[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

PROTECTING LOWER-INCOME FAMILIES
WHILE FIGHTING GLOBAL WARMING

=======================================================================

HEARING

before the

SUBCOMMITTEE ON
INCOME SECURITY AND FAMILY SUPPORT

of the

COMMITTEE ON WAYS AND MEANS

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

__________

MARCH 12, 2009

__________

Serial No. 111-6

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Printed for the use of the Committee on Ways and Means

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COMMITTEE ON WAYS AND MEANS

CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California DAVE CAMP, Michigan
SANDER M. LEVIN, Michigan WALLY HERGER, California
JIM MCDERMOTT, Washington SAM JOHNSON, Texas
JOHN LEWIS, Georgia KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee ERIC CANTOR, Virginia
XAVIER BECERRA, California JOHN LINDER, Georgia
LLOYD DOGGETT, Texas DEVIN NUNES, California
EARL POMEROY, North Dakota PAT TIBERI, Ohio
MIKE THOMPSON, California GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut GEOF DAVIS, Kentucky
EARL BLUMENAUER, Oregon DAVE G. REICHERT, Washington
RON KIND, Wisconsin CHARLES W. BOUSTANY, JR.,
BILL PASCRELL, JR., New Jersey Louisiana
SHELLEY BERKLEY, Nevada DEAN HELLER, Nevada
JOSEPH CROWLEY, New York PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky

Janice Mays, Chief Counsel and Staff Director

Jon Traub, Minority Staff Director

______

SUBCOMMITTEE ON INCOME SECURITY AND FAMILY SUPPORT

JIM MCDERMOTT, Washington, Chairman

FORTNEY PETE STARK, California JOHN LINDER, Georgia
ARTUR DAVIS, Alabama CHARLES W. BOUSTANY, JR.,
JOHN LEWIS, Georgia Louisiana
SHELLEY BERKLEY, Nevada DEAN HELLER, Nevada
CHRIS VAN HOLLEN, Maryland PETER J. ROSKAM, Illinois
KENDRICK MEEK, Florida PAT TIBERI, Ohio
SANDER M. LEVIN, Michigan
DANNY K. DAVIS, Illinois

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C O N T E N T S

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Page

Advisory of March 5, 2009, announcing the hearing................ 2

WITNESSES

Terry Dinan, Ph. D., Senior Advisor for Climate Issues,
Congressional Budget Office.................................... 6
Dallas Burtraw, Ph. D., Senior Fellow, Resources for the Future.. 20
Chad Stone, Ph. D., Chief Economist, Center on Budget and Policy
Priorities..................................................... 27
Lord Christopher Monckton, Chief Policy Advisor, Science and
Public Policy Institute........................................ 39

SUBMISSIONS FOR THE RECORD

H. Sterling Burnett, Statement................................... 78
Stephen A. Smith, Statement...................................... 81
The National Community Action Foundation, Statement.............. 84

PROTECTING LOWER-INCOME FAMILIES
WHILE FIGHTING GLOBAL WARMING

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THURSDAY, MARCH 12, 2009

U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Income Security and Family Support,
Washington, DC.

The Subcommittee met, pursuant to notice, at approximately
10:10 a.m., in room B-318 Rayburn House Office Building, Hon.
Jim McDermott [Chairman of the Subcommittee] presiding.
[The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON

INCOME SECURITY AND FAMILY SUPPORT

CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
March 5, 2009 ISFS-1

McDermott Announces Hearing on

Protecting Lower-Income Families While Fighting Global Warming

Congressman Jim McDermott (D-WA), Chairman of the Subcommittee on
Income Security and Family Support of the Committee on Ways and Means,
today announced that the Subcommittee will hold a hearing on protecting
low- and moderate-income families while curbing global warming. The
hearing will take place on Thursday, March 12, 2009, in B-318 Rayburn
House Office Building, immediately after a brief Subcommittee
organizational meeting beginning at 10:00 am. In view of the limited
time available to hear witnesses, oral testimony at this hearing will
be from invited witnesses only. However, any individual or organization
not scheduled to appear may submit a written statement for
consideration by the Subcommittee and for inclusion in the record of
the hearing.

BACKGROUND:

A major international assessment released in 2007 highlighted the
clear consensus in the scientific community that the Earth's climate
has unequivocally warmed and that most of the observed changes since
the 1970s are due to greenhouse gases emitted as a result of human
activity. Various proposals have been advanced to curb these emissions
and the associated risk of significant and potentially catastrophic
environmental and economic damage. Such proposals will likely raise the
price of fossil-fuel energy sources, which could present a particular
hardship for low-and moderate-income families. The Congressional Budget
Office estimates that households in the bottom fifth of income would
have their energy costs, as a percentage of their income, rise nearly
twice as much as households in the top fifth if greenhouse emissions
were cut by 15 percent. This raises the question of how to best
mitigate these costs for lower-income households to shield them from
enduring increased hardship.

In announcing the hearing, Chairman McDermott stated, ``We must
address the dire risks of global warming while also ensuring this
effort does not impose additional hardships on families already
struggling to get by. We should establish specific mechanisms to help
these families, and I look forward to hearing testimony related to that
goal.''

FOCUS OF THE HEARING:

The hearing will focus on ensuring effective and efficient
protections for low- and moderate-income families while addressing the
threat of climate change.

