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Tuesday, April 28, 2009

A cap-and-trade system is being considered at the federal level as a strategy to reduce and regulate greenhouse gas emissions. Although such a system will be good for the environment, it is expected to cause a modest increase in the price of energy and energy intensive products.

Current energy costs consume a disproportionate share of income for lower wage households. As illustrated in Figure One, households in the bottom fifth of the income scale spend about 21 percent of their income on energy compared to four percent for the wealthiest households.

The Congressional Budget Office estimates that a 15 percent reduction in greenhouse gas emissions will lead to more than a three percent increase in energy costs for lower income consumers. By contrast, the same reduction of emissions will only lead to less than a two percent increase for the wealthiest households.

Existing tax and benefit systems can be used to mitigate a cap-and-trade program’s regressive effects on lower income households. The Center on Budget and Policy Priorities has introduced such a proposal in which qualifying households would receive a climate rebate to help offset the increased energy costs. The proposal represents an efficient and effective strategy to protect lower-income consumers and should be considered in any federal climate policy.

It should be noted that left unhindered, greenhouse gas emissions will likely result in higher costs to consumers. A recent report by the Climate Leadership Initiative at the University of Oregon has projected that in Washington State alone, households will experience $1,250 in additional costs on average as a result of climate change per year by 2020 if no action is taken to reduce greenhouse gas emissions.

Up Next in the Series: The limitations of using utility companies to protect lower-income consumers.

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