Conservatives, libertarians, and classical liberals have long advocated for less government intervention in energy markets. Freer markets encourage competition, which attracts more resources and innova-tive technologies and results in an energy supply that is more reliable and affordable. However, U.S. energy markets are far from free. Government subsidies, regulations, and mandates at the local, state, and federal levels influence private investment and consumer choice. A common justification for these policies is that fossil fuel companies do not pay for the full costs of pollution and climate damage. In the absence of a direct climate policy, government intervention is often justified as a way to account for the environmental cost of emissions—a rationale commonly used to support carbon pricing.
However, the United States does have a climate policy. While less straightforward than a direct price on carbon, such as a carbon tax, a plethora of federal regulations explicitly target greenhouse gas (GHG) reduction, and subsidies support the development of emissions-free power. It is crucial that policymakers assess the effectiveness of these efforts and the financial burden they place on taxpayers and energy consumers. Rather than emphasizing the need for a carbon tax, policymakers should instead ask: How effective are existing federal regulations that target GHG reductions, and what is the fiscal impact these regulations have on taxpayers and energy consumers?
In this piece, we analyze more than two decades of federal climate regulations, estimate their compliance and abatement costs, and compare those estimates with the government’s figures used to justify specific regulations. We also assessed the taxpayer burden of subsidizing specific energy technologies through the Inflation Reduction Act (IRA).
Our findings point to significant variation in the cost-effectiveness of these regulations, which highlights four key takeaways:
● First, in most cases, climate benefits account for only a minority of the total benefits claimed by regulators, whereas co-benefits comprise the majority of the benefits.
● Second, direct compliance costs estimated by regulators significantly understate the total burden on consumers. When factoring in economic inefficiencies, the true cost per metric ton of CO2 abated is substantially higher (i.e., $486.72/mt vs. $121.68/mt).
● Third, had the IRA’s $1.2 trillion in subsidies remained in place, Americans would have paid an estimated $208 per metric ton of CO2 abated in the electric sector and $600 per ton overall.
● Fourth, these figures likely underestimate the full cost of U.S. climate policy, as they exclude state and local subsidies, regulations, and mandates such as renewable portfolio standards.