Update: How to Lower Costs of Climate Change Policies for Consumers

The Budget & Policy Center is releasing a new policy brief today on a federal climate rebate proposal. With cap-and-trade legislation currently being drafted in the U.S. House Energy and Commerce Committee, it is critical that lawmakers adequately address the regressive financial impact that any carbon-pricing policy will have on lower and moderate income households. The paper provides a framework for how a climate rebate assisting lower and moderate income households can be integrated into federal climate policy.

A climate rebate represents an effective and efficient strategy for mitigating the household budget impact of a cap-and-trade system. It would utilize existing benefit and tax structures to deliver a cash rebate to lower and moderate income families, would be fully funded from cap-and-trade emission permit revenue, and would reach virtually all eligible families.

An important strength of a climate rebate is that it would address the shortcomings of other consumer assistance proposals, such as a utilities approach. For more information on how a climate rebate would work, please refer to our paper.

Update: Yesterday, the U.S. House Energy and Commerce Committee concluded the markup of the American Clean Energy and Security Act of 2009 (H.R. 2454) by voting to move it out of committee. Introduced by Reps. Henry Waxman (D-CA) and Ed Markey (D-MA), the bill (commonly referred to as Waxman-Markey) would cap the emissions of greenhouse gases in order to curb climate change.

Importantly, the Waxman-Markey bill includes provisions to protect lower income consumers from the financial impact of climate policy, similar to the recommendations outlined in our recent policy brief (based on analysis by the CBPP). In particular, the bill would allocate 15 percent of emission permit revenue to fully offset the average loss in purchasing power for lower income consumers. For more information on the bill, refer to the Center on Budget and Policy Priorities’ recent report.

Climate Series #4: Utilities are a Limited Option for Offsetting Increased Energy Costs

As noted in previous posts, Congress is considering legislation to implement a cap-and-trade program to restrict greenhouse gas emissions in order to curb climate change. Although such a program would have a positive impact on the environment and the health and well-being of communities, it would also cause regressive energy cost increases for lower income households.

Relying on utility companies for consumer assistance has emerged as one strategy to offset the costs. However, according to a recent report by the Center on Budget and Policy Priorities there are limitations to this approach.

For starters, utility bills will account for less than half of the total rise in energy costs for lower income households. As illustrated in Figure One, over 50 percent of the cost impact experienced by lower income consumers would be due to increases in the price of gasoline, home energy bills other than utility bills, and energy-intensive products, such as food.


Importantly, a utilities approach would reduce the incentive for lower income consumers to conserve energy. A key goal of a cap-and-trade system would be to motivate consumers to reduce their energy consumption by modestly raising prices. Because lower income households’ utility bills would be reduced under a utilities strategy, these households would have less of an incentive to conserve energy.

And finally, lower income households whose utilities are built into their rents, might not receive adequate compensation. Instead of a utilities approach, see our post on an alternative rebate strategy proposed the Center on Budget and Policy Priorities.

Climate Series #3: Offsetting Increased Energy Costs for Lower Income Households

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.

Climate Series #2: Why Cap and Trade?

Climate change caused by the emission of greenhouse gases presents a serious threat to the environment, the health and well-being of communities, and the economy. Congress has acted to address climate change through a national cap-and-trade policy proposal recently introduced in the House Energy and Commerce Committee.

The creation of a national cap-and-trade program has the potential to curb climate change while simultaneously creating new opportunities and supporting economic security in communities across the nation. The purpose of a cap-and-trade program is to establish concrete greenhouse gas emission reductions and to generate market-based incentives for consumers and companies to conserve energy. For a comprehensive report on how a cap-and-trade program would work, check out the Sightline Institute’s cap-and-trade policy primer.