MAKING CAP-AND-TRADE FAIR

If there is anything people can do about global climate change, it is cutting greenhouse gas emissions (GhGs). Though there are other causes of increasing GhGs in the atmosphere, the main thing people can do to cut them is stop burning Old Energy (fossil fuels).

To move away from Old Energy, people will need 2 things: (1) A reason to stop depending on Old Energy, and (2) New Energy. Increasing the price of Old Energy will accomplish both.

Making Old Energy cost more will make people want to use less of it and use it more efficiently. There are 2 ways to make Old Energy cost more: (1) A government imposed cost (tax), and (2) a government imposed restriction on businesses that drives market forces (a cap-and-trade system).

Either way, government intervenes to do what is necessary. That is what government does: It protects the common good by drawing on some of the general welfare.

The majority of people don’t like new taxes on the general welfare. They prefer the idea of the government acting through market forces to finance improvements to the common good. They think market forces act more wisely and realistically than political leaders. That’s why a cap-and-trade system is a more popular idea than a carbon tax for cutting GhGs.

Because most people in the world have concluded it is necessary to do what is possible to act on global climate change (cut GhGs), U.S. political leaders are likely to follow European leaders and legislate a cap-and-trade system after the election in November. U.S. leaders have therefore begun to ask questions about how to make the system effective and fair.

There are 2 keys to making a cap-and-trade system effective. The first is to establish solid caps and ratchet them down as hard as the system will tolerate. The second is to auction the right portion of the allowances provided to power companies and industry for the right to generate GhGs.

The revenue that comes form the auction will do 2 very important things: (1) It will fund research and development of New Energy, making cap-and-trade more effective, and (2) it will make the system more fair by funding support for the people at the bottom of the economy. Those are the people who will disproportionately bear the burden of the higher Old Energy costs that will result from cap-and-trade, the higher costs necessary to drive people away from Old Energy and cut GhGs.

Designing Climate Change Legislation That Sheilds Low-Income Households From Increased Poverty And Hardship, a new paper from the Center on Budget and Policy Priorities (CBPP), stipulates 4 principles that should guide the design of climate change legislation to protect those who might otherwise unduly suffer: (1) Protect the most vulnerable households, (2) use mechanisms that can actually reach all or nearly all low-income households, (3) minimize red tape, and (4) don’t focus solely on utility bills.

The paper is an important contribution to the debate.

The debate is just beginning.

Cap-and-trade is coming.

From the CBPP report - click to enlarge

Designing Climate Change Legislation That Sheilds Low-Income Households From Increased Poverty And Hardship
Robert Greenstein, Sharon Parrott, Arloc Sherman, May 9, 2008 (Center on Budget and Policy Priorities)
and
Climate-Change Policies Can Treat Poor Families Fairly and Be Fiscally Responsible
(Center on Budget and Policy Priorities)

WHO
The Center on Budget and Policy Priorities (CBPP); U.S. policy makers; Low- and moderate-income Americans; Congressional Budget Office (CBO)

From the CBPP report - click to enlarge

WHAT
Designing Climate Change Legislation That Sheilds Low-Income Households From Increased Poverty And Hardship, a new paper from the Center on Budget and Policy Priorities (CBPP), says that well-designed climate-change policy can mitigate global climate change without adding burden to low- and moderate-income households and without worsening the national economy. The key is auctioning a portion of the allowances for GhGs and using the revenues effectively to stimulate the building of New Energy and ease the impact of rising energy prices on those in the bottom half of the economy.

WHEN
Debate on legislation instituting a cap-and-trade system for the U.S. is expected immediately before or after the Congressional Memorial Day break. Passage is not expected until after the November election.

From the CBPP report - click to enlarge

WHERE
- The paper suggests the revenues earned through the auctioning of credits to emit GhGs can be (1) used to fund New Energy incentives and R&D programs and (2) returned to those who need the assistance through
- 14% of revenues from auctioning allowances should go to protect low- and moderate-income households via (1) the Earned Income Tax Credit, (2) the electronic benefit transfer (EBT) systems used to fund state human service agencies serving, for example food stamp programs and the Medicare prescription drug benefit, (3) the Low Income Home Energy Assistance Program and the Weatherization Assistance Program.

WHY
- While giving the sum total of allowances to emit GhGs to power companies and industry would be like “windfall profits” for them, auctioning a portion of the allowances to emit GhGs would create a revenue stream and disincentivize emissions.
- Cap-and-trade could generate $50 billion to $300 billion annually.
- Legislation must protect low- and moderate-income citizens.
- A modest 15% cut in GhGs would impose an estimated $750/year in average added costs on a family in the bottom 20% of the income spectrum (average income ~$13,000).
- Examples of revenue applications: (1) basic research on New Energy, assisting coal dependent communities and other industry communities affected by the shift away form Old Energy (fossil fuels), training low-income workers for green collar jobs.

From the CBPP report - click to enlarge

QUOTES
- Paper: “Myth #1: Energy prices won’t rise if we give away the emission allowances. To the contrary, the law of supply and demand explains why energy prices will rise — and by the same amount — whether energy companies have to buy allowances or get them for free. A cap on emissions will limit the amount of energy produced from fossil fuels. Regardless of whether the government gives away or sells the allowances, the supply of fossil-fuel energy will be restricted, and prices will rise to bring supply and demand back into line — just as the price of bananas would rise if there were a banana shortage. Either way, energy companies will be able to charge what the market will bear and to sell their products at the higher price.* This is why CBO has emphasized that energy companies will reap multi-billion-dollar windfall profits if they receive many of the allowances free of charge.
*A partial exception exists where states still regulate electricity rates. There the state regulators may — or may not — disallow rate increases if the power company gets the allowances for free. Where regulators do disallow rate increases, however, the market signal for cleaner energy would be short-circuited.”
- Paper: “Myth #2: Energy producers need most of the emission allowances to compensate for their losses. Greenhouse-gas restrictions will affect energy companies’ profits and stock-market value by lowering the overall demand for their products. But CBO estimates that, on the whole, companies’ net losses would amount to less than 15 percent of the total value of the emission allowances. Thus, giving energy producers more than 15 percent of the allowances would over-compensate them for their potential losses and give them windfall profits. Those windfall profits, in turn, would be highly regressive, boosting incomes among the (mostly high-income) shareholders of energy companies, even as lower-income households struggle to cope with higher energy bills.