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Chairman MCDERMOTT. I would now like to start the hearing
itself. Would the panel of witnesses please take their seats.
If you'll come up to the table and we'll get you started.
We're here today to discuss helping low- and moderate-
income families as we attempt to reduce the harmful greenhouse
gas emissions that threaten our planet.
As a medical doctor, I took an oath that says, ``When it
comes to treating patients, do no harm.'' There's no doubt in
my mind that we can protect the planet from environmental harm
and protect low- and moderate-income Americans from economic
harm while we do it.
Moving toward greener and cleaner energy will impose costs.
There's no question about it, but the long-term cost of
inaction is surely much, much higher, and we fail to respond to
it at our own peril.
Furthermore, we can mitigate the impact of the higher
energy costs resulting from climate change legislation for most
households.
This Subcommittee's jurisdiction over many of the primary
programs for low-income families and the Full Committee's
responsibility for providing tax relief to middle-income
Americans provide us the tools needed to achieve this goal.
The world's scientific community has told us in unequivocal
terms that our climate is warming and that most of this warming
is the result of human activity, primarily the release of
greenhouse gases into the Earth's atmosphere.
There's a graph up on the monitor, which is from the
National Oceanographic and Atmospheric Administration. It shows
a significant change in the mean global temperature over the
last 30 years, with eight of the ten warmest years on record
occurring since 2001.
Now climate change means more flooding and more droughts,
longer and hotter heat waves, and rising sea levels. These
trends translate into the growing loss of human life, the
extinction of many animal species, and the imposition of
extraordinary economic costs.
I don't know how anyone can suggest we could sit on our
hands and watch this happen, because such inaction would be the
worst kind of generational malfeasance.
Reducing the threat of climate change means reducing the
emission of harmful greenhouse gases, such as carbon dioxide.
There are various proposals for achieving this goal, but they
all ultimately seek to impose some form of limit on those
emissions by making the cost reflect their impact on our
climate.
Producers of energy will likely pass through much of the
costs to their consumers. The good news, however, is that the
limits on the greenhouse emissions will generate revenues that
can be directly returned to consumers to offset higher energy
costs.
Climate control legislation also will generate new
employment opportunities in green jobs that produce cleaner
energy and promote greater efficiency.
In helping the consumers, we must take particular care to
reach out to lower income Americans, since they have less
disposable income available to meet the higher energy costs. We
saw that in the run-up in gas prices last year.
Furthermore, our ability to offset higher energy costs will
be maximized if we comprehensively focus on the consumers,
without needlessly diverting resources to energy producers in
the vain hope that they'll pass along the savings.
We've seen in the last little while the folly of handing
money to banks and expecting them to lend, and giving money to
utilities runs the same risk, in my view.
The Obama Administration has proposed that some of the
revenues from climate control legislation be used to continue
the Making Work Pay credit, which provides a refundable tax
credit of $400 a year for individuals and $800 for couples.
This may be a useful start, but there may need to be
additional tax relief for low- and moderate-income households
in the future to ensure that higher energy costs are fully
offset.
Additionally, we should consider providing further
assistance to large families, given the fact that more children
usually mean higher energy costs.
Finally we need to recognize that some Americans don't have
earnings--senior citizens, the disabled, the unemployed--but
they still need help in addressing higher energy costs.
If you're living on SSI, and your electric rates go up, you
are participating in this whole process.
Any proposed assistance that excludes needy households is
incomplete and inadequate, in my view.
In short, we can protect low- and middle-income families
while also protecting our planet.
I look forward to hearing from our witnesses on how best to
pursue this goal.
The leadership of the House has suggested that we are going
to move on this issue rather quickly. So, we called this
hearing because we wanted to deal with what is undoubtedly one
of the impacts of this process. We need to get our thinking
clear about how we're going to mitigate the impacts on the
society.
I now yield to my Ranking Member, Mr. Linder.
Mr. LINDER. Thank you, Mr. Chairman.
In your announcement for this hearing, you began with this
statement. ``A major international assessment released in 2007
highlighted the clear consensus in the scientific community
that the Earth's climate has unequivocally warmed as a result
of human activity.''
Not so fast. Science is not a democracy. The head count
fallacy has been recognized as irrational since Aristotle. Even
if science were a democracy, for every scientist who supports
the notion of human-caused global warming, there are more than
ten who consider that notion pure vanity, and they have made
their names public.
Our Committee has been told that water vapor is the
overwhelming heat-producing gas. CO2 is a bit part
player. The UN's climate panel has exaggerated its effect on
temperature tenfold as satellite data show.
In the 1995 IPCC report, a UN bureaucrat removed five
statements in the scientist's final draft that there was no
basis to blame human activity, and replaced them with a
contrary statement that humans were to blame.
That is not science, but it has been the official line ever
since. No science, just bureaucratic conclusions contrary to
science, an excuse for a brand new tax.
In the scientific world, only two conditions obtain. One is
theory and the other is fact. Areas are studied for centuries,
and then are proven by facts to be correct or incorrect. Both
Galileo and Einstein were famous deniers of centuries-old
theories. They were right. The consensus was wrong.
In this rather recent discussion, the whole notion of
proving or disproving the theory is not only ignored, it is
considered heretical.
Parenthetically, let me note that to question science is
called ``scholarship''; to question religion is considered
heresy.
Since the mid 1970s when some of the same scientists were
warning of a coming ice age, and then felt comfortable going
after some of the research grant money on the global warming
side, we have not yet heard a single fact adduced proving
humans to be responsible.
The entire case for panic is based on computer games. I
want to remind you that the other multi-trillion-dollar debacle
we are witnessing around the world today is because risk
managers with gray hair were replaced by computers. The
computers got it spectacularly wrong, yet the financial
consensus relied upon them.
Today predictions of future weather calamities are being
made by computer games that do not take into consideration
scientific observations of the Earth's natural temperature
modulations.
Every computer predicting calamity requires for its
accuracy a growing hot spot high above the equator. We have had
years to measure that hot spot with scientific instruments. It
doesn't exist.
How do the modelers respond? ``You must have misread your
thermometers for 50 years, because the computer guesses that it
should be there.''
So, we prepare to attack this erroneous conclusion with the
one thing our government does best: Raise taxes on the rich and
give that money to the poor. There! That fixes that!
Have we forgotten the testimony before this Committee that
showed us that because of entitlements, our Nation's total
revenue stream will be insufficient to pay just the interest on
the debt in 31 years? So, we'll just add another entitlement.
Let me show you a slide. Whether you select the minimum
plan or the maximum plan put forth by the experts, this program
will dwarf our current welfare program. Turning the vast
majority of our citizens into supplicants is as futile as it is
cruel.
Assuming you satisfy yourselves that you have taken care of
the poor and fixed the climate, a vanity at which I just
cringe, who is going to be hurt? Well, just 2 billion of the
world's most vulnerable people.
We've enjoyed a living standard in the last 100 years,
which is the envy of the world. India and China are now going
through what we went through. One byproduct of that success is
CO2. Why do we want to deny that same opportunity to
the most vulnerable, whom we will consign to a lifetime of
hunger and poverty.
As Dr. John Christy told us just last week, having lived
among the world's poor, their lives there are brutal and short.
Those who kick the poor in the teeth while pretending to soak
the rich do not merit the votes from either.
Thank you, Mr. Chairman.
Chairman MCDERMOTT. We will now turn to our first witness.
Everyone has 5 days to put things in the record, if they wish
to make statements.
I will turn to Dr. Dinan.

