The Heritage Foundation estimated a month ago that cap-and-trade legislation making its way through the House of Representatives would cost the average American household about $1,500 a year in higher energy bills and the American economy about $9.6 trillion in lost gross domestic product between now and 2035.

But last week the Congressional Budget Office released a report claiming the bill would cost the average household only about $175 per year.

The difference is stark. What’s up? A small part of the difference might be explained by changes in the bill over the past month. But only a small part.

The Heritage Foundation released a critique of the CBO report on June 22 that points out some basic errors that result in gross underestimate of costs.

• Most importantly, the CBO report completely omits the economic damage from restricting energy use and requiring substitution of more expensive for less expensive energy sources. That means CBO essentially ignores the $393 billion per average year in lost GDP. But that GDP loss is money that otherwise would have been in people’s pockets--"$6,790 per family of four,” Heritage points out, “and that is before they pay their $4,600 share of the carbon taxes.”
• The CBO also uses 2020 as its exemplary year--resulting in unrepresentatively low cost estimates across the board, since 2020 is projected to have the second lowest GDP loss of the 24-year period.
• The CBO report underestimates the cost of “allowances"--emissions permits bought by energy producers and users. The report takes the year 2020 as illustrative and claims that the cost then will be only about $28 per ton, which, with a cap of 5.056 billion tons, implies gross allowance cost of $142 billion, but the report lists only $91.4 billion--an amount inexplicably lower than CBO’s own June 5 estimates of $119.7 billion, $129.7 billion, $136 billion, $145.6 billion, and $152.9 billion for the years 2015 to 2019. “It’s hard to believe that the next number in that series would be $91.4 billion,” says the Heritage critique.
• The CBO report also assumes that the government’s spending of the revenues received from permit sales will be of direct, dollar-for-dollar benefit to consumers. That simply isn’t realistic. “When have Americans ever seen all of a tax returned to them?” asks Heritage. “It’s like suggesting your tax rebate will be as large as the amount taken from your paycheck every year.”

The Heritage critique points out other serious errors in the CBO report. The low-down: CBO grossly understates costs of cap-and-trade legislation.