Who Pays for Climate Policy?

April 22, 2009

It’s Earth Day today, and Congress began hearings on a carbon cap-and-trade bill. It’s still unclear how the Obama administration came to their revenue estimates from auctions of carbon allowances, and it’s unclear what the revenue will be used for.

One thing is clear: any policy that aims to reduce greenhouse gas emissions, whether it’s a cap-and-trade system or a carbon tax, will have real burdens on American households. We won’t get into the arguments as to whether or not there should be this type of climate policy. Instead we want to ask why Congress and the Obama administration are pushing a cap-and-trade system instead of a carbon tax. Andrew Chamberlain, an adjunct scholar of the Tax Foundation, says the following in a recently released working paper on the issue:

“A cap-and-trade system offers lawmakers a way to curb greenhouse gas emissions through regulations rather than tax increases – a less visible approach that enjoys the popular perception of being less burdensome to households. Contrary to this perception, economic theory teaches that cap-and-trade and a carbon tax impose nearly identical economic burdens on households.”

Assuming a cap-and-trade system designed to cut U.S. carbon emissions by 15 percent compared to 2006 levels, with an allowance price of roughly $100 per metric ton of carbon (a model used by most U.S. Congressional Budget Office studies), here are some things that Andrew points out in his study:

  • In total, the annual burden from a cap-and-trade program would be $144.9 billion n American households, which would be about $1,218 per household.
  • The analysis also shows that the burden of cap-and-trade would be disproportionately borne by low-income households because they tend to spend a larger fraction of their income on carbon-intensive products like fuel and electricity than higher-income households. The bottom 20 percent of income earners have an annual cap-and-trade burden that is equal to 6.2% of their household cash income, almost double that of the second quintile of income earners (3.2%).
  • The burden of cap-and trade would also be disproportionately borne by those under age 25 and over 75 years, those in southern states, and single parents with dependent children.

Matt Lewis featured the study on Townhall and David Harsanyi of the Denver Post cited it an op-ed today. As for media appearances on the subject, I appeared on the Al Roney Show on 810-AM WGY in Albany this morning. Our president, Scott Hodge, will be on Fox News’s Your World with Neil Cavuto at 4 PM ET. I’ll be on Fox Business News’s America’s Nightly Scorecard at 7 PM ET.


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