STATEMENT OF TERRY DINAN, PH.D., SENIOR ADVISOR FOR CLIMATE
ISSUES, CONGRESSIONAL BUDGET OFFICE

Dr. DINAN. Chairman McDermott, Congressman Linder, and
Members of the Subcomittee, thank you for the invitation to
testify on the effects that a Cap and Trade Program for carbon
dioxide emission might have on low-income households.
Global climate change poses one of the nation's most
significant long-term----
Mr. LINDER. Excuse me, Doctor. Is your microphone on?
Dr. DINAN. It is. Should I move it closer?
Mr. LINDER. Thank you.
Dr. DINAN. Can you hear me? Okay.
Global climate change poses one of the nation's most
significant long-term policy challenges. While the potential
damage from climate change is large, the potential cost of
avoiding it is large too.
Policy makers could help minimize that cost by using a tax
or well-designed cap and trade program to motivate reductions
and emissions.
Either a tax or a cap would inevitably cause prices of
goods and services to increase, with larger increases for goods
that entail greater emissions, such as home heating.
Those price increases are essential to the success of the
program, but they would impose a larger financial burden on
low-income households than on higher income households.
Lawmakers could choose to reduce the burden created by
prices by selling the allowances and giving the money back to
households. As depicted on the left-hand side of this figure,
low-income households would actually be made better off under a
cap-and-trade policy if the government sold all of the
allowances and used the proceeds to provide the same lump-sum
rebate to each household in the United States
In that case, the size of the rebate is likely to be larger
than the average increase in expenditures that low-income
households would face as a result of the policy.
In contrast, the same size rebate would not fully offset
higher income households for the increased expenditures.
Lawmakers could use the revenue gained by selling allowances in
many ways. The middle section of the figure shows the
distributional outcome of using that revenue to fund a decrease
in corporate taxes. Higher-income households bare most of the
burden of corporate taxes, they would actually be made better
off under this policy.
Their decreased taxes would more than compensate them for
their higher expenditures. Lower income households, however,
would gain little as a result of the corporate tax cut.
Determining how to distribute the allowance value could
entail tradeoffs. As depicted by the middle bar in the figure
now showing, decrease in corporate taxes could lower the
overall cost of the policy, even though it would provide little
benefit for low-income households.
That cost reduction stems from the increase in economic
activity that a tax cut would encourage.
In contrast, distributing the allowance value in the form
of lump-sum rebates would have higher economy-wide cost. Giving
the allowances away, which was depicted at the right hand side
of both figures would score low on both measures. It would have
relatively high economy-wide cost, and would do little to
offset the cost for lower income households.
If lawmakers wanted to use a more targeted approach for
offsetting cost incurred by low-income households, they could
choose from a variety of different strategies.
Using existing transfer programs or providing rebates for
the income tax system would avoid creating new institutional
structures for administering payments.
No single existing system would reach all households,
however. For example, as shown in this figure, only 54 percent
of households in the lowest fifth of the income distribution
receive earnings, and thus would be likely to file an income
tax return.
Providing rebates through the income tax system would
require the participation of households that would not
otherwise have an incentive to file.
The response to the recent stimulus rebate suggests that
such an approach can work, but that 100 percent participation
is unlikely.
Delivering rebates through a combination of the income tax
system and existing transfer programs would do a better job of
reaching low-income households than would relying on either
approach by itself.
However, it is not easy to coordinate among existing
programs to avoid compensating the same household twice. For
example, 10 percent of households in the lowest income quintile
both had earnings and received Social Security benefits. Those
households would receive some automatic compensation for higher
prices through the Social Security COLA.
Finally, no program or set of programs could account for
all of the regional and household-specific circumstances that
would cause the cost burden created by a cap-and-trade program
to vary among low-income households.
That concludes my prepared statement. I'd be pleased to
answer any questions that you might have.
Thank you.
[The prepared statement of Dr. Dinan follows:]

Statement of Terry M. Dinan, Senior Advisor

The Distributional Consequences of a Cap-and-Trade Program for
CO2 Emissions
This document is embargoed until it is delivered at 10:00 a.m.
(EDT) on Thursday, March 12, 2009. The contents may not be published,
transmitted, or otherwise communicated by any print, broadcast, or
electronic media before that time.

Chairman McDermott, Congressman Linder, and Members of the
Subcommittee, thank you for the invitation to testify this morning on
the implications for low-income families of cap-and-trade programs that
are designed to reduce U.S. emissions of carbon dioxide
(CO2).
Global climate change poses one of the nation's most significant
long-term policy challenges. Human activities are producing
increasingly large quantities of greenhouse gases, particularly
CO2. The accumulation of those gases in the atmosphere is
expected to have potentially serious and costly effects on regional
climates throughout the world. The magnitude of such damage remains
highly uncertain, but there is growing concern about the risk that the
damage may be extensive and perhaps even catastrophic.
A risk of such magnitude can justify actions to reduce that
possible harm in much the same way that the hazards we all face as
individuals motivate us to buy insurance. Although the potential damage
from climate change is large, the potential cost of avoiding it is
large too, because it would entail making large reductions in global
emissions over the coming decades. U.S. emissions currently account for
roughly 20 percent of global emissions. As a result, substantially
reducing global emissions would probably entail large reductions in
U.S. emissions. Achieving such reductions would be likely to involve
transforming the U.S. economy from one that runs on CO2-
emitting fossil fuels to one that relies on nuclear and renewable
fuels, improvements in energy efficiency, and the large-scale capture
and storage of CO2 emissions.
One option for reducing emissions in a cost-effective manner is to
establish a carefully designed cap-and-trade program. Under such a
program, the government would set gradually tightening limits on
emissions, issue rights (or allowances) consistent with those limits,
and then allow firms to trade the allowances among themselves. The net
financial impact of such a program on low- and moderate-income
households would depend in large part on how the value of emission
allowances was allocated. By itself, a cap-and-trade program would lead
to higher prices for energy and energy-intensive goods. Those price
increases would impose a larger burden on low- and moderate-income
households than on higher-income households, relative to either their
income or total spending. Lawmakers could choose to offset the price
increases experienced by low- and moderate-income households by
providing for the sale of some or all of the CO2 emission
allowances and using the revenues to compensate such households.
My testimony makes the following key points about those issues:

A cap-and-trade program, like a tax on CO2
emissions, could raise a significant amount of revenue because the
value of the allowances created under such a program would probably be
substantial. As the cap specified in legislation became more stringent
over time, the value of the allowances would grow. A key decision for
policymakers is whether to sell all of the emission allowances, thereby
capturing their value in the form of Federal revenue that could be used
in various ways, or to give some of them away (for example, to
companies that produce or use fossil fuels).
Under a cap-and-trade program, firms would not ultimately
bear most of the costs of the allowances but instead would pass them
along to their customers in the form of higher prices. Such price
increases would stem from the restriction on emissions and would occur
regardless of whether the government sold emission allowances or gave
them away.
Price increases would be essential to the success of a
cap-and-trade program because they would be the most important
mechanism through which businesses and households would be encouraged
to make investments and behavioral changes that reduced CO2
emissions. Those increases, however, would impose a larger burden,
relative to their income, on low-income households than on high-income
households.
Policymakers would face tradeoffs in deciding how to use
the value of the allowances. For example, they might sell the
allowances and use the revenue to reduce existing taxes that discourage
the productive use of capital and labor. That strategy could lessen the
overall cost that a cap-and-trade program would impose on the economy
but would do little to offset the burden that the price increases would
impose on low-income households. Alternatively, policymakers might
choose to use the revenue raised by selling allowances to provide
support for low-income households--a strategy that would lessen the
burden on low-income households but that could have somewhat higher
economywide costs. Thus, policymakers will face tradeoffs in deciding
how to best use the value of the allowances. A policy of giving the
allowances away to companies would preclude either reducing the
economywide costs or lessening the burden on low-income households.
Designing programs that protect low-income households
could be challenging: No program could address all the region- and
household-specific circumstances that could affect families' costs. A
variety of policy instruments might be necessary to effectively target
most low-income households. Although a significant fraction of those
households have earnings (and, thus, are likely to file tax returns),
many do not. Some mechanisms already in place, such as cost-of-living
adjustments for Social Security and other entitlement programs, would
automatically compensate households for some or all of the increased
energy costs.
The Risk of Damage from Climate Change
Shifts in climate resulting from the accumulation of greenhouse
gases in the atmosphere will have many different effects, including
impacts on regional and seasonal weather patterns; the amount and type
of precipitation; large storms and hurricanes; oscillations in
temperature and precipitation; sea level; ocean acidity; ecosystems and
biodiversity; agriculture, forestry, and fishing; water supply; and
human health.
Although linking particular effects to specific changes in global
temperature is extremely difficult, those effects are expected to
become increasingly severe as the climate warms. According to the most
recent major report of the Intergovernmental Panel on Climate Change
(IPCC), even 1 degree Celsius of additional warming could result in
increasing drought and decreasing water availability in arid regions
such as the Mediterranean and the American Southwest; increasing damage
from storms, flooding, and rising sea level in several regions;
substantial bleaching of corals and a significant fraction of the
world's species being placed at increasing risk of extinction; shifts
in agricultural productivity, with degradation in some regions and
improvement in others; and changes in the geographic distribution of
some diseases. Figure 1, which is drawn from the IPCC report,
summarizes the research about the types of environmental and economic
changes that might accompany varying changes in the climate.\1\ The
potential for a rapid, abrupt change in climate to occur if global
temperatures pass a critical, but uncertain, level is of most
significant concern. Such rapid change would entail substantial damage
because it would not allow time for species and ecosystems to adjust.
For reasons similar to why individuals insure themselves against risks
they face, policymakers might want to cut CO2 emissions in
order to reduce the potential for substantial damage.
---------------------------------------------------------------------------
\1\ Neil Adger and others, ``Summary for Policymakers,'' in M.L.
Parry and others, eds., Climate Change 2007: Impacts, Adaptation and
Vulnerability. Contribution of Working Group II to the Fourth
Assessment Report of the Intergovernmental Panel on Climate Change
(Cambridge, U.K.: Cambridge University Press, 2007).
---------------------------------------------------------------------------
Figure 1.
Key Effects of Climate Change as a Function of an Increase in Global
Average Temperature

