a swing that is bigger than the economy of the Netherlands ($650 billion). It is impossible to design effective policies when the cost estimates have a margin of error that is as big as the 20th largest economy in world.

Citations:

Dinkel, J., Enkvist, P.-A., Nauclér, T., and Pestiaux, J. (2009). Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve. McKinsey & Company.

Liebreich, M., Greenwood, C., von Bismarck, M., and Gurung, A. (2009). Green investing: Towards a clean energy infrastructure. World Economic Forum and New Energy Finance.

United States Government Accountability Office (2008). Climate change: Expert opinion on the economics of policy options to address climate change. GAO-08-605.

In addition to typical annual capital investments, the report concludes that beginning in 2011, additional investments of $475 billion a year would be required to keep global temperatures 2 degrees Celsius below pre-Industrial temperatures. By 2026, the cost would rise to $1.2 trillion a year.

The net present value today of the additional expenditures between 2011 and 2030 would be approximately $7.3 trillion. That is bigger than China’s economy today and equivalent to the economies of Japan and India combined.

Citation:
Dinkel, J., Enkvist, P.-A., Nauclér, T., and Pestiaux, J. (2009). Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve. McKinsey & Company.

A recent working paper using a time series covering more than 140 years found almost exactly the same relationship. The authors conclude that changes in carbon dioxide emissions and changes in GDP are cointegrated. They calculate that over the long run, a 1 percent decline in carbon dioxide emissions would be associated with a 0.74 percent decline in GDP.

Citation:
Annicchiarico, B., Bennato, A. R., and Costa, A. (2009). Economic growth and carbon dioxide emissions in Italy, 1861-2003. MPRA Paper No. 12817.

Oregon is a leader in climate change legislation. The state has adopted one of the most ambitious greenhouse gas emissions reduction goals in the world. Although Oregon is big in leadership status, it is small in size. Even if all Oregonians dropped their energy consumption to zero–or doubled it–the Earth’s climate would never know it. Thus, policies to substantially reduce greenhouse gas emissions in the state run the risk of being virtually “all pain, no gain.”

There is no getting around it: both carbon taxes and cap-and-trade programs raise energy prices. If either program is put into effect, households, businesses, and the public sector will have steeper power bills and will pay more to drive their vehicles. Meeting the goals would mean Oregon’s economic growth would be cut almost in half. In turn, state and local governments would collect $4.4 billion less in revenues.

Numerous businesses are shrinking, closing shop, or exiting the state, leaving Oregon with almost double digit unemployment. Higher energy prices under a carbon tax or cap-and-trade program will only make things worse.

• Oregon has one of the world’s most ambitious greenhouse gas reduction goals: A 40 percent reduction per person by 2020.
• There is a strong relationship between economic activity and carbon emissions: A 1% decrease in carbon emissions is associated with 0.71% lower GDP.
• Technological advances cannot fully mitigate the costs of a 40 percent reduction in GHG emissions. Replacing capital is expensive and take years.  Households and firms would have to face years of significantly higher energy prices before investments in more energy efficient technologies replace existing technologies.
• Meeting Oregon’s greenhouse gas reduction goals will slow the state’s economic growth:
  • Output would be $48.3 billion lower because of the State’s GHG emissions targets,
  • 90,000 fewer people would be employed,
  • State and local government revenues would be $4.4 billion lower.

Citation:

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute.

The Portland Tribune reports that Oregon’s business interests are recognizes that the state’s ambitious emissions goals will come at an economic cost. NW Natural president and Oregon Global Warming Commission member, Gregg Kantor, describes his concerns.

We need to protect workers of businesses in Oregon. You don’t want to create another reason to ship jobs offshore.

Mr. Kantor’s concerns are buttressed by a white paper written by Eric Fruits and Randall Pozdena.

The paper notes that the notion of capping emissions and providing market signals through a cap-and-trade scheme is not conceptually unreasonable or without precedent. However, the cap-and-trade mechanism has a history of implementation difficulties. The difficulties are due to the vulnerability of the caps and permit allocations to political influence and the tendency of permit values to be highly volatile. In the Oregon context, in which the portfolio of politically-acceptable, alternative energy sources is constrained, and the non-carbon technology options undeveloped, these problems may be aggravated.  The studies key findings include the following.

1. Economic output, energy use and carbon dioxide emissions have been tightly cointegrated historically, and energy strongly “causes” economic vitality. This is true both in studies over time and across countries. Of the OECD countries that display lower than average energy use relative to their economies, all have embraced nuclear power–a source that historically has been “off-the-table” in Oregon.
2. The cost to the Oregon economy of meeting the state’s emissions goals are large. Oregon’s economic growth to 2020 would be approximately cut in half, and gross output per capita would be reduced by 20 percent relative to the baseline case.
3. State and local revenues would be reduced by about 13 percent, relative to the baseline case.
4. Energy consumption and technology choices are strongly embedded in long-lived capital. This raises
   theoretical and practical obstacles to the economic development and adoption of low-carbon technology. In addition, because of the existing carbon intensity of the production of capital goods, too-rapid turnover of existing capital may actually accelerate atmospheric carbon accumulation.

Citation:

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute.

Among the options considered, DEQ’s proposed action would provide the largest environmental benefit. However, DEQ’s proposed action would also produce the large electricity rate increases.