Fact Sheet
June 3, 2008

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Center on Budget and Policy Priorities
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www.cbpp.org

 

 


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.

TABLE 1:  Households That Would Automatically Receive a Climate Rebate, by State

State EITC Claimants Households Receiving Food Stamps Individuals Receiving Medicare  Low-Income Drug Subsidy Total Households Receiving Climate Rebate (estimated unduplicated count)
Alabama

502,914

227,917

223,873

757,000

Alaska

41,578

21,578

14,123

62,000

Arizona

413,730

248,027

151,059

644,000

Arkansas

287,085

158,388

132,230

466,000

California

2,501,510

888,017

1,151,602

3,502,000

Colorado

274,839

107,477

91,305

377,000

Connecticut

172,838

118,524

99,823

317,000

Delaware

59,692

32,441

24,132

92,000

District of Columbia

50,041

47,552

20,548

96,000

Florida

1,631,758

714,471

588,556

2,272,000

Georgia

905,365

402,330

290,386

1,264,000

Hawaii

87,540

47,675

35,081

136,000

Idaho

106,143

39,629

34,904

141,000

Illinois

884,010

591,004

337,857

1,471,000

Indiana

446,347

261,914

169,801

715,000

Iowa

177,348

113,657

82,429

303,000

Kansas

181,348

84,472

67,468

268,000

Kentucky

352,878

282,257

192,758

678,000

Louisiana

494,289

273,545

187,217

775,000

Maine

88,923

85,311

81,512

211,000

Maryland

352,221

162,028

121,704

497,000

Massachusetts

319,973

258,234

243,275

662,000

Michigan

680,765

580,679

268,807

1,260,000

Minnesota

272,171

140,226

125,648

429,000

Mississippi

376,998

185,317

159,999

581,000

Missouri

451,570

310,894

194,923

782,000

Montana

74,627

35,249

25,210

109,000

Nebraska

113,877

52,111

43,748

168,000

Nevada

169,055

64,614

46,858

218,000

New Hampshire

64,012

30,637

31,501

101,000

New Jersey

501,105

206,432

222,898

732,000

New Mexico

199,825

93,092

67,122

289,000

New York

1,527,318

987,397

721,725

2,599,000

North Carolina

788,523

412,073

339,266

1,228,000

North Dakota

40,222

21,684

17,495

64,000

Ohio

815,691

520,328

314,205

1,340,000

Oklahoma

318,879

175,486

122,182

501,000

Oregon

231,934

236,825

95,307

472,000

Pennsylvania

799,335

551,729

394,456

1,434,000

Rhode Island

68,034

39,376

41,081

118,000

South Carolina

439,010

250,282

169,978

687,000

South Dakota

56,415

25,538

21,935

84,000

Tennessee

565,090

406,441

284,669

1,021,000

Texas

2,288,849

962,687

680,572

3,132,000

Utah

145,622

52,750

33,672

183,000

Vermont

38,824

27,279

25,710

74,000

Virginia

503,896

242,149

199,720

754,000

Washington

364,929

297,222

149,135

656,000

West Virginia

146,840

123,654

87,104

298,000

Wisconsin

309,552

172,062

138,303

500,000

Wyoming

33,208

9,631

10,881

43,000

Other Areas

29,085

13,040

9,413

Not Available

United States

22,747,631

12,393,332

9,385,166

35,562,000

 

Source:  IRS data for 2005, USDA data on food stamp enrollment for January 2008, and HHS data on Medicare low-income drug subsidy enrollment for January 2008.  Estimates of total households automatically receiving climate rebates are based on CBPP estimates of program overlap from Census Bureau data.  (Additional households could receive climate rebates by signing up with their state human services agency or filing for the EITC.)