How do Congressional Budget Office Scores Impact Climate Policy? | Article

Part 1: The Current State of the Congressional Budget Office

Since its establishment, the Congressional Budget Office (CBO) has been a linchpin of the Congressional policy and budget-making process. CBO was created by the Congressional Budget and Impoundment Control Act of 1974 in response to budgetary conflicts between the executive and legislative branches, with President Richard Nixon threatening to withhold appropriated funds for programs inconsistent with his policy priorities. CBO provides Congress with non-partisan analyses but does not make recommendations. Nevertheless, CBO analyses, seemingly bound by statute, often have the effect of determining policy outcomes due to the economic decision-making methodologies used.

Mandatory and discretionary spending are controlled by different statutory procedures whose goals are essentially the same: deficit neutrality. The Budget Enforcement Act of 1990 (BEA) limits discretionary spending through “caps,” while mandatory spending is limited by the Statutory Pay-As-You-Go Act of 2010 (PAYGO). CBO uses a methodology called scoring to ensure compliance with these laws. In the executive branch, the President’s Office of Management and Budget (OMB) uses the same process to review annual agency budget requests.

CBO is required to prepare cost estimates for each bill approved by a House or Senate committee. It also creates baseline projections of the budget and economy and estimates of a bill’s effect on spending or revenues over the next 10 years. In the decades since CBO was established, lawmakers have increasingly relied on its scores to guide policy. This becomes an issue if CBO scores are taken out of context: CBO scores are intended as data points, but policymakers have used them as justification to prevent legislation from passing. In practice, the pursuit of a “good” CBO score can influence members of Congress to avoid introducing certain kinds of policy.

In the case of climate change, CBO’s methodology often unintentionally serves to discourage climate change mitigation policies that may have high short-term budget cost impacts but will more than payback those costs with economic, social, and environmental dividends in the long term. For example, CBO's narrow focus on potential hurricane-related damage impacts on the federal budget do not consider impacts on the nation as a whole. There have been calls throughout the past decade to reform the CBO scoring process to provide a more complete understanding of the impact of legislation on climate, but questions still remain regarding what kinds of changes are needed or possible.

How CBO Falls Short on Climate

CBO identifies actions that may increase the federal deficit, which then triggers offsetting actions. Unfortunately, the models it uses may actually result in higher long-term costs to the government. According to former Senate Budget Committee economist Stephanie Kelton, assumptions within CBO models minimize the long-term economic benefits of public investments by assuming that large public investments crowd out private investment. This assumption has been criticized for being based on too little empirical evidence. It also disincentivizes climate policies that include significant public investment in solutions like clean energy, energy efficiency, and sustainable infrastructure, since policymakers can improve bills’ CBO scores by avoiding public investment and instead relying on private investors to enact climate solutions.

Other assumptions in CBO scoring models lead to scores that do not capture the full extent of policies’ impact on the climate. The models' ten-year time frame, for example, does not look at the full life cycle of policy that may have benefits or consequences that take longer than a decade to be reflected in economic data. Similarly, the limited time frame prevents CBO scores from fully accounting for the benefits of mitigating the long-term impacts of climate change. Many co-benefits of climate policy, including things that are difficult to monetize, are also not included in CBO scores. Finally, the CBO does not score bills based on their impact on greenhouse gas emissions as a standard practice. This means that only bills with the explicit goal of reducing emissions are evaluated in their potential to do so, and the potential for other legislation to increase emissions is not taken into consideration.

Calls for Change

Members of Congress have recognized gaps in CBO’s evaluation of climate policy and have proposed changes. The Carbon Pollution Transparency Act (H.R.5733/S.2905), last introduced by Representative Jared Huffman (D-Calif.) and Senator Bernie Sanders (I-Vt.) in 2014, sought to directly resolve the incongruity between CBO scores and climate impacts. The bill, which died in committee in both chambers, required the CBO to calculate a carbon score for legislation along with the other economic markers it already produces. If passed, it would have expanded all CBO scores to include the projected net greenhouse gas emissions resulting from the bill.

