Friday, April 27, 2007

Most Cap & Trade Cost Will Be Borne By Consumers

Apr 25: The Congressional Budget Office (CBO) has released a brief 8-page report entitled, Trade-Offs in Allocating Allowances for CO2 Emissions. The report explores the implications of a “cap-and-trade” program to reduce U.S. emissions of greenhouse gases (GHG), including carbon dioxide (CO2) which is currently being considered in Congress. Under a cap-and-trade program for carbon dioxide emissions, policymakers would set a limit on the total amount of CO2 that could be emitted in a given period -- the “cap”—and would issue rights, or allowances, corresponding to that level of emissions. Entities that were subject to the cap (such as coal mines, oil importers, refineries, or electric utilities, depending on the proposal) would be required to hold allowances for their CO2 emissions. After the allowances were initially distributed, entities would be free to buy and sell them -- the “trade” part of the program—and the price of allowances would adjust to reflect the cost of meeting the emission cap.

The CBO brief focuses only on CO2 emissions and examines how policymakers’ decisions about allocating the allowances would affect the total cost of the policy to the U.S. economy, as well as the distribution of that cost among households in their various roles as workers, consumers, and investors. CBO points out that the emission allowances (e.g. right to emit, say, 1 ton of CO2) would have substantial value -- perhaps totaling tens of billions or even hundreds of billions of dollars per year. Who received that value would depend on how the allowances were allocated. One option would be to have the government capture their value by selling the emission allowances, as it does for licenses to use the electromagnetic spectrum. Another possibility would be to give the allowances to energy producers or some energy users at no charge -- the approach that the U.S. government adopted in the sulfur dioxide program and that the European Union has used since 2005 in its cap-and-trade program for CO2 emissions.

CBO says that, "Regardless of how the allowances were distributed, most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline. Those
price increases would be regressive in that poorer households would bear a larger burden relative to their income than wealthier households would." In the most regressive of the strategies that CBO examined, average household income would fall by 3.0 percent for the lowest quintile and rise by 1.9 percent for the highest quintile.

Access the CBO report (
click here). [*Climate]