HOW A "CLIMATE REBATE" WOULD WORK

Policies that restrict greenhouse-gas emissions will significantly raise the price of fossil-fuel energy products.  That’s necessary to encourage energy efficiency and greater use of clean energy sources, but it will pose serious challenges for low- and moderate-income households.  Even a modest 15 percent reduction in greenhouse-gas emissions would cost the poorest fifth of Americans an average of $750 a year per household. These households have average annual incomes of only about $13,000.

The Center on Budget and Policy Priorities has designed a “climate rebate” that would offset the impact of higher energy-related prices on low- and moderate-income consumers.  A climate rebate returns to consumers the purchasing power they would lose due to the higher prices, thus avoiding substantial hardship.  And a rebate can be delivered without creating large new programs or bureaucracies.  Here’s how it would work.

The basics:  Each month, a climate rebate would be delivered to very low-income households through the Electronic Benefit Transfer (EBT) systems — which are essentially debit cards — that states already use to provide food stamps and other forms of assistance to low-income families, the elderly, and others.

At the same time, low- and moderate-income working families would receive a climate rebate in the form of a higher Earned Income Tax Credit (EITC).  Any household filing for an EITC on its federal tax return would automatically receive a climate rebate as part of its tax refund for that year.

Who would be eligible?  The EBT form of the rebate would automatically be provided to the millions of households that receive food stamps or the low-income subsidy for the Medicare prescription drug benefit.  Households that are financially eligible for these programs but don’t participate in them could apply for the climate rebate through their state human services agency.  The EITC form of the rebate would go to anyone who is eligible for the EITC and files a federal tax return.

How much would the rebate be worth?  The rebate would be set annually by the Energy Information Administration and would equal the loss in purchasing power that the average household in the bottom fifth of the population would experience due to the effects of higher prices for home energy, gasoline, food, and other goods and services resulting from the emissions cap.  Larger families would receive larger rebates.  The dollar amount of the rebate would go up over time, as the emissions cap tightened and energy prices rose.

How many people would get rebates?   The EBT/EITC approach would generally make assistance available to the approximately 60 million Americans in the “bottom quintile” (the lowest-income 20 percent of the population).   For a family of three, these are households with incomes below $27,000.    About three-fourths of these households would be helped automatically, with no need for additional outreach, because they already receive food stamps, the EITC or the Medicare low-income drug subsidy.

More than 20 million Americans in the next-to-bottom quintile would also receive rebates, which would phase down at the same income levels as the EITC.  In 2007, the EITC completely phased out at about $40,000 for a married couple with two children, and $15,000 for workers without children.

How could the rebates be paid for?  Climate-change policies can generate more than enough revenue to pay for the rebates.  The rebates described here would cost only about 14 percent of the total value of the emissions allowances in a cap-and-trade system (or 14 percent of the revenues generated by a carbon tax).  Of this 14 percent, one percent should be used to boost funding for the Low-Income Home Energy Assistance Program (LIHEAP) and the Weatherization Assistance Program, particularly for families facing above-average energy costs.

Would low-income people still have an incentive to conserve energy?   Absolutely.  They would still face higher prices for energy-related products, and would therefore have a strong incentive to conserve and seek out energy efficiency improvements.  The idea is not to have utility bills go down, but rather to prevent a loss in purchasing power, which leads to the best of both worlds — incentives to conserve remain but families are protected against poverty and hardship.

Why are rebates more effective than relying on utility company programs or LIHEAP? Relying on utility companies to assist their low-income customers is particularly ill-advised.  Utility companies generally don’t know their customers’ incomes, so they can’t easily identify which ones have low incomes.  Also, reducing utility bills won’t help households cope with increases in other energy-related costs, such as gasoline, food, or rents (when utilities are built into the rent, as they are for about 20 percent of low-income households).  In fact, less than half of the impact of climate-change policies stems from higher home energy costs. 

LIHEAP is an important program, but it has a limited reach.  It serves only one in seven of those eligible, and is narrowly tied to utility bills. LIHEAP (and weatherization assistance) can, however, play a useful role in supplementing rebates for low-income consumers facing above-average energy costs.

Could the middle class get climate rebates too? If sufficient resources are made available, climate rebates could be extended to the middle class as well.  For about half of the total value of the emissions allowances under a cap-and-trade system, for example, one could provide full climate rebates to households in the bottom 60 percent of the income scale, and partial rebates to the next 20 percent; married couples making up to about $100,000 a year (and single filers making up to about $50,000) would get at least a partial rebate.  (Under such an approach, the EBT mechanism would still be needed to reach very low-income households who do not file tax returns, but the EITC increase could be replaced with a broader refundable climate change tax credit.)  Alternatively, if sufficient resources were available, one could use all of the emissions allowances to issue an equal “climate dividend” to every American.

For a fuller discussion of these issues, see Designing Climate-Change Legislation that Shields Low-Income Households from Increased Poverty and Hardship, online at http://www.cbpp.org/10-25-07climate.htm.