[GRAPHIC] [TIFF OMITTED] T9410A.018

Source: Neil Adger and others, ``Summary for Policymakers,'' in
M.L. Parry and others, eds., Climate Change 2007: Impacts, Adaptation
and Vulnerability. Contribution of Working Group II to the Fourth
Assessment Report of the Intergovernmental Panel on Climate Change
(Cambridge, U.K.: Cambridge University Press, 2007), p. 16.
Note: Effects will vary by extent of adaptation, rate of
temperature change, and socioeconomic pathway.
a. ``Significant'' is defined as more than 40 percent.
b. Based on an average rise in sea level of 4.2 millimeters per
year from 2000 to 2080.
How a Cap-and-Trade Program Would Work
As part of a global effort to reduce CO2 emissions, the
United States is considering a cap-and-trade program that would seek to
mitigate those changes by setting a limit on total emissions during
some period and requiring regulated firms to hold rights, or
allowances, to the emissions permitted under that cap. (Each allowance
would entitle companies to emit one ton of CO2 or to sell
fuel that would release one ton of CO2 when it was burned.)
After the allowances for a given period were distributed, firms would
be free to buy and sell the allowances among themselves. Firms that
were able to reduce emissions most cheaply would profit from selling
allowances to firms that had relatively high abatement costs. The
trading aspect of the program would lead to substantial cost savings
relative to command-and-control approaches--which would mandate how
much entities could emit or what technologies they should use--because
it would provide more flexibility in where and how emission reductions
necessary to meet any given target were achieved.
A cap-and-trade program has been implemented at the Federal level
in the United States to limit emissions of sulfur dioxide (which
contribute to acid rain). That program has been in effect since 1995
and is widely judged to have reduced emissions at a significantly lower
cost than would have been the case if lawmakers had chosen to rely on a
command-and-control approach. A cap-and-trade program for
CO2 emissions is currently in effect in the Northeast region
of the United States, and several states outside that region are
considering following suit. The European Union has a cap-and-trade
program for CO2 emissions as part of its effort to comply
with emission limits under the initial phase of the Kyoto Protocol,
which spans the period from 2008 to 2012.
Distributional Consequences of a Cap-and-Trade Program
In establishing a cap-and-trade program, policymakers would create
a new commodity: the right to emit CO2. The emission
allowances would have substantial value. On the basis of a review of
the existing literature and the range of CO2 policies now
being debated, CBO estimates that by 2020, the value of those
allowances could total between $50 billion and $300 billion annually
(in 2006 dollars). The actual value would depend on various factors,
including the stringency of the cap, the possibility of offsetting
CO2 emissions through carbon sequestration or international
allowance trading, and other features of the specific policy that was
selected.\2\
---------------------------------------------------------------------------
\2\ Carbon sequestration is the capture and long-term storage of
CO2 emissions underground (geological sequestration) or in
vegetation or soil (biological sequestration). For more information,
see Congressional Budget Office, The Potential for Carbon Sequestration
in the United States (September 2007).
---------------------------------------------------------------------------
Policymakers would need to decide how to allocate the allowances
that corresponded to each year's CO2 cap. One option would
be to have the government capture the value of the allowances by
selling them, as it does with licenses to use the electromagnetic
spectrum. Another possibility would be to give the allowances to energy
producers or some energy users at no charge. The European Union has
used that second approach in its cap-and-trade program for
CO2 emissions, and nearly all of the allowances issued under
the 14-year-old U.S. cap-and-trade program for sulfur dioxide emissions
are distributed in that way. Whether policymakers decided to sell all
of the allowances or give some of them away would have significant
implications for the distribution of gains and losses among U.S.
households and for the overall cost of the policy.
Market Forces Would Determine Who Bore the Costs of a Cap
Obtaining allowances--or taking steps to cut emissions to avoid the
need for such allowances--would become a cost of doing business for
firms that were subject to the CO2 cap. However, those firms
would not ultimately bear most of the costs of the allowances. Instead,
they would pass those costs along to their customers (and their
customers' customers) in the form of higher prices. By attaching a cost
to CO2 emissions, a cap-and-trade program would thus lead to
price increases for energy and energy-intensive goods and services, the
production or use of which contributes the most to those emissions.
Such price increases would stem from the restriction on emissions and,
except in limited circumstances (for electricity in states with price
regulations, for instance), would occur regardless of whether the
government sold emission allowances or gave them away. Indeed, the
price increases would be essential to the success of a cap-and-trade
program because they would be the most important mechanism through
which businesses and households would be encouraged to make
economically motivated changes in investment and consumption that
reduced CO2 emissions.
The rise in prices would impose a larger burden, relative to
income, on low-income households than on high-income households for two
reasons. First, low-income households spend a much larger fraction of
their income than do high-income households. In addition, energy-
intensive items compose a greater share of low-income households' total
expenditures. Data collected by the Bureau of Labor Statistics
indicates that, measured as a share of income, spending on energy-
intensive items by households in the lowest income quintile averages
more than five times that by households in the highest income quintile
(see Table 1).
Table 1.

