Cheap energy isn’t just the result of the shale-gas boom. In much of the US, the power industry continues to rely on coal. Consumers in Kentucky, where over 90% of electricity is generated from coal, enjoy electricity prices roughly 50% lower than in the UK – an indication of the huge potential cost of Obama’s plans.
Indeed much higher bills are almost inevitable now that the US is adopting EU-style policies. Carbon emissions from the power sector will be cut by an ambitious 32% by 2030 (compared to 2005 levels). Worse still, the ‘Clean Power Plan’ will favour expensive renewable energy over the relatively low-cost option of cutting emissions by switching from coal to natural gas.
Higher energy costs will not only mean hikes in utility bills but will also translate into higher prices in the shops. At the same time, there could be downward pressure on wages as firms attempt to mitigate the impact. US productivity growth is also likely to be lower as the returns from investing in energy-intensive, labour-saving measures are reduced. Fuel poverty is likely to increase dramatically, as it has in the UK.
Environmentalists would argue that the benefits of reducing emissions are worth the economic sacrifice, but it is far from certain that Obama’s policy will have the desired effect. There are huge question marks over the long-term impact of climate change – inevitable when trying to predict the behaviour of complex systems decades in advance.
Obama’s plans are therefore ill-conceived. There is a high risk that the economic costs will far outweigh any benefits. A sensible US strategy on climate change would instead focus on win-win policies that help both the environment and the economy. Examples include phasing out agricultural subsidies and ending foreign aid programmes that contribute to the destruction of the rainforests.
Dr Richard Wellings is Deputy Editorial Director at the Institute of Economic Affairs.