CBO Says Cap & Trade To Cost $175 Per Household In 2020

Jun 22: At the request of Representative David Camp (R-MI) Ranking Member of the House Ways and Means Committee the Congressional Budget Office (CBO) has completed an analysis of the potential effects on households of the cap-and-trade program that would be implemented pursuant to H.R. 2454, the Waxman-Markey American Clean Energy and Security Act of 2009 (ACES), as reported by the House Committee on Energy and Commerce on May 21 [See WIMS 5/22/09]. As indicated in a press conference today (June 23), President Obama said the House would take up the legislation this week. Media reports quoting sources from Speaker Nancy Pelosi's office indicate that the bill will be considered on the House Floor on Friday, June 26.

In an accompanying letter to Camp, CBO Director Douglas Elmendorf said, "The attached report summarizes the results of that analysis, indicating both the net overall cost per household nationwide and the net costs or benefits that would be realized by households in various income quintiles. CBO has estimated those amounts for the bill as it would be implemented in 2020 (but shown in 2010 dollars). This analysis does not address other provisions of the bill, nor does it encompass the potential benefits associated with any changes in the climate that would be avoided as a result of the legislation." Copies of the report will also released to Ways and Means Chairman Charles Rangel (D-NY), Committee on Energy and Commerce Chairman Henry Waxman (D-CA) and Ranking Member Joe Barton (R-TX).

According to an explanation of the analysis posted on the CBO blog, "Reducing emissions to the level required by the cap would be accomplished mainly by stemming demand for carbon-based energy by increasing its price. Those higher prices would, in turn, reduce households’ purchasing power. At the same time, the distribution of emission allowances would improve households’ financial situation. The net financial impact of the program on households in different income brackets would depend in large part on how many allowances were sold (versus given away), how the free allowances were allocated, and how any proceeds from selling allowances were used. That net impact would reflect both the added costs that households experienced because of higher prices and the share of the allowance value that they received in the form of benefit payments, rebates, tax decreases or credits, wages, and returns on their investments.

"The incidence of the gains and losses associated with the cap-and-trade program in H.R. 2454 would vary from year to year because the distribution of the allowance value would change over the life of the program. In the initial years of the program, the bulk of allowances would be distributed at no cost to various entities that would be affected by the constraint on emissions. Most of those free allocations would be phased out over time, and by 2035, roughly 70 percent of the allowances would be sold by the federal government, with a large share of revenues returned to households on a per capita basis. This analysis focuses on the effect of the legislation in the year 2020, a point at which the cap would have been in effect for eight years (giving the economy time to adjust) and at which the allocation of allowances would be representative of the situation prior to the phase-down of free allowances. The incidence of gains and losses would be considerably different once the free allocation of allowances had mostly ended. Although the analysis examines the effects of the bill as it would apply in 2020, those effects are described in the context of the current economy -- that is, the costs that would result if the policies set for 2020 were in effect in 2010.

"On that basis, CBO estimates that the net annual economywide cost of the cap-and-trade program in 2020 would be $22 billion -- or about $175 per household. That figure includes the cost of restructuring the production and use of energy and of payments made to foreign entities under the program, but it does not include the economic benefits and other benefits of the reduction in greenhouse gas emissions and the associated slowing of climate change. Of the total cost, CBO could not determine the incidence of certain pieces (including both costs and benefits) that represent, on net, about 8 percent of the total.

"For the remaining portion of the net cost, households in the lowest income quintile would see an average net benefit of about $40 in 2020, while households in the highest income quintile would see a net cost of $245. Added costs for households in the second lowest quintile would be about $40 that year; in the middle quintile, about $235; and in the fourth quintile, about $340. Overall net costs would average 0.2 percent of households’ after-tax income."

The House Committee on Rules has indicated that it is expected to meet this week to report a rule that may structure the amendment process for floor consideration of H.R. 2454. The Committee has issued a notice that any Member wishing to offer an amendment to the American Clean Energy and Security Act of 2009 must do so by 9:30 AM on Thursday, June 25, 2009, in order for the amendment to be considered by the Rules Committee. The Committee has also posted the text of H.R. 2454 to be introduced (see link below).

Access links to the analysis, data, letter and blog post (click here). Access a Bloomberg's report indicating House scheduling for this week (click here). Access the Rules Committee posting (click here).