Average Annual Household Expenditures on Energy-Intensive Items, by Income Quintile, 2007
(Dollars)
----------------------------------------------------------------------------------------------------------------
Quintile All
------------------------------------------------------------------
Lowest Second Middle Fourth Highest Households
----------------------------------------------------------------------------------------------------------------
Utility Expenditures 1,203 1,596 1,840 2,181 2,847 1,934
Gasoline Expenditures 1,046 1,768 2,418 2,988 3,696 2,384
Total Spending on Energy-Intensive Items 2,249 3,364 4,258 5,169 6,543 4,318
Total as a Percentage of Income 21.4 12.2 9.2 7.1 4.1 6.8
----------------------------------------------------------------------------------------------------------------
Note: Energy-intensive items include natural gas, electricity, fuel oil, other heating fuels, gasoline, and
motor oil.
Source: Congressional Budget Office based on data from Bureau of Labor Statistics, Consumer Expenditure Survey,
2007 (www.bls.gov/cex/2007/Standard/quintile.pdf).

Although the price of energy-intensive items such as electricity,
natural gas, home heating fuels, and gasoline would increase the most,
the price of most items would rise in response to the imposition of a
cap-and-trade program (because energy is an input for almost all goods
and services). The price increases (as a percentage of income) for
items that were not energy-intensive would account for approximately 40
percent of the total price increases for households.
The price increases caused by a cap-and-trade program would impose
additional costs on households. For example, without incorporating any
benefits to households from lessening climate change, CBO estimates
that the price increases resulting from a 15 percent cut in
CO2 emissions could cost the average household roughly
$1,600 (in 2006 dollars), ranging from nearly $700 in additional costs
for the average household in the lowest one-fifth (quintile) of all
households arrayed by income, to about $2,200 for the average household
in the highest quintile.
The higher prices that would result from a cap on CO2
emissions would reduce demand for energy and energy-intensive goods and
services and thus create losses for some current investors and workers
in the sectors of the economy that supply such products. Investors
might see the value of their stocks decline, and workers could face
higher risk of unemployment as jobs in those sectors were cut. Stock
losses would tend to be widely dispersed among investors because
shareholders typically diversify their portfolios. In contrast, the
costs of unemployment would probably be concentrated among relatively
few households and, by extension, their communities. The magnitude of
those transitional costs would depend on the pace of emission
reductions, with more rapid reductions leading to larger transitional
costs.
Policymakers Would Determine Who Received the Value of the Allowances
Although the price increases triggered by a cap-and-trade program
for CO2 emissions would have a greater impact, relative to
income, on lower income households, the program's ultimate
distributional effect would depend on policymakers' decisions about how
to allocate the emission allowances. Those allowances would be worth
tens or hundreds of billions of dollars per year. Who received that
value would depend on how the allowances were distributed.
Lawmakers could choose to offset the price increases experienced by
low-income households or the costs imposed on workers in particular
industrial sectors by providing for the sale of some or all of the
allowances and using the revenue to pay compensation. For example, CBO
previously examined the distributional effects of a cap-and-trade
program that would reduce CO2 emissions in the United States
by 15 percent. That study concluded that lower income households could
be better off as a result of the policy (even without including any
benefits from reducing climate change) if the government chose to sell
the allowances and use the revenue to pay an equal lump-sum rebate to
every household in the United States.\3\ In that case, the size of the
rebate would be larger than the average increase in spending by low-
income households resulting from the higher price of energy (see the
top panel of Figure 2).\4\ High-income households would be worse off
under that scenario (again, excluding any benefit from reducing the
risks associated with climate change) because the average increase in
their spending would be larger than the rebate.
---------------------------------------------------------------------------
\3\ See Congressional Budget Office, Who Gains and Who Pays Under
Carbon-Allowance Trading? The Distributional Effects of Alternative
Policy Designs (June 2000).
\4\ One researcher has suggested that an environmental tax credit
based on earnings also could reduce the regressive effects of the price
increases that would result from a tax or cap on CO2
emissions. See Gilbert E. Metcalf, A Proposal for a U.S. Carbon Tax
Swap, Discussion Paper 2007-12 (Washington, D.C.: Brookings
Institution, Hamilton Project, October 2007).
---------------------------------------------------------------------------
Figure 2.
Effects of a 15 percent Cut in CO2 Emissions, with the
Allowances' Value Used in Various Ways
(Percentage change)
[GRAPHIC] [TIFF OMITTED] T9410A.019

Sources: Congressional Budget Office (top panel); Terry M. Dinan
and Diane Lim Rogers (bottom panel), ``Distributional Effects of Carbon
Allowance Trading: How government Decisions Determine Winners and
Losers,'' National Tax Journal, vol. 55, no. 2 (June 2002), 199-221.
Notes: These figures do not reflect any of the benefits from
reducing climate change.
The policy examined here is a cap-and-trade program designed to
reduce carbon dioxide (CO2) emissions by 15 percent from
1998 levels. (CBO performed the analysis in 2000 and used 1998 emission
levels so the distributional effects could be based on actual, rather
than projected, data on consumer spending and taxes.) In the top panel,
the costs of the cap-and-trade policy are shown as decreases in real
household income, measured as a percentage of aftertax income before
the policy change. Those numbers reflect data on each quintile's cash
consumption and estimates of cash income. (A quintile contains one-
fifth of U.S. households arrayed by income.) Because of data
limitations, those numbers should be viewed as illustrative and broadly
supportive of the conclusions in this analysis rather than as precise
estimates.
a. Indicates the net effect of households' increased expenditures
because of cap-induced price increases and the income that households
would receive as a result of the allowance-allocation strategy.
b. These estimates assume that the government would use any
positive net revenue remaining after accounting for ways in which the
policy affected the Federal budget to provide equal lump-sum rebates to
households. The results would be more regressive if the government used
any positive net revenue to decrease corporate taxes or payroll taxes.

