Impact on the Economy of the Climate Provision in the Obama Administration's FY 2010 Budget Proposal

Prepared By: CRA International - April 2009

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Executive Summary

CRA International is a leading global consulting firm that has provided economic, financial, strategy and business management advice to public and private sector clients since 1965. CRA serves clients from offices on four continents.

As requested by the Coalition for Affordable American Energy (CAAE), CRA International has used its state-of-the-art MRN-NEEM and MS-MRT modeling systems to analyze the potential economic impacts of the climate provisions contained in the Obama Administration's FY 2010 Budget Proposal sent to the U.S. Congress. All projections in this analysis were based on these models and publicly available data. The study examined the Cap and Trade policy described in the Administration's FY 2010 Budget Proposal, including the stated caps on U.S. greenhouse gas emissions and proposals for use of the revenues to fund renewable energy programs, the "Making Work Pay" tax credits, and other transfer payments. The analysis focused on how these could affect key performance metrics of the United States' economy.

The report finds that the climate provisions of the Administration's proposed FY 2010 budget would be expected to have significant economic and energy market impacts. The model results indicate that market shares would shift within the energy sector. Natural gas is projected to expand its market share, particularly for power generation. Increased imports of natural gas are estimated to supply most of the increased domestic demand for natural gas, whereas domestic natural gas production is projected to increase only slightly. Both oil and coal are estimated to decline in market share. These measures would tend to lower rates of return on investments in the production of domestic oil, and petroleum products. With lower rates of return, domestic investment levels would be expected to fall. Domestic crude oil and refined products production are projected to decline. The share of renewable energy is estimated to rise. Total energy consumption in the U.S. economy is estimated to contract.

The model results also indicate that business users and consumers would face higher energy costs. The resulting higher energy production and transportation costs in-turn would lead to increased costs of other goods and services throughout the economy. As the costs of goods and services rise, household disposable income and household consumption would fall. As explained in the body of the report, the Cap and Trade policy would be expected to have the effect of causing more investment in costly forms of renewable energy, thereby directing funding away from investments with greater potential to enhance productivity, so that the economy would grow more slowly and job growth would decline. Overall, the economy would be expected to grow more slowly, leading to substantial differences in disposable income and personal consumption.