January 8, 2008

RALEIGH – A model the Appalachian State University Energy Center used to project the economic impact of N.C. climate change policies has “serious flaws” that undermine its credibility. That’s the verdict of a new peer review report (pdf version) from a Boston-based economic research group.

Click here to view and here to listen to Dr. Roy Cordato discussing this press release.

The John Locke Foundation is drawing attention to the peer review it commissioned from the Beacon Hill Institute at Suffolk University. The peer review raises red flags about the model’s projections. “The Appalachian State Energy Center used this model to predict hundreds of thousands of new jobs and a major positive impact on North Carolina’s economy,” said Dr. Roy Cordato, JLF Vice President for Research and Resident Scholar. “Trained economists conducting this new peer review found that the model is so flawed that no one should trust the results.”

The Locke Foundation commissioned the review because the N.C. Division of Air Quality chose not to submit the Appalachian State University study for an independent assessment, Cordato said. “A study that could have drastic impacts on North Carolina consumers and taxpayers needs a thorough, independent review of its validity.”

The model officially called the North Carolina Energy Scenario Economic Impact Model, or NC-ESEIM, first appeared in 2005, according to the peer review. Last year, Appalachian State researchers used it to measure the economic impact of 31 policy options designed to reduce greenhouse gas emissions. Advocates target these emissions as a source of global warming.

“Unfortunately, the model has serious flaws that undermine its ability to forecast how changes in energy policy will impact wages, Gross State Product, and the number of jobs in North Carolina,” according to report author Jonathan Haughton. Haughton is senior economist for the Beacon Hill Institute, founded in 1991 as the research arm of the Department of Economics at Boston’s Suffolk University. Haughton is an associate professor of economics at Suffolk with an economics Ph.D. from Harvard University. “The model is so flawed that its results are not credible,” he wrote in his peer review.

The first major problem with the Appalachian State study is its lack of transparency. The university’s Energy Center refused to provide access to its data when the Locke Foundation’s Carolina Journal requested it. “Our comments are based on secondary sources, as we did not have direct access to the model or the underlying code,” Haughton wrote.

Apart from the “lack of documentation and public access to the model,” the Beacon Hill Institute peer review identifies several major flaws. The model uses a “multiplier analysis” that’s inappropriate for an economy such as North Carolina’s that has low unemployment. The model does not address correctly the impact of changing electricity prices tied to proposed energy policy changes. Plus the model uses assertions about investment that are “too optimistic” and assumptions about energy costs that are “implausible.”

The incorrect use of the “multiplier analysis” leads to a questionable claim that new climate change policies would increase state employment by 23,500 jobs per year, according to the Beacon Hill Institute report. “In an economy with full employment, hiring someone for a new job essentially means bidding someone away from another job,” Haughton wrote. “For the full multiplier effects to apply, one would have to assume that the state were in perpetual recession though 2020.”

“This is Economics 101,” Cordato said. “It’s testimony to the fact that the Appalachian State Energy Center report lists no trained economists among its principal authors.”

Cordato also draws attention to another finding that defies logic. “The Energy Center contends that North Carolina’s economy — measured in Gross State Product — will rise when electricity is produced with greater inefficiency or expense,” he said. “In other words, the Appalachian State University report says more expensive energy will somehow lead to more jobs. The peer review is correct when it labels this idea ‘nonsensical.’ Sound economics and common sense tell us that higher energy prices do not create more jobs.”

Overall, the results tied to the NC-ESEIM are “not compelling,” according to the Beacon Hill Institute assessment. “We are just beginning the great debate about the extent to which, and how, state governments should pursue policies to reduce greenhouse gas emissions,” Haughton wrote. “Appropriate formal models to measure the economic impact of such policies will have an important role to play in this process, but it is essential that such models be credible and testable. The NC-ESEIM model falls short of this standard.”

For more information, please contact Dr. Roy Cordato at (919) 828-3876 or [email protected]. To reach Jonathan Haughton at the Beacon Hill Institute, call (617) 573-8750 or write to [email protected] To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].