Senate Can Strengthen Climate Legislation By Reducing Corporate Welfare and Boosting True Consumer Relief
CBO Finds Middle-Income Households Would Fare Less Well than High-Income Households Under House Bill, Due to Certain Business Provisions
 Congressional Budget Office, “The Estimated Costs to Households from the Cap-and-Trade Provisions of H.R. 2454,” June 19, 2009. CBO analyzed the bill as reported by the House Committee on Energy and Commerce. The bill that passed the House on June 26, H.R. 2454, was a slightly modified version of the bill that CBO analyzed. Thus, the numbers in this analysis differ slightly from what they would be if based on the bill as passed. The allocation of allowances reflected in the CBO distributional analysis is broadly consistent with the allocation of allowances during the 2016 through 2025 period when free allocations to utilities would be fully phased in and before they would start to be phased out.
 Differences between these proportions and those under the bill that the House ultimately approved are minor.
 The remaining 18 percent of allowances would go to federal and state governments. About 11 percent would be used for energy efficiency and clean energy technologies, other public purposes, and deficit reduction. The other 7 percent would be spent overseas to prevent deforestation, encourage the adoption of more energy-efficient technologies, and help developing countries adapt to climate change.
 CBO includes in this broad “LDC” category a small fraction of allowance value that would go to states to be used for the benefit of consumers of heating oil, propane, and kerosene for residential or commercial purposes and a modest (5 percent or less) percentage of allowances that would go to “merchant coal” generators, which are unregulated competitive generators of electricity. The distributional effects of the allocation to the states are akin to those of the allocation to electricity and natural gas LDCs, but the allocation to merchant coal generators — who face no restrictions on how they may use these funds — will mainly benefit the shareholders of the companies receiving the allocation. The bill that the House passed also designates a small percentage of the allowance value for generators with long-term delivery contracts (which would have distributional effects like those for allocations to merchant coal generators) and adds a small fraction of allowance value for “small LDCs,” typically rural electric co-ops. The allocations to small LDCs would have distributional effects similar to those for other LDCs.
 The provisions of the bill relating to natural gas and home heating oil require that a specific portion of the benefit be delivered through energy efficiency programs for consumers. The bill is silent on the role of energy efficiency programs for electricity customers.
 According to the latest data from the Energy Information Administration, 37 percent of electricity retail sales are to residential customers and 63 percent are to business customers. About 30 percent of natural gas retail sales are to residential customers and about 69 percent are to business customers.
 A firm is maximizing its profits when any increase in how much it produces would increase its costs by more than it would increase its revenue and any decrease in how much it produces would reduce its revenue by more than it would reduce its costs). A change in fixed costs does not change this decision because it does not change the relationship between incremental revenues and costs. A change in variable costs does change that relationship and hence the firm’s profit-maximizing behavior.
 The bill reported by the House Energy and Commerce Committee, which is the bill that CBO analyzed, is clear in its intention that LDCs apply rebates to the fixed portion of the bill for all ratepayers to the maximum extent practicable. Language was added to the bill that passed the House floor which creates some ambiguity about the treatment of industrial customers. The language says rebates may vary with the quantity of electricity delivered. If that is interpreted to mean that each industrial customer gets a rebate based on how much electricity it uses, that would be the equivalent of allowing utilities to apply the relief provided to industrial customers on the variable part of the bill and would undercut the goal of the legislation, which is to create incentives to reduce carbon consumption. A different interpretation is that the change merely reflected the recognition of huge size disparities among industrial users. If several size classes were created but the rebate was uniform for all firms in the same size class, the intention of the bill to provide a rebate on the fixed portion rather than the variable portion of the bill would be preserved. This is just one of the many complex issues that state utility regulators will confront in trying to implement a utility-based approach to mitigating the impact of higher energy costs on households’ budgets.
 See Chad Stone, “Holding Down Increases in Utility Bills Is a Flawed Way to Protect Consumers While Fighting Global Warming,” Center on Budget and Policy Priorities, June 3, 2009.
 Rich Sweeney, Josh Blonz and Dallas Burtraw, “The Effects on Households of Allocation to Electricity Local Distribution Companies,” Resources for the Future, June 5, 2009, http://www.rff.org/wv/Documents/LDC_Allocation_090605.pdf.
 RFF’s analysis does not incorporate all of the features of the House bill, which include cost-containment measures that could hold down the costs that would arise from the blunting of price incentives. In particular, analyses by CBO, the Environmental Protection Agency, and the Energy Information Administration all find that in the early years of climate legislation, firms would “bank” allowances to be used later when the costs of compliance are expected to be higher because the cap is tighter. Upward pressure on near-term allowance prices of the sort described by RFF could lead to less banking, in effect shifting the costs into the future. In addition, the House bill allows extensive use of international offsets, which allow firms to meet their compliance obligation under the cap not by reducing their own emissions but by in effect purchasing emissions reductions abroad. Upward pressure on allowance prices would increase the demand for international offsets. If such offsets were readily available, their use would mitigate some of the upward pressure on allowance prices and costs.
 For a description of a specific proposal to provide direct consumer relief to both low- and middle-income households, see Sharon Parrott, Dottie Rosenbaum, and Chad Stone, “How to Use Existing Tax and Benefit Systems to Offset Consumers’ Higher Energy Costs Under an Emissions Cap,” Center on Budget and Policy Priorities, April 20, 2009.
 For details see Dorothy Rosenbaum, Sharon Parrott, and Chad Stone, “How Low-Income Consumers Fare in the House Climate Bill,” Center on Budget and Policy Priorities, July 8, 2009.
 CBO estimates that the economy-wide costs of the legislation would average $175 per household. Not all of the benefits and costs that go into that calculation were included in CBO’s distributional analysis (because they could not readily be allocated among households), resulting in the lower figure of $165 per household in the distributional analysis.
 These figures represent CBO’s analysis of the legislation as reported by the House Energy and Commerce Committee. Figures for the bill as passed on the House floor should be similar but not identical.
 See Sharon Parrott,Dottie Rosenbaum, and Chad Stone, “How to Use Existing Tax and Benefit Systems to Offset Consumers’ Higher Energy Costs Under an Emissions Cap,” Center on Budget and Policy Priorities, April 20, 2009.
 See Jennifer Kefer and Robert Greenstein, “Adding Funding to the House Climate Bill for Low-income House Energy Assistance Would Help Poor Families Facing Particularly Large Increases in Energy Costs,” Center on Budget and Policy Priorities, July 8, 2009.
 These are the allocations to merchant coal generators and generators with long-term contracts discussed in footnote 4 above.