July 18, 2008

By Matt Fiedler

Protecting the budgets of low-income consumers is a critical issue in the design of climate change legislation. The Lieberman-Warner Climate Security Act recently debated in the Senate contained a measure that relied primarily on electric and gas utilities to deliver such relief. However, evidence from the only existing federal program that delivers low-income assistance through utility companies — the Lifeline program for telephone service — strongly suggests that an untried utility-based mechanism would miss large numbers of consumers who could be captured using proven alternatives.


Effective climate change policies work by raising the price of fossil-fuel energy in order to encourage energy efficiency and the substitution of clean energy sources for fossil fuels. Such policies are needed to reduce the risk of significant, and potentially catastrophic, environmental and economic damage from climate change. However, these policies will also raise costs to consumers for a wide array of products and services, from gasoline and electricity to food, mass transit, and other products or services with significant energy inputs.

These price increases will have disproportionate effects on low-income families, because these families devote a relatively large share of their budgets to energy and energy-intensive products, and they are the least able to absorb higher costs or afford new investments in energy-efficient cars, heating systems, or appliances. The total size of the impact on these families will be quite significant. The Center’s analysis, based on an approach developed by the Congressional Budget Office, finds that policies that cut emissions by just 15 percent would reduce the purchasing power of families in poorest 20 percent of the population by $750 per year, on average. These families’ incomes average just over $13,000 per year.

There is growing support for the concept of designing climate change legislation so it provides assistance to low-income households sufficient to offset the purchasing-power losses that will result from higher prices for carbon-intensive goods and services. To achieve this goal, some have proposed providing resources to local electric and natural gas utility companies, with the requirement that the utilities use some of those resources to assist their low-income customers. This approach featured prominently in S. 3036, the Lieberman-Warner Climate Security Act of 2008, which was debated by the Senate during the week of June 2.

The most basic test for utility-based proposals is whether utility companies can efficiently and effectively deliver assistance to low-income households. Electric and natural gas utilities generally do not have information on their customers’ incomes. To provide assistance to low-income consumers, they would first need to build new infrastructure that would allow them to target assistance based on income and then enroll millions of eligible households in a new program.

The Lifeline Program’s Track Record

To get a sense of how successful utilities are likely to be in this challenging endeavor, it is instructive to examine the one existing federal program that delivers aid to low-income households through utility companies: the federal telephone Lifeline program, which provides discounted telephone service to low-income consumers who meet specified eligibility criteria.

Nationwide, the Lifeline program serves only 1 out of every 3 eligible low-income households. This participation rate is well below the participation rates of other federal programs that could be used to identify needy families and deliver assistance. In fact, a program that delivered climate-change assistance through a combination of the Earned Income Tax Credit (EITC) and the electronic benefit transfer (EBT) system that all states use to deliver food stamps could automatically reach about three of every four households in the bottom 20 percent of the population.

While it is conceivable that a utility-based mechanism for delivering climate assistance could perform better than the Lifeline program does, it is extremely unlikely that it could come close to achieving the high level of participation that an approach building on stronger existing delivery mechanisms would attain. Moreover, a utility-based approach to delivering climate assistance would also face several other serious implementation challenges that could substantially diminish its impact and effectiveness (see the box on page 3). Because the consequence of a poorly functioning mechanism would be significant increases in poverty and hardship, and because an approach based upon low-risk, high-performing mechanisms like the EBT system and the EITC is almost certain to be more effective and simpler and cheaper to implement, taking a chance on a utility-based mechanism would be ill-advised.

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Effective climate change policies work by raising the prices of fossil-fuel intensive goods. There is a growing consensus that climate change legislation should provide assistance to low-income consumers to offset the purchasing power losses that would result from these higher prices.

The climate change legislation recently debated in the Senate proposed delivering assistance to low-income consumers primarily through local utility companies.

The only existing federal program that delivers assistance to low-income consumers through utility companies is the Lifeline telephone discount program. That program has a disappointing track record — it reaches only 1 of every 3 eligible households.

In contrast, about three-fourths of low-income households could be helped automatically — even before outreach activities are undertaken — through a program that provided climate-change assistance to people who already receive food stamps, the Earned Income Tax Credit, or the low-income subsidy for the Medicare prescription drug program.

Policymakers would be ill-advised to take a very large gamble on a new, utility-based mechanism when proven alternative mechanisms are available that are very likely to reach a much larger share of households and be substantially simpler and less costly to implement.

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