In contrast, using the revenues from selling allowances to reduce
corporate income taxes would provide smaller offsets to the price
increases experienced by low-income households than would an equal
lump-sum rebate to every household. Although corporations write the
checks to pay the corporate income tax, that money ultimately comes
from households through some combination of lower returns to capital,
lower wages, and higher prices. The issue of who pays the tax is
uncertain, but most assumptions about the incidence of the tax suggest
that higher-income households pay a greater portion of the corporate
income tax than low-income households and that the benefits to low-
income households from reducing corporate income taxes would not offset
the increased costs from higher energy prices. Using the revenues from
selling allowances to decrease payroll taxes would also provide smaller
offsets to low-income households than would an equal per-household
rebate. That offset would be less than the increased costs borne by
low-income households but larger than the offset provided by a
reduction in corporate income taxes.
Giving all or most of the allowances to energy producers--as was
done in the cap-and-trade program for sulfur dioxide emissions--would
also exacerbate the regressivity of the price increases. The reason is
that the prices of those goods and services would go up, regardless of
whether producers were required to purchase the allowances or received
them for free (because the price increases stem from the restriction on
emissions). Those price increases would reflect the value of the
allowances. If companies benefited from the price increases but did not
have to purchase the allowances, they would receive windfall profits,
which could be very large. For example, in 2000, CBO estimated that if
emissions were reduced by 15 percent and all of the allowances were
distributed free of charge to producers in the oil, natural gas, and
coal sectors, the value of the allowances would be 10 times the
combined profits of those producers in 1998. Thus, the windfall gains
that they would receive as a result of the free allocation would far
outweigh the loss in sales that they might experience as consumers cut
back on their use of fossil fuels.
The profits resulting from a free allocation of allowances would
accrue to shareholders, who are primarily from higher-income
households. That additional income would more than offset those
households' increased spending. Low-income households, by contrast,
would benefit little if allowances were given to energy producers for
free, and they would still bear a disproportionate burden from the
price increases that would nonetheless occur. Thus, giving away
allowances would be significantly regressive, making higher-income
households better off as a result of the cap-and-trade policy and
making lower income households worse off.
Reducing the Overall Economic Impact of a CO2 Cap
How lawmakers allocated the revenue from selling emission
allowances would affect not only the distributional consequences of a
cap-and-trade policy but also its total economic cost. For instance,
the government could use the revenue from auctioning allowances to
reduce existing taxes that tend to dampen economic activity--primarily,
taxes on labor, capital, or personal income. A CO2 cap would
have economic effects like those of raising such taxes: The higher
prices caused by the cap would reduce real (inflation-adjusted) wages
and real returns on capital, which would be equivalent to raising
marginal tax rates on those sources of income. Using the value of the
allowances to reduce such taxes could help mitigate that adverse effect
of the cap. Alternatively, policymakers could choose to use the revenue
from auctioning allowances to reduce the Federal deficit. If that
reduction lessened the need for future tax increases, the end result
could be similar to dedicating the revenue to cuts in existing taxes.
The decision about whether or not to sell the allowances and use
the proceeds in ways that would benefit the economy could have a
significant impact on the efficiency cost of an emissions cap. (The
efficiency cost of a policy reflects the additional costs that
producers would incur in order to produce goods in a way that led to
lower emissions; it also reflects the loss in well-being that consumers
would experience as a result of forgoing consumption of goods.) For
example, the efficiency cost of a 15 percent cut in emissions could be
reduced by more than half if the government sold allowances and used
the revenue to lower corporate income taxes, rather than devoting the
revenue to providing lump-sum rebates to households or giving the
allowances away (see the bottom panel of Figure 2).
In choosing among options for using revenues from the sale of
allowances, policymakers could face a tradeoff between providing
targeted assistance to low- and moderate-income households and
offsetting some of the adverse effects on economic activity caused by
the price increases. For example, using some of the auction proceeds
for an equal lump-sum rebate paid to every household in the United
States (set at an amount equal to the increase in energy costs for the
average household) could actually more than offset the average increase
in spending on energy-intensive goods by low-income households;
however, a lump-sum rebate would not lower existing tax rates and thus
would not offset any of the adverse effects that higher energy prices
had on incentives to work. In contrast, using a portion of the auction
proceeds to reduce corporate income tax rates could offset a
substantial share of the additional adverse economic incentives, but it
would relieve only a small portion of the increase in energy costs
experienced by low-income households.
Policies can be designed to achieve a mixture of outcomes. For
example, lowering payroll tax rates on a portion of earnings or
reducing the rate at which the earned income tax credit (EITC) phases
out would target more relief toward lower income families than would a
reduction in corporate tax rates, while potentially offsetting a small
fraction of the adverse economic effects of the program.
Options for Offsetting the Economic Impact of a Cap-and-Trade Program
on Low-Income Households
Lawmakers could choose a variety of policies for offsetting the
costs to households of higher energy prices. An important consideration
in using revenues to provide assistance to households would be to do so
in a way that did not incur significant new administrative or
compliance costs. Using existing transfer programs or providing rebates
through the income tax system would avoid creating new institutional
structures for administering payments. Existing systems that already
collect information on household income also are well suited to
targeting assistance on the basis of need. No single existing system
would reach all households, however. For example, only 54 percent of
households in the lowest fifth of the income distribution receive
earnings and thus would be likely to file an income tax return (see
Figure 3). Households that normally would not file a return would need
to file to participate in a rebate program based on the income tax
system. The response to the recent stimulus rebates suggests that such
an approach can work but that 100 percent participation is unlikely.
Figure 3.
Low-Income Households with Income and Benefits from Selected Sources
(Percent)

[GRAPHIC] [TIFF OMITTED] T9410A.019

Sources: Congressional Budget Office tabulations and tax
calculations based on data from the March 2005 Current Population
Survey.
Notes: Quintiles are based on household income, unadjusted for
household size. Quintiles have equal numbers of people.
SNAP = Supplemental Nutrition Assistance Program; LIHEAP = Low
Income Home Energy Assistance Program; EITC = earned income tax credit.

