Working Paper No. 6
Many U.S. lawmakers view cap and trade as a politically superior non-taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. approach to climate policy. However, cap and trade imposes identical economic burdens on households to a similarly designed carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. . Using the newly-released 2002 input-output accounts we present new estimates of the distributional impact of a typical cap-and-trade system by income, age, U.S. region and family type. In total, households would face an annual burden of roughly $144.8 billion per year with costs disproportionately borne by low-income households, those under age 25 and over 75 years, those in Southern states, and single parents with dependent children. Using RIMS II multipliers we estimate the broader economic impact of cap and trade. Depending on how the system is structured, cap and trade could reduce U.S. employment by 965,000 jobs, household earnings by $37.8 billion, and economic output by $136 billion per year or roughly $1,145 per household. Lawmakers weighing the costs and benefits of climate policy should be aware that cap and trade would impose a significant and regressive annual burden on U.S. households, and would not represent a “tax free” way to reduce greenhouse gas emissions.