Testimony: Chad Stone on Protecting Lower-Income Families in Climate Change Legislation

PDF of this testimony (15pp.)

Revised April 20, 2009

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Note: This testimony and the testimony of Robert Greenstein were delivered on the same day and are similar in most respects.

Chairman McDermott, Ranking Member Linder, and other members of the Subcommittee. Thank you for the opportunity to testify on this important topic. The main message of my testimony is that it is indeed possible for climate change legislation to fight global warming effectively while also protecting consumers. Here is the argument in a nutshell:

Fighting global warming requires policies that significantly restrict greenhouse gas emissions. The most cost-effective ways to do that are to tax emissions directly or to put in place a “cap-and-trade” system. Either one 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. Those higher prices create incentives for energy efficiency and the development and increased use of clean energy sources. But they will also put a squeeze on consumers’ budgets, and low- and moderate-income consumers will feel the squeeze most acutely.

Fortunately, climate change policies can be designed in a way that preserves the incentives from higher prices to change the way we produce and consume energy while also offsetting the effect on consumer budgets of those higher prices. That is because well-designed climate policies will generate substantial revenue. That revenue will be sufficient to offset the impact of higher prices on the budgets of the most vulnerable households, to cushion the impact substantially for many other households, and to meet other legitimate public needs, such as expanded research on alternative energy sources.

To capture this revenue in a cap-and-trade system, it is important that most or all of the allowances or permits used to limit emissions be auctioned for public purposes rather than given away free to emitters. Giving away, or “grandfathering,” allowances is sometimes portrayed as a way to keep down costs for consumers, but that argument does not stand up to scrutiny. Rather, if allowances are given away free to polluting firms, only the firms and their shareholders would benefit. These firms would, as CBO has explained, receive “windfall profits”: they would be able to charge higher prices for their products, but they would not have to pay for their emissions allowances. Ordinary consumers would get no help in dealing with the strain that the higher prices put on their budgets. Greg Mankiw, former chair of the Council of Economic Advisers for President George W. Bush, has written in a similar vein that consumer prices will rise regardless of whether allowances are given free to emitters and that grandfathering the allowances would constitute “corporate welfare.” There is little disagreement among economists about this effect.

Protecting low- and moderate-income consumers should be the top priority of the consumer relief provisions included in climate change legislation. Those people 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. But middle-income consumers, too, will feel the squeeze from higher energy-related prices, and policymakers likely will want to extend consumer relief to them as well.

Much of the Center on Budget and Policy Priorities’ work on climate change policy has focused on developing concrete proposals to shield low- and moderate-income households from increased poverty and hardship in a way that is effective in reaching these households, efficient (with low administrative costs), and consistent with energy conservation goals. With these goals in mind, the Center has designed a “climate rebate” that would efficiently offset the average impact of higher energy-related prices on low- and moderate-income households. That rebate would be delivered each month to very low-income households through state Electronic Benefit Transfer (EBT) systems, which are essentially debit card systems that states already use to provide food stamps, TANF, and other forms of assistance to low-income families, the elderly, and others. A rebate also would be delivered to low- and moderate-income working families in the form of a higher Earned Income Tax Credit (EITC).

More recently, the Center has developed options for modifying this proposal to extend consumer relief farther up the income scale while still protecting those who are the most vulnerable. In these proposals, a new refundable tax credit would substitute for the EITC, while the EBT delivery mechanism would be preserved for very low-income households that do not file income taxes. The size of the climate rebate, and how far up the income scale it extends, can be made larger or smaller depending on the portion of the auction revenues that policymakers wish to devote to this purpose. All proposals we have developed, however, have a common principle and feature — they all fully offset the average “hit” on low-income households. Climate-change policies need not — and should not — push more Americans into poverty or make those who are already poor still poorer.

The approach that we have designed can be linked to the climate change measures outlined in the President’s budget. The President proposes instituting a cap-and-trade system, auctioning all the allowances, and using the major share of the auction proceeds for consumer relief — including about $65 billion of relief that would be delivered every year through a permanent extension of the Making Work Pay tax credit. The President also proposes using $15 billion a year for clean technology investments to facilitate the transition away from fossil fuels.

Additional measures to protect consumers — particularly individuals with very low incomes, some seniors, and others who do not pay taxes — will be necessary. Over time, the relief that would be provided through the Making Work Pay tax credit also would need to be increased or supplemented to respond to the further increases in energy costs that would occur as the emissions cap tightened. We are currently developing proposals to incorporate the EBT component of our low-income proposal into an approach that makes these adjustments.

The Center on Budget and Policy Priorities strongly believes that a rebate approach to providing consumer relief in climate change legislation is far superior to the alternatives we have seen, both for low-income consumers and for consumers farther up the income scale. Our specific concerns with approaches that rely on utility companies to provide consumer relief or on proposals that would cut tax rates (as opposed to providing a refundable tax credit) are outlined later in this testimony. The approach that is closest in spirit to our approach is the cap-and-dividend approach popularized by Peter Barnes, which would use all of the allowance value for per capita dividends. We believe, however, that careful attention would have to be devoted to the delivery mechanism in such an approach to make sure that the dividend would actually reach low-income households, and we think there are better uses for the allowance value that would be consumed by making payments to consumers with very high incomes under a cap-and-dividend system in which all the allowances were used for dividends.

The remainder of this testimony elaborates on these ideas. The next section discusses the economics of cap and trade in more detail. The section after that discusses our climate rebate proposal in more detail. And the last section discusses in more detail the reasons why we think our rebate approach is superior to other approaches we have seen.

Click here to view a PDF of the full testimony (15pp.)

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