Costs Beyond the Disclosing Firms.

• Author: Winden, Matthew

The Securities and Exchange Commission's new carbon emissions disclosure rule would lead to substantial economy-wide costs exceeding the agency's own estimates, eclipsing the ostensible benefits investors would get from such a rule. The reason the SEC underestimates the costs is because it focused on direct compliance costs of firms and ignored other costs that the rule would impose elsewhere in the economy. Among those are reductions in aggregate economic activity indirectly stemming from compliance and a degradation in domestic business competitiveness.

The SEC estimates that public companies would incur direct costs of $6.37 billion to comply with the proposed rule. That far exceeds the estimated $3.85 billion in compliance costs for all current SEC regulations. However, the aggregate effect of the proposed rule on the entire U.S. economy goes beyond the direct compliance costs to the affected firms.

To estimate the total cost (both direct and indirect), I used the Regional Economic Models Inc. (REMI) model of the U.S. economy. REMI is a dynamic, computable general equilibrium model of the interlinkages of components of the economy (e.g., aggregate demand for consumer goods and services, investment, government, net international trade, labor and capital demand of companies, demographics and labor supply, interactions between firms and households) at regional and national levels. By entering the direct compliance cost as a regulatory cost increase (a de facto tax) on businesses, REMI can model the ripple effects of the compliance rule throughout the broader economy.

I estimated that by the end of the decade, when...