Other members have demonstrated interest in some form of climate-related scoring. Draft legislation for the Climate Equity Act, introduced by Senator Kamala Harris (D-Calif.) and Representative Alexandria Ocasio-Cortez (D-N.Y.) in August 2020, would require future climate and environmental legislation to receive an “equity score,” modeled after CBO scores, to estimate the legislation’s effects on frontline communities.

More recently, the House Select Committee on the Climate Crisis’s majority staff report called for changes to CBO methodology to better account for climate change. The report recommended that Congress expand the CBO’s capacity to analyze the economic effects of the climate impacts of legislation, with a particular focus on evaluating savings from avoided costs and reduced risks brought about by federal investments in resilience:

Congress must ensure that it weighs the full benefits of climate action relative to the costs of inaction. Federal offices that calculate benefits and costs of proposed policies, including the Congressional Budget Office (CBO) for legislative action and the Office of Management and Budget (OMB) for executive action and rulemaking, need to establish benefit-cost methodologies that fully account for climate change, including the long-term benefits of avoided disasters (Solving the Climate Crisis, page 539).

This recommendation is similar to one offered by EESI in response to the Select Committee’s Request for Information. EESI suggested that CBO should place a higher priority on the human health effects of environmental policy and on its long-term environmental impacts. The staff report also calls for reestablishing an interagency working group to develop a new social cost of carbon that “reflects the best available climate science; acknowledges that U.S. greenhouse gas emissions have a global impact; and factors in the impact of current policy on the future generations that will bear the brunt of unmitigated climate change.”

Part 2: Frequently Asked Questions about the Congressional Budget Office

CBO’s methods of analysis have received valid criticism for their inability to fully encompass the impact of legislation on the climate. However, there is currently no policy that would cause CBO to fill these gaps. Below we dive into questions about CBO’s scoring as it relates to climate and how current scoring could be adapted to better account for climate change.

Does CBO have the capacity to assess climate impacts in the first place?

CBO scores already include projections for unemployment levels and numbers of people affected by changes in insurance policy, so its capacity extends beyond only reporting monetary values. However, the Select Committee staff report does identify a lack of capacity to adequately include climate concerns in CBO scores. The funding required to build this capacity is not articulated in previous related legislation: the Carbon Pollution Transparency Act of 2014 did not specify the additional funding the office would need to project bills’ emissions, stating only that funds would be authorized at a level that is “necessary to develop the expertise and capacity required to carry out the analyses.”

How does CBO address factors that are not easily monetized?

CBO's current approach to evaluating proposed legislation skews outcomes by favoring considerations that can be easily priced, such as benefits from industry and jobs, and omitting difficult-to-measure benefits like healthy ecosystems and well-functioning social institutions. One critical omission, according to Josh Bivens of the Economic Policy Institute, is the social cost of carbon. Federal agencies commonly use the social cost of carbon in rule-making processes to account for the negative impact of carbon emissions on human and environmental health, but CBO has been hesitant to include the social cost of carbon in its analyses because of the lack of an agreed-upon cost per ton of carbon.

How does CBO address co-benefits of legislation and how could this process be improved?

Just as it neglects to consider the social cost of carbon, CBO rarely considers the co-benefits of legislation, and when it does, it is only to track savings in social service programs, such as when effective training programs (Department of Labor budget) result in savings in food stamps (U.S. Department of Agriculture budget). Climate co-benefits can include energy efficiency upgrades that improve indoor air quality, lower electricity costs, and reduce emissions as well as nature-based solutions that reduce storm impacts, sequester carbon, provide wildlife habitat, improve water quality, and create recreation opportunities. Because the nation as a whole reaps these benefits, federal programs should be credited with the value of co-benefits in their budget justifications—even if those benefits were not the program’s original intent.

How does CBO’s 10-year time frame impact climate policy development?

Ten-year scorecards are required by PAYGO, and economists have justified this time frame by asserting that projecting economic conditions more than a decade into the future cannot be done without an unacceptable degree of uncertainty. But this gain in certainty comes at the expense of capturing the full life cycle of a policy. Although climate-friendly actions and policies tend to have high up-front costs, they typically pay back in cost savings over time. Unfortunately, considering impacts only on a 10-year time frame does not capture the entire life cycle of an investment in climate mitigation or adaptation. This relatively short time frame also fails to capture the life cycle of policies that contribute to exacerbating climate change in the long term. This raises questions about intergenerational equity, since it assumes that a resource, an identical substitute, or a new technology will always be available and that future generations will be able to absorb the costs of policies implemented today.

