Will a Climate Bill Cost Iran $100 Million a Day?

A big new talking point has emerged in the battle for a climate bill. Reuters reports:

“[Senator John] Kerry also has been casting the climate debate in national security tones. He joined veterans of the Iraq war to unveil a clock that counted U.S. revenues Iran would be deprived of as the United States lowers carbon emissions by burning less imported oil. The clock, adorned with Iranian President Mahmoud Ahmadinejad’s picture, is measuring $100 million a day in potential lost revenues to Iran….”

Senator Kerry hinted at this line in a piece for Politico last week, writing (in the context of the climate bill) that U.S. dependence on imported oil “makes Iran $100 million richer every day”. Indeed I’ve noticed it cropping up frequently over the last week. Its origins appear to be an April 9^th Center for American Progress Action Fund analysis; an NRDC blog post on April 12^th correctly checked the math.

[UPDATE 4/29: Brad Johnson, who wrote the original CAP post, has a thoughtful response in the comments, in which he writes: "I feel that you conflated what I did in your piece with how others are talking about it. Hopefully it was transparent that I recognized this is a long-term strategic shift, not a short-term crisis response." I encourage people to read his comment, and his original post.]

As someone who works on both Iran and climate, I’d be quite happy if it was true.

Unfortunately, by any common sense interpretation, it’s not.

The CAP analysis suggests that Iran would lose $1.8 trillion between now and 2050 if the United States passed a strong climate bill and the world as a whole slashed its emissions too. That works out to over $100 million each day for the next forty years.

The problem is that while the Iranian nuclear problem is unfolding on a relatively short timescale, most of the projected decline in oil revenues comes in the out years. The annual savings, using CAP’s own methodology (which is admirably transparent), reach less than $5 billion annually in 2015, or about $10 million dollars a day. (That roughly doubles by 2020.) That’s about 2-3% of what EIA thinks Iranian oil revenue will be in 2015 (based on the 2009 IEO) – a nontrivial number, but not one that’s of much strategic consequence.

There are other places to quibble with the CAP methodology, and in this case the fixes probably help their case. In particular, they assume that Iranian oil production would be unaffected by strong emissions limits. That’s almost certainly wrong. The oil price reductions in the CAP scenario result from lower world oil consumption, which, all else being equal, should result in equal or lower production from everyone, including, possibly Iran.* The effect could be comparable to the one that CAP focuses on: an 0.1 mb/d drop in Iranian production (against a backdrop of 4 mb/d of production and $100/bbl oil prices) would hit Iranian revenues to the tune of $10 million each day. Still, it’s hard to see how the order of magnitude would change.

Don’t get me wrong: There are plenty of reasons to pass a good energy and climate bill that includes a price on carbon. There are also plenty of reasons to cut U.S. oil consumption through a variety of policy tools (of which carbon pricing is probably the weakest) – including the fact that, done right, it might weaken some nasty states. But climate bill proponents are overpromising.

*Oil markets are strange things, which means that there are theoretically plausible (though probably unlikely) scenarios in which a policy-driven (as opposed to price-driven) drop in global oil consumption (and prices) actually leads to higher Iranian production. Lower consumption must be supported by lower market prices for oil. Lower prices will knock out some high-cost production. If the amount of high-cost non-OPEC production foregone because of a drop in market prices is greater than the reduction in oil consumption that accompanies it (that is, if the elasticity of non-OPEC production is greater than the elasticity of oil consumption), then a drop in total consumption will let OPEC grab some extra barrels. The result can be a higher production quota for Iran.