Extending "Climate Rebates" to Include Middle-Income Consumers

PDF of full report (12pp.)

By Chad Stone and Hannah Shaw [1]  

February 19, 2009

Key Findings

  • Effective policies to reduce greenhouse gas emissions will raise prices for energy-related products and thereby squeeze family budgets.
  • The squeeze will be greatest for low- income households, but middle-income households will also be affected.
  • Refundable tax credits are the most efficient way to restore middle-income households’ lost purchasing power. A new climate tax credit, coupled with a rebate provided to very low-income households through state electronic benefit transfer (EBT) systems, could effectively keep low- and middle-income households from being made worse off.
  • Other options to help low- and middle-income households, such as cutting tax rates or giving utility companies billions of dollars to reduce utility bills, would be far less effective.
  • Auctioning the emissions allowances under a cap-and-trade system would generate more than enough revenue to pay for this consumer relief. Less than 60 percent of the auction revenues would be sufficient to provide relief to a substantial majority of U.S. consumers.

Related Areas of Research

Policies that restrict greenhouse gas emissions will significantly raise the price of fossil-fuel energy products — from home energy and gasoline to food and other goods and services with significant energy inputs.  Such policies are necessary to encourage energy efficiency and greater use of clean energy sources.  They will, however, cut into consumers’ budgets.   

Low-income consumers are the most vulnerable because they spend a larger share of their budgets on necessities like energy than do better-off consumers.   They also are the people least able to afford purchases of new, more energy-efficient automobiles, heating systems, and appliances.  Protecting low-income consumers therefore should be the top priority of the consumer relief provisions included in climate change legislation.  The Center on Budget and Policy Priorities has designed a “climate rebate” that would efficiently offset the average impact of higher energy-related prices on low-income households.[2]  The rebates would be funded with revenues raised by climate change legislation, most likely from the auctioning of emissions allowances under a cap-and-trade system.   

Middle-income consumers, too, will feel the squeeze from higher energy-related prices, and policymakers have expressed interest in helping offset their added costs as well.  Accordingly, this report outlines two options for modifying the Center’s proposal in order to extend consumer relief further up the income scale while still protecting those who are the most vulnerable.  The size of the climate rebate, and how far up the income scale it extends, would be tied to the amount of funding that policymakers make available and how much of consumers’ losses they want to offset. 

Click here to view a PDF of the full report (12pp.)

End Notes:

[1] Martha Coven and Heather Long also contributed to this report.

[2] Center on Budget and Policy Priorities, “How a Climate Rebate Would Work,” Fact Sheet, June 3, 2008.

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