The 10-year timeframe also limits consideration of the long-term costs of climate inaction and the benefits of mitigating long-term impacts. For example, a 2018 CBO report on the economic effects of carbon pricing notes that climate change has been projected to have a small impact on the U.S. economy in the next few decades. The report acknowledges, however, that the economic impacts of climate change will rise over time, but CBO does not monetize these effects or count the avoidance of future costs in its analysis because the specific impacts are uncertain and fall outside of the projection window. In another report on carbon pricing, CBO did not conclusively address the future cost of climate change, instead noting the uncertainty in its projected economic impacts. Some researchers, taking a longer perspective, project that climate change will cost the U.S. economy up to $500 billion each year by the end of the century.

Would it be beneficial or even practicable for CBO to expand projections beyond 10 years into the future?

While projecting greenhouse gas emissions and climate impacts beyond a decade in the future is commonplace in reports by groups such as the Intergovernmental Panel on Climate Change, projecting economic conditions beyond 10 years may make results too uncertain to be useful. CBO will need to be creative in generating new ways to look at climate impacts and opportunities related to legislation over different time scales. One option may be for CBO to provide forecast ranges beyond 10 years.

How has CBO scoring impacted a proposed climate policy in the past?

CBO was criticized for the way its scoring of the American Clean Energy and Security Act of 2009 (H.R.2454), known as the Waxman-Markey bill after its chief sponsors, disincentivized the bill’s authors from including provisions to help consumers access funding for energy efficiency projects. Because of technicalities in CBO’s methodology, energy efficiency programs are counted in the bill’s costs, but their benefits are not counted in the bill’s favor. This may discourage policies that facilitate energy efficiency, a cost-effective method of emissions r eduction that saves consumers money on energy bills and allows for spending elsewhere in the economy.

Policymakers commonly include projections of emission reductions when introducing legislation. If CBO were to score bills on their impacts to emissions and the climate, what effect would that have on these projections?

Since most bills go unscored until they pass out of committee, lawmakers would still likely conduct their own projections of emission reductions on climate-specific bills to inform committee deliberation. However, institutionalizing emissions scoring by a widely-respected, politically neutral body may alter consideration of which models are chosen to analyze bills and which bills are analyzed for climate impacts during the drafting process.

How can CBO scoring impact the trajectory of greenhouse gas emissions?

CBO does not score bills on their impact on greenhouse gas emissions, which means that few bills that do not explicitly address climate are ever evaluated on their climate impact. Responding to the climate crisis requires environmentally-sound policy in all issue areas, since all aspects of society and the economy will be affected by climate impacts. Not acknowledging climate change in the standard analysis of legislation minimizes the importance of reducing emissions from all sources, and may result in climate policy gains being subverted by emissions directly or indirectly caused by legislation that does not specifically relate to the environment.

Would incorporating climate impacts into CBO’s scoring impact the office’s political neutrality?

Although some Republican lawmakers have introduced bills aimed at reducing emissions, climate legislation is still viewed as a partisan issue. Therefore, there may be a chance that requiring the CBO to score bills on their climate impacts would alter its nonpartisan image. However, most climate models are understood by most scientists and economists to be methodologically sound and not driven by political agendas. And despite the CBO using models and methods accepted by the majority of economists, Republican lawmakers called for funding cuts to the CBO after its unfavorable scoring of the American Health Care Act (H.R.1628), the proposed replacement to the Affordable Care Act (H.R.3590). This suggests that the CBO, because of its importance, will always be subject to accusations of partisanship.

It is clear that current CBO methodology is not creating scores that include the full costs or benefits of legislation. Passing effective climate policy requires looking into the future and considering factors that are not easily monetized. As the window to act on climate grows smaller, it is important that all pieces of legislation are considered through the lens of climate impact so that progress from climate-centered policy is not reversed by policy that generates additional emissions.

Authors: Abby Neal and Jonathan Herz