Delivering rebates through a combination of the income tax system
and existing transfer programs would, in theory, do a better job of
reaching affected households than would relying on either approach by
itself, and it would not require a new program. In practice, however,
it is not easy to coordinate among existing programs to avoid overlap
and ensure that economically equivalent households receive roughly the
same benefit. For example, although 54 percent and 45 percent of
households in the lowest quintile receive earnings and Social Security
benefits, respectively, 10 percent of households receive both. As a
result, 11 percent of households in the lowest quintile receive
neither.
Reductions in Income Tax Rates
Reductions in individual or corporate income tax rates would be
straightforward to administer and would provide the largest benefits in
terms of economic efficiency, but they would score low in terms of
offsetting energy price increases for low- and moderate-income
households. Reductions in individual income tax rates would enable
taxpayers to reduce the amount of taxes withheld from their paychecks
to cover the cost of additional expenditures on energy-intensive items
as they occurred throughout the year.
A proportional reduction in all individual income tax rates would
provide the largest percentage increase in aftertax income and the
largest dollar amount of tax reductions for taxpayers in the highest
income tax brackets; taxpayers in the 10 percent or 15 percent tax
brackets, who constitute roughly two-thirds of taxpayers with taxable
income, would receive minimal benefits. Limiting the rate reductions to
only the two lowest income tax brackets would provide a larger share of
the tax benefits to taxpayers in those brackets, but taxpayers whose
income put them near the top of the 15 percent bracket ($41,450 for a
single taxpayer and $83,000 for a couple in 2008) would benefit the
most. Reductions in income tax rates would not help low-income
households that did not have sufficient income to owe income taxes.
A reduction in corporate income tax rates would benefit owners of
corporate stock in the short run, with most of the benefits going to
higher-income households. As capital markets adjusted over the longer
term, however, the economic gain from reducing the tax would spread
across all types of capital. And over time, at least some of the
economic gains could also be shifted to wage earners, although the
degree of such shifting is uncertain. Nevertheless, any gains by low-
and moderate-income households from a reduction in corporate taxes
would be modest--even over the longer term--and insufficient to offset
their increased energy costs.
Payroll Tax Rebates
A payroll tax rebate would reach the approximately 165 million
workers who are covered under the Social Security and Medicare
Programs. Economist Gilbert Metcalf of Tufts University has proposed a
payroll tax rebate for Social Security and Medicare taxes as an offset
to a carbon dioxide tax.\5\ Under that proposal, the rebate would apply
to the tax on the first $3,660 of earnings. With a combined employee
and employer tax rate of 15.3 percent, the maximum energy credit per
worker would be $560.\6\
---------------------------------------------------------------------------
\5\ Gilbert E. Metcalf, A Green Employment Tax Swap: Using a Carbon
Tax to Finance Payroll Tax Relief, Tax Reform, Energy, and the
Environment Policy Brief (Washington, D.C.: Brookings Institution and
World Resources Institute, June 2007).
\6\ A payroll tax rebate would not have to affect the financial
status of Social Security and Medicare or the future retirement
benefits of workers. Workers would receive credit for their full
covered earnings, and the Social Security and Medicare trust funds
could be credited for the full amount of the payroll tax.
---------------------------------------------------------------------------
Households without covered earnings would not benefit from a
payroll tax rebate. Many of those households have low income or include
retirees. Data from the 2008 Current Population Survey, produced by the
U.S. Census Bureau, indicate that although about 80 percent of all
households would be eligible for a payroll tax rebate, only slightly
more than half (54 percent) of the households in the lowest fifth of
the income distribution would qualify. Among those who qualified, some
would receive less than a full $560 rebate if their earnings were less
than $3,660. About three-quarters of the households in that quintile
who would not qualify for a payroll tax rebate receive Social Security
benefits and thus would be partially protected from higher energy costs
by cost-of-living adjustments.
Administering a payroll tax rebate would be complicated by a number
of issues. Adjusting payroll tax withholding would impose some
administrative burden on employers, who also would lack the necessary
information to adjust withholding for workers with more than one job.
An alternative to adjusting payroll tax withholding would be to pay the
rebate through the income tax system when workers filed their returns.
Although that approach would be easier to administer, the timing of the
rebate would not coincide with the timing of individuals' increased
expenditures. Furthermore, because some workers who pay payroll taxes
do not currently file income tax returns, some additional
administrative costs would be incurred to process more returns.
A payroll tax rebate (like any fixed-dollar rebate) would be
progressive over most of the income distribution, providing benefits
that were a larger percentage of income for lower income households
except for those with the very lowest income and little or no earnings.
(The rebate would not necessarily be equal for households with the same
income, because the rebate amount would depend upon the number of
workers within each household.)
A payroll tax rebate would provide modest incentives for greater
participation in the labor force by increasing workers' take-home pay.
It would not offer new work incentives for people already in the labor
force with earnings high enough to qualify for the maximum rebate.
Income Tax Rebates
The Internal Revenue Service (IRS) has experience, most recently
with the 2008 stimulus payments, in delivering rebates based on
information in income tax returns. When filing, households could claim
a rebate as a credit against their income tax liability. That
transaction would present the same timing issues described in the
preceding section. Unless the rebates were refundable (that is, payable
in excess of the amount of income tax owed), they would be of little or
no value to taxpayers who filed income tax returns but owed no income
tax--which was the case for approximately 45 million of the 138 million
returns filed in 2006. Moreover, as seen in the experience with
stimulus payments, the IRS would need to undertake substantial
educational efforts, and many wage earners and others who otherwise
would not file income tax returns (because their income falls below the
statutory requirements for filing) would need to file one to obtain the
rebate. In 2006, for example, an estimated 20 million households did
not file a return. Households with very low income and those headed by
elderly people account for most of the households that do not file a
return.
The economic stimulus rebates that were available in 2008 provide
an indication of the number of eligible households that are likely to
file an income tax return in order to claim a rebate. The IRS received
approximately 156 million individual income tax returns during the 2008
filing season, the first year in which filers could claim the recovery
rebate included in the Economic Stimulus Act of 2008. That total
represents an increase of 16 million returns (11.5 percent) over the
number received in the previous year. Much of that increase probably
represents those filing solely to claim the rebate--the annual
increases in returns received during the 2006 and 2007 filing seasons
were just 1.6 percent and 3.0 percent, respectively. Although many
households appear to have filed a return just to claim the rebate, the
number that did so was a bit below expectations. When the Economic
Stimulus Act of 2008 was enacted, the Joint Committee on Taxation
estimated that $106.7 billion in stimulus payments would be paid in
fiscal year 2008. A total of $94.1 billion was actually distributed in
that year, although it is difficult to know how much of the shortfall
was attributable to eligible people failing to claim the rebate. The
economic stimulus rebates were temporary, however. The percentage of
eligible households that would file under a permanent program would
probably be higher.
A refundable tax rebate of a fixed dollar amount would be
progressive, providing greater relief as a percentage of income to low-
income households. Rebates can be adjusted for differences in family
size. They can also be targeted to low-income taxpayers by reducing
(phasing out) the amount of the credit at higher incomes. For example,
the individual income tax rebates that were part of the economic
stimulus package enacted in 2008 were reduced by 5 percent of income in
excess of $75,000 for individuals and $150,000 for couples. Phasing out
a rebate reduces its budgetary cost but adds complexity to the
calculation of tax liability and makes the true tax on additional
income (the marginal tax rate) less transparent.
One issue is whether the rebates would be paid to all households or
only those that met certain income requirements. The recent economic
stimulus rebates were payable to households without income tax
liability if their combined income from earnings, Social Security, and
veterans' disability payments was at least $3,000. Allowing all
households to claim a refundable income tax rebate would increase
administrative costs.
A fixed rebate that did not depend on earnings would not provide
households with any additional incentives to work or save and thus
would not offset any of the overall economic costs associated with a
cap-and-trade program.

