The United States can reduce greenhouse-gas emissions in a way that is fiscally responsible and does not increase poverty or otherwise harm low-income households.  Provision can and should be made in any global-warming legislation to protect low-income consumers. 

Efficient, effective policies to reduce greenhouse-gas emissions work in part by putting a price on those emissions, thereby ending the free use of the atmosphere to dispose of pollution.  This raises prices for fossil-fuel energy products.  The higher prices operate as a market signal that encourages investment in energy efficiency and development of cleaner sources of energy. 

When energy prices rise, households with limited incomes are affected the most.  They spend a larger share of their budgets on energy than better-off households do.  They also are less able to afford investments that can reduce their energy demand, such as buying a more efficient car or heating and cooling system.   

Fortunately, well-designed climate-change policies can provide sufficient revenue to cushion the impact on vulnerable households and meet other legitimate public needs, such as expanded research on alternative energy sources.  A “cap-and-trade system” can accomplish these goals — as long as it treats the emission allowances as a resource to be auctioned off for public purposes rather than handing them to energy companies free of charge as windfall profits.  A carbon tax can accomplish these goals as well.

If policymakers do not adequately protect vulnerable households from the increase in energy prices, many low-income Americans will slip into poverty, and those who are already poor will grow poorer.  Alternatively, if policymakers take care of these and other public needs but do so through deficit spending because they fail to auction enough of the emission allowances to cover the costs, the federal budget deficit — already on course to reach unsustainable levels in future decades — will grow still larger. 

Well-designed climate-change policies can avoid both of these outcomes.  In other words, they can slow global warming without increasing poverty and hardship among low-income households and without enlarging the deficit.

Protecting Those Most Vulnerable to Rising Energy Prices

Effective climate-change policies (whether a cap-and-trade system or a carbon tax) put a price on dumping greenhouse gases into the atmosphere.  Cap-and-trade policies directly limit the amount of carbon dioxide and other global-warming pollutants that power plants, factories, vehicles, and other sources may put into the air.  Carbon taxes limit that pollution indirectly by placing a price on each ton of emissions. 

Both methods encourage energy efficiency and alternative energy sources.  Both also raise the costs of a wide array of products and services, from gasoline and electricity to food, mass transit, and other products or services with significant energy inputs. 

That will pose special challenges for low- and moderate-income families, who pay a larger share of their budgets for energy-related costs than higher-income families.  

For Low-Income Families, Added Costs Could Total $750-1,000 a Year

Poor and near-poor families will face the biggest challenges.  Unless adequate measures are included to shield low-income families, even a relatively modest climate-change policy (one aimed at reducing greenhouse-gas emissions by 15 percent) would impose an estimated $750-$1,000 a year in added costs, on average, for a family in the bottom 20 percent of the income spectrum.[1]  These households have average incomes of only $16,000.

Climate-change initiatives will also create other important needs, such as assisting workers and communities that depend on the coal industry and other industries most affected by the shift to a less carbon-intensive economy.  In addition, the increase in prices for energy and energy-related products will drive up the cost to the federal, state, and local governments of providing many important services and benefits (for instance, the Defense Department is the nation’s single largest consumer of energy).  Offsetting those effects in order to avoid reductions in services or benefits or an increase in already unsustainable federal deficits should be a high priority.

Raising the Needed Revenues

Effective climate-change policies can generate enough revenue to address these needs (see Figure 2).

• Under a cap-and-trade system, the revenues would come from the federal government’s auctioning the allowances that energy producers must hold to cover emissions that result from burning fossil fuels.

• Under a carbon tax, the revenues would come from the tax itself, which would be collected from energy producers in proportion to their emissions.  (Ultimately, under either system energy producers will be able to pass along most or all of the cost to consumers.)

Policies Could Generate $50-300 Billion a Year, According to CBO

A cap-and-trade system or carbon tax could raise more than enough money to:  offset the effect of higher energy prices on vulnerable households; offset the effects of those price increases on federal, state, and local government budgets; assist the industries, workers, and communities affected by climate-change policies; and address other legitimate claims, such as promoting basic research on alternative energy sources.

A cap-and-trade system could eventually generate $50 billion to $300 billion a year, according to the nonpartisan Congressional Budget Office (CBO).  (A carbon tax that reduced greenhouse-gas emissions by comparable amounts would raise comparable amounts of revenue.)

But that won’t happen if the government gives away a large percentage of the emission allowances to energy producers free of charge.  This is a serious risk.  Many current cap-and-trade proposals, based in part on misconceptions about how a cap-and-trade system operates (see box), would do just that.

Principles for Designing Assistance to Low-Income Consumers

An estimated 14 percent of the total value of the emission allowances under a cap-and-trade system would be sufficient to fund “climate rebates” that protect vulnerable households from the effects of higher energy costs.  To provide these rebates in a way that is effective and efficient, policymakers should follow several basic principles: 

• Fully protect the most vulnerable households.  For households in the bottom fifth of the income spectrum, climate rebates should fully offset the impact of higher energy costs resulting from climate-change legislation.  No climate-change legislation should make poor families poorer or push more people into poverty.

• Use mechanisms that reach all or nearly all low-income households.  Some low-income households work for low wages and could receive their climate rebate through the tax code, such as by increasing the Earned Income Tax Credit.  But others are elderly, unemployed (especially during recessions), or have serious disabilities.  Climate rebates must reach all of them.

Fortunately, policymakers can tap existing mechanisms to reach the large number of low-income households that cannot be reached through a tax rebate mechanism because their incomes are so low they are not required to file a federal income tax return.  For example, climate rebates could be provided through the electronic benefit transfer (EBT) systems that state human service agencies already use to provide assistance to many poor people.  Any remaining gaps could be filled, and weatherization assistance provided, through some relatively modest increases in the Low Income Home Energy Assistance Program.

• Minimize red tape.  Funds set aside for climate rebates should go to intended beneficiaries, not to administrative costs or profits.  Accordingly, relief should operate as much as possible through existing, proven delivery mechanisms rather than new public or private bureaucracies.

• Don’t focus solely on utility bills.  For households in the bottom fifth of the population, higher home energy costs will account for less than half of the hit on their budgets from increased energy prices.  (See Figure 3.)  Climate rebates must be structured so that they can also help low-income families with higher prices for gasoline and other products and services that are sensitive to energy costs.

• Adjust relief to reflect changing needs.  Climate rebates should be smaller when a cap-and-trade system or carbon tax is just phasing in, and become more substantial when the system is fully in place.

•  

The Center on Budget and Policy Priorities is developing policy options based on these principles.

End Notes:

[1] This estimate is based on data from the Consumer Expenditure Survey and methodology developed by the Congressional Budget Office, including CBO methods of estimating the costs to consumers from lowering allowable emissions.