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Frequently Asked Questions About The CRA Economic Study
Below is a summary of the most commonly asked questions about the context, methodology and assumptions of the CRA economic study.
Why was this study commissioned?
There has been a great deal of discussion and policy action on energy and climate change issues in Minnesota over the past several years. However, the discussion to this point has almost exclusively revolved around environmental goals and
policymakers largely deferred study of the economic implications of these energy policies.
Partners for Affordable Energy along with several other Minnesota trade associations and utility groups commissioned this study to obtain an objective and professional analysis of the economic impacts of Minnesota's current climate change policies and regional policies under consideration. We believe it is critical to have a fully informed discussion of these issues, based on the current wording of Minnesota law.
This research is a critical first step toward a more informed discussion about how sweeping changes to the state's energy policy could put Minnesota's industries at a competitive disadvantage, impose increased burdens on Minnesota households and significantly hinder the state's economic viability.
How will this research be used?
This study is not intended to deter progress on important energy issues; it is intended to inform the discussion and focus our attention on how Minnesota can achieve both environmental and economic goals.
Supporters of this study believe we need to move forward on energy policy in a way that keeps our environment healthy but doesn't sacrifice the economic strength of the state. We are advocating for a balanced approach to Minnesota's energy policy that includes five key elements:
- Address climate change at an international or national level.
- Support a reliable and affordable mix of renewable energy sources.
- Increase energy conservation.
- Improve technology at power plants and industrial facilities to reduce emissions.
- Keep Minnesota's borders open to necessary sources of power.
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Why will energy prices increase under a regional cap-and-trade policy?
The cost of carbon (the cost of compliance with a carbon reduction cap) will impact energy prices. This carbon cost will filter throughout the economy and impact everything from electricity rates to gasoline prices. And as the carbon cost directly impacts various energy sources, it inevitably impacts the cost of manufacturing, producing and transporting goods. These cost increases are felt directly by consumers in their household energy prices and increased costs for consumer goods and services.
Is $575 in additional costs per year too much to ask of Minnesota families?
That's ultimately up to Minnesotans to answer but families are already struggling with home energy costs. As an example, in one part of Minnesota the average amount of fuel assistance for home heating was $600 in 2007. For people on fixed incomes, such as seniors with a monthly income of $1,200 to $2,000, any increase will be hard to manage.
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How did the study evaluate potential job losses?
The model estimates jobs aggregated across all sectors, using a "sticky wage" model that assesses how changes in the economy-wide real wage rate alters the supply-demand balance for total labor. The net job loss estimate implies that across the entire economy more jobs are lost due to the higher cost of energy than are created in new activities such as renewables generation.
Does the study account for job increases expected through new "green" investments?
Yes, the study accounts for new jobs associated with increased investments in renewables generation and energy efficiency. However, even with those additional jobs, increased energy prices for industries will drive the net loss of 21,000 jobs by 2015.
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Why was this study based on a regional cap-and-trade policy rather than a national cap-and-trade system?
This analysis was based on Minnesota's Next Generation Energy Act, which calls for the implementation of a regional approach to reducing greenhouse gases (216H.02 subd. 6). For purposes of analysis, the study needed to make certain assumptions and those assumptions were based on following the direction of Minnesota, as outlined in its law.
How do the assumptions used affect the likelihood that the economic costs will actually be more severe than reflected in this report?
CRA made a number of assumptions in developing the economic model that have the effect of creating a conservative estimate of the cost impacts to Minnesota:
- An open and accessible transmission system that will support the transport/import of any new non-emitting energy sources.
- No new transmission costs.
- The availability of non-emitting resources that can be imported into Minnesota from other states.
- The exclusion of non-CO2 emissions (because reliable data on these emissions is not available for the region analyzed) from the cap, loosening the cap and the cost of compliance.
- The inclusion of offsets that also has the impact of loosening the cap and the cost of compliance.
- An optimistic expectation on the quantity of wind generation that will be available in the region.
- A higher than 1.5% level of conservation in response to higher energy prices.
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Why does this study show that Minnesota emissions will only be reduced by 38% when the goal is 80% reduction by 2050?
There are a number of barriers to extending Minnesota's law to a regional level. One of those challenges is measuring non-CO2 emissions. There is no reliable data on these emissions at a regional level. Therefore, this analysis respects the spirit of the law but makes accommodations for the limited information in order to model some of the economic implications of the policy. Lacking the regional data, the study focused only on CO2 emissions, which are estimated to account for about 78% of Minnesota's greenhouse gas emissions.
The CO2 emission declines in Minnesota are achieved through three policy approaches that, while common to regional policies, have the effect of loosening the stringency of the overall greenhouse gas emission goals. The first is "banking" in the model, which means that the covered states are making larger reductions in earlier years to ease the pain of meeting the more stringent caps in the future. The result is that if you were to add up the cap across all of the years and add up the emissions across all of the years they would be the same number. The second approach is that the model allowed emission offsets (i.e., reductions from non-covered sectors or increases in sinks that absorb CO2). These offsets were not allocated to any particular state. Lastly, emissions in some of the other covered states may have fallen by more than in Minnesota because of the availability of new nuclear generators in those regions. These regions would have the incentive to over-comply and sell their excess allowances to states like Minnesota.
How are Minnesota's energy laws different from other states?
When Minnesota passed the Next Generation Energy Act and Renewable Energy Standard in 2007, it surged ahead of most of the rest of the nation in establishing aggressive greenhouse gas reductions and a planning timeline for implementation of a regional cap-and-trade system.
The greenhouse gas emissions reductions agreed to by six states (including Minnesota) and the Canadian Province of Manitoba under the Midwestern Greenhouse Gas Reduction Accord is the most aggressive regional climate change policy in the nation. Only the state of Florida's policy is slightly more ambitious. The other two regional climate change policy initiatives in the nation - the Western Climate Change Initiative and the regional greenhouse gas initiative (RGGI) including ten Northeastern states - are taking more gradual steps than the 60 to 80 percent below 2005 greenhouse gas emissions levels that the Midwestern states have set as goals by 2050.
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Who funded the CRA study?
The study was commissioned by Partners for Affordable Energy, along with several other Minnesota trade associations that are interested in policies that support affordable and reliable energy. Funding came from a variety of organizations, including Partners for Affordable Energy, the lignite mining industry, Minnesota utility companies, Minnesota Chamber of Commerce, Iron Mining Association of Minnesota, Minnesota Forest Industries, Printing Industry of Minnesota, Central Minnesota Municipal Power Agency, Minnesota Rural Electric Association, Minnesota Utility Investors, Dairyland Power Cooperative and the Southern Minnesota Beet Sugar Cooperative.
Do the backers of this study support a federal cap-and-trade policy?
The participants in this study believe that this economic analysis highlights the commonly understood risks of regional climate policies - they place a higher burden on the covered region while simply shifting the emissions problem to bordering states and regions. We prefer that Minnesota be on an even economic playing field with the rest of the nation. However, support for any specific federal legislation will depend on the details of each proposal.
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