Increased EITC Payments
An option based on the current tax system, and targeted
specifically toward low-income households, would be to expand the
earned income tax credit. The EITC is a refundable credit (that is,
households receive a payment if the credit exceeds their income tax
liability), payable to low-income families with earnings. In 2008,
single parents with one child and income up to $33,995 ($36,995 for a
married couple) were eligible for the credit. Single parents with two
or more children could qualify with income up to $38,646 ($41,646 for a
married couple). Childless workers between the ages of 25 and 65 were
eligible for a much smaller credit but must have had income of less
than $16,000 to qualify.
In 2006, taxpayers filed for the earned income tax credit on 23
million tax returns. The total amount of the credit was $44.4 billion,
of which $39.1 billion (88 percent) was refundable. About half of the
total EITC payments went to families whose income was less than
$15,000.\7\
---------------------------------------------------------------------------
\7\ Internal Reveune Service, Statistics of Income--2006:
Individual Income Tax Returns , Publication 1304 (Rev. 07-2008), 2008.
---------------------------------------------------------------------------
Increasing the EITC payments would be straightforward for the IRS
to administer. If the increase was proportional to the existing credit,
most of the benefits would go to low-income families with children and
very few to childless workers. Increasing the EITC would not provide
any benefits to households without earnings, however.
An expansion of the EITC could also yield economic benefits. For
example, studies have found that increases in the EITC have had a
positive effect on the participation of low-income single women in the
labor force.\8\ Although increasing the EITC would raise marginal tax
rates for some workers, there appears to be little adverse effect on
the number of hours worked by people who are already working.
---------------------------------------------------------------------------
\8\ See Bruce D. Meyer, ``The U.S. earned income tax credit, Its
Effects, and Possible Reforms,'' Harris School of Public Policy Studies
(University of Chicago) and National Bureau of Economic Research
(August 2007); and Nada Eissa and Hilary W. Hoynes, ``Behavioral
Responses to Taxes: Lessons from the EITC and Labor Supply,'' in James
M. Poterba, ed., Tax Policy and the Economy, vol. 20 (Cambridge, Mass.:
MIT Press, 2006), pp. 74-110.
---------------------------------------------------------------------------
Automatic Increases in Social Security and Supplemental Security Income
Benefits
Households receiving benefits from the Social Security or
Supplemental Security Income (SSI) programs would be partially
protected from higher energy costs because those benefits are
automatically increased each year to reflect increases in consumer
prices. Therefore, considered in combination with automatic increases
in Social Security benefits and SSI, options such as a payroll tax
rebate that are limited to households with earnings can reach a large
portion of the low- and moderate-income population. Data from the
Current Population Survey indicate that about 95 percent of households
would qualify for a payroll tax rebate or an automatic cost-of-living
increase in Social Security benefits, including 85 percent to 90
percent of households in the lowest income quintile. Cost-of-living
increases for Social Security and SSI would only partially protect
households receiving those benefits because income from those sources
covers only part of their total expenditures. That effect would be
exacerbated because expenditures on energy-intensive items are a higher
share of total expenditures for the elderly (see Table 2).
Table 2.

Average Annual Household Expenditures on Energy-Intensive Items, by Age, 2007
(Dollars)

Under Age 65 Age 65 and Over All Households

Utility Expenditures......................................... 1,947 1,880 1,934
Gasoline Expenditures........................................ 2,607 1,461 2,384
Total Spending on Energy-Intensive Items................. 4,554 3,341 4,318
Total as a Percentage of Income.......................... 6.6 8.3 6.8

Note: Energy-intensive items include natural gas, electricity, fuel oil, other heating fuels, gasoline, and
motor oil.
Source: Congressional Budget Office based on data from Bureau of Labor Statistics, Consumer Expenditure Survey,
2007 (www.bls.gov/cex/2007/Standard/sage.pdf).

Supplement to SNAP Benefits
An energy credit based on the same eligibility rules as those for
the Supplemental Nutrition Assistance Program (SNAP, formerly known as
the Food Stamp Program) would be a way to target benefits to low-income
households. To be eligible for SNAP, an applicant's monthly income must
be at or below 130 percent of the poverty guideline ($2,238 for a
family four) and countable assets must be less than $2,000 ($3,000 for
households with elderly or disabled members). Approximately 27 million
people receive SNAP benefits each month. About 65 percent of eligible
people participate in the program, and nearly 90 percent of eligible
children do.\9\
---------------------------------------------------------------------------
\9\ Kari Wolkwitz, Trends in Food Stamp Program Participation
Rates: 1999–2005 (prepared by Mathematica Policy Research for the
U.S. Department of Agriculture, Food and Nutrition Service, June 2007).
---------------------------------------------------------------------------
An energy credit could be distributed to households through the
same system as SNAP benefits, which are paid through an electronic
benefit transfer system. Those SNAP benefits are deposited
electronically in individual accounts each month, and recipients use a
card to debit their account when paying for groceries.
An energy supplement to SNAP benefits would not affect work or
savings incentives at the margin and thus would not offset any of the
economic efficiency costs of higher energy prices.
Increased Funding for the Low-Income Home Energy Assistance Program
Increases in funding for the Low-Income Home Energy Assistance
Program (LIHEAP) could supplement other options for offsetting higher
energy costs but by themselves would not be an effective way to help
the majority of low- and moderate-income households. Federal rules
restrict LIHEAP assistance to households with income up to 150 percent
of the Federal poverty guideline (or 60 percent of state median income
if greater). States, however, can choose to set lower income limits,
and as a result, eligibility requirements vary from state to state. In
2006, an estimated 5.5 million households received assistance through
LIHEAP--about 16 percent of federally eligible households.
Providing assistance to all low- and moderate-income households
would require a major expansion of the program, a substantial increase
in administrative costs, and possibly a major overhaul of the program.
The current program is funded as a block grant from the Federal
Government to the states and other entities, leaving wide latitude in
the types of assistance provided. Increasing LIHEAP subsidies could
raise the overall cost of achieving a given cap because it would offset
the price signals that are necessary to motivate households to
undertake low-cost reductions.

Increased Incentives for Energy-Saving Investments by Households
The increase in energy prices that would result from a cap-and-
trade program would encourage businesses and households to adjust their
energy usage. Using revenues from auctioning allowances to subsidize
household investments that reduced carbon dioxide emissions would lower
the cost to households of adapting to higher energy prices. For
example, subsidizing weatherization improvements would enable
households to use less energy for heating and cooling.
However, incentives for energy-saving investments in combination
with a cap-and-trade program would not reduce CO2 emissions
below the level set by the program. Although investment incentives
could alter the timing of emission reductions by lowering the cost of
meeting the targets, the cap set by the program would ultimately
determine the total amount of the reductions.
Furthermore, such incentives could increase the total costs (both
public and private) of meeting the cap because they would encourage
households to choose certain alternatives over others in adjusting to
higher energy prices. For example, a tax credit for solar heating would
encourage the use of that technology even if it was not the most cost-
efficient alternative in the absence of the credit. Creating a tax-
incentive system without distorting technology choices is difficult.
A wide variety of deductions or credits related to energy savings
already exist at both the Federal and state levels. A Federal credit
(termed the section 45 production tax credit) is available for
electricity produced using certain renewable energy sources, including
wind, biomass, geothermal energy, solar energy, and others. Other
credits are available for the manufacture of energy-saving appliances,
the construction of new energy-efficient homes, energy-efficient
improvements to existing homes, and purchases of alternative types of
motor vehicles.

Chairman MCDERMOTT. Thank you very much for your testimony.
Dr. Burtraw.

STATEMENT OF DALLAS BURTRAW, PH.D., SENIOR FELLOW, RESOURCES
FOR THE FUTURE

Dr. BURTRAW. Thank you for the opportunity to testify
today.
I am senior fellow at Resources for the Future. RFF takes
no position on issues and neither lobbies on specific
proposals. The views I express are my own.
The main point I would like to convey is that the primary
impact on households----
Chairman MCDERMOTT. Did you hit your mic? There's a button
down at the bottom that will--there you go.
Dr. BURTRAW. Okay. The light's on.
Chairman MCDERMOTT. Okay.
Dr. BURTRAW. The main point I would like to convey is that
the primary impact on households depends on the way emission
allowances are distributed under the cap-and-trade or the way
revenues would be distributed under an