Issues with CBO Numbers on Waxman-Markey Cap-and-Trade Bill

July 9, 2009

There currently exists a talking points war on the issue of numbers between proponents and opponents of the Waxman-Markey cap-and-trade bill that has passed the House of Representatives. Proponents (typically those on the left) are citing a CBO study that showed the impact would not be as regressive as some might imagine and that it would only cost the average household $175. Opponents (typically those on the right) of Waxman-Markey have cited studies like that done by Tax Foundation economist Andrew Chamberlain, which concluded that the average household would pay over $1,000 from a typical cap-and-trade bill.

So what’s going on?

First, the Tax Foundation study, which serve the basis for the cap-and-trade calculator on the Tax Foundation’s website, is not based upon Waxman-Markey. It was written well before Waxman-Markey was even brought up. The Tax Foundation study is a measure of the gross burden from cap-and-trade and did not model any specific piece of legislation that included proposals like energy rebates to selected groups chosen by Congress. Congress can spend the money from cap-and-trade revenues however it wants.

Second, the CBO study adjusts the 2020 carbon emissions allowance value based upon a GDP ratio as opposed to a price level ratio. Specifically, CBO calculates the $91.4 billion market value of allowances in 2009 levels by calculating the market value of allowances in 2020 and then multiplying that 2020 amount by the ratio of GDP in 2009 to GDP in 2020. It does not adjust to 2009 levels using CPI. I guess CBO’s idea is to measure the relative impact of the allowances on the overall economy in 2020 and apply that to 2009. The CPI adjustment approach and the GDP adjustment approach will differ to the extent that real GDP is projected by CBO to grow from 2009 to 2020. (This assumption, along with the rebates and overall level of allowances, is one of the determining factors of the now-famous $175 per household figure.)

Finally, regarding the question of how CBO distributes the overall costs to households, it was a bit odd to discover that CBO makes a rather unrealistic economic assumption that was written into Waxman-Markey when it comes to some of the allowances that utility companies would receive. CBO’s report says this:

“It would also include about $14 billion in allowances given to companies that distribute electricity and natural gas, with instructions to pass those benefits on to residential customers.”

Mandating that the savings accruing to a company from this “subsidy” be passed along to consumers is impossible without forcing these utility companies into a long-term economic loss position. While CBO may be assuming that this occurs however it does (just because it’s in the law), a more likely scenario is that like other allowances the gains from giving away these permits to companies will flow to the owners of the firm than end-use consumers. The end result is that the distributional effects of Waxman-Markey will be somewhat more regressive than CBO estimates. (This has nothing to do with the $175 per household average, which is an average of all households. This has to do with the distribution of the burden.)


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