In testimony before the Senate Finance Committee, Congressional Budget Office (CBO) Director Douglas Elmendorf laid out the projected cost of legislation to reduce greenhouse gas emissions, as well as the cost of doing nothing.
Early in May, the CBO entered into legislative debate over climate change legislation with a report on the potential harm to the economy that could result from climate change. In Senate testimony on May 7, Elmendorf presented CBO’s estimate of the projected impact of putting a price on carbon dioxide through a cap-and-trade system:
Obtaining allowances—or taking steps to cut emissions to avoid the need for such allowances—would become a cost of doing business for firms that were subject to the CO2 cap. However, those firms would not ultimately bear most of the costs of the allowances. Instead, they would pass those costs along to their customers (and their customers’ customers) in the form of higher prices. Such price increases would stem from the restriction on emissions and in most circumstances would occur regardless of whether the government sold the allowances or gave them away.
Although the price of energy-intensive items such as electricity, natural gas, home heating fuels, and gasoline would increase the most, the price of nearly all items would rise in response to the imposition of a cap-and-trade program because energy is an input for almost all goods and services. The price increases for items that were not energy-intensive would account for approximately 40 percent of the total price increases for households.
Without incorporating any benefits to households from lessening climate change, CBO estimates that the price increases resulting from a 15 percent cut in CO2 emissions could cost the average household roughly $1,600 (in 2006 dollars). As noted above, most of those costs reflect the value of the allowances and would appear as income somewhere else in the economy, with the specific location depending on policymakers’ decisions. … CBO estimates that the additional cost would range from nearly $700 for the average household in the lowest one-fifth (quintile) of all households arrayed by income to about $2,200 for the average household in the highest quintile.
The CBO estimate, it should be noted, is based on an analysis of the impact of cap and trade proposals conducted in 2000 and restated in 2006 dollars; the CBO estimate is not an analysis of the Waxman-Markey bill.
This CBO projection differs significantly from a projection by the Environmental Protection Agency (EPA), which estimated that households would have to pay an additional $98 to $140 annually under the bill. The difference can be largely attributed to EPA assumptions regarding the availability and price of domestic and international offsets in the early years of the program. Analysis of the Waxman-Markey bill shows that 96 percent of the CO2 reductions through 2050 could potentially come from domestic and international offsets. The EPA predicts that 50 percent of the reductions likely would come from offsets.
In his testimony, Elmendorf expressed concern about the disproportionate impact on low-income consumers:
The rise in prices would impose a larger burden, relative to income, on low-income households than on high-income households for two reasons. First, low-income households spend a much larger fraction of their income than do high-income households. Second, energy-intensive items account for a greater share of low-income households’ total expenditures. Data collected by the Bureau of Labor Statistics indicates that, measured as a share of income, spending on energy-intensive items by households in the lowest income quintile averages more than five times that by households in the highest income quintile.
In discussing the bill’s likely impact on low-income Americans, the CBO Director offered the following perspective:
If policymakers gave priority to protecting low-income households, a variety of policy instruments would probably be needed. Although a significant fraction of those households have earnings—and thus are likely to file tax returns—many do not. Some mechanisms already in place, such as cost-of-living adjustments for Social Security and other entitlement programs, would automatically compensate some households for part or all of the increased energy costs. Still, no program could address all the region- and household-specific circumstances that could affect families’ costs.