The Costs of Cap-and-Trade

Curve-aceous economist Arthur Laffer (and his colleague Wayne Winegarden) have a new study out this week, estimating the costs to the U.S. economy of adopting a cap-and-trade mechanism for reducing greenhouse gas emissions. Not surprisingly, Laffer finds the costs to be unacceptably high. Here are a some of his findings:

Cap-and-trade may reduce U.S. economic growth by 4.2 percent — even to achieve the comparatively modest GHG reductions of the Kyoto Protocol (i.e., GHG emissions 7 percent below 1990 levels by 2008-2012). The cost to reach the ultimate goal of some GHG control proponents (e.g., reducing GHG emissions to 80 percent below 1990 levels by 2050) would be significantly greater. Moreover, these estimates may underestimate the actual cost as they assume the government would auction the rights to emit greenhouse gases — as opposed to simply giving them away, which is the approach often discussed in the Congress.


Based on the energy efficiency responses to the energy supply shocks of the 1970s, the U.S. economy could be 5.2 percent smaller in 2020 compared to what would otherwise be expected if cap-and-trade regulations are imposed. This equates to a potential income loss of about $10,800 for a family of four for the initial Kyoto GHG reduction target.

Sounds like a strategy we can do without.