4 Reasons the So-Called "Light Switch Tax" Will Not Cost You $3,000

Conservative political figures have long taken pride in their belief that they understand economics better than their free-spending, tax-loving brethren on the port side of the political spectrum.

With well fitting green eyeshades, sharp pencils, and a thorough grounding in the seminal thinking of Adam Smith, David Ricardo, et. al., they have long considered themselves the grownups when it comes to economic management.

So, why did House Minority Leader John Boehner overlook a basic principle of economics the other day in the process of misrepresenting a Massachusetts Institute of Technology study on climate cap-and-trade policies?

Here’s what happened: In a rush to declare cap-and-trade to be an unfair "light switch tax," Boehner quoted the MIT study to argue that cap-and-trade would cost each American household $3,100 per year.

Not quite, said an MIT worthy. Not even close.

Apparently, the flacks in Boehner’s office came up with the $3,100 figure by adding up the amount that the federal government would collect from selling emissions allowances from 2015 to 2050, then computing a simple annual average.

The faulty $3,100 estimate was rooted in several mistakes, John Reilly, associate director of MIT’s Joint Program on the Science and Policy of Global Change, wrote to Boehner.

Mistake No. 1: Boehner and company confused the revenue raised by selling emissions allowances with the cost of reducing emissions, which are different concepts.

Mistake No. 2: The price of emissions allowances reflects the marginal cost of avoiding the last ton of emissions, but there are ways to reduce emissions that cost less than cutting out that last ton.

Mistake No. 3: The average cost of emissions reductions per household would depend mightily on how allowance revenues would be used. Would they be spent on residential energy efficiency incentives? Workforce retraining in coal country? Rebates for low-income households? Dividend checks for every legal resident? Those are only a few of the ideas on the table. Each individual option and combination of options would yield a different cost outcome. And Congress isn’t close to settling on an answer.

Mistake No. 4: This is the truly embarrassing one. An economics major who made a boneheaded slip-up like this would get a red “F” on his term paper. I’ll let Reilly explain the error: “The costs are borne over time and it is wrong to produce a simple average of such costs as that does not take into account the time value of money.”

The time value of money. A dollar today is worth more than a dollar in the future. It is a foundational principle that informs financial decisions at all levels of our society, from a college kid getting a loan to buy her first car to a giant utility raising capital to build its first nuclear power plant. Congressmen in charge of the taxpayers’ dollars ought to have at least a passing familiarity with the concept.

As Reilly patiently explained, accounting for the time value of money went into MIT’s estimate that the average annual cost of cap-and-trade for a household of four works out to a net present value of $340 – some 90 percent lower than the $3,100 figure.

Costs will be one of the central issues as the debate moves forward on policies for putting a price on greenhouse gas emissions. Planning a future energy menu that’s lighter on carbon servings will not be cost-free, but there are multiple ways to get at the problem. Congress and the administration will need to ponder the matter carefully.

Which makes it critically important for lawmakers to ensure that their statements can pass at least a coarse screen for analytical rigor. That goes double for conservatives who profess to be the more trustworthy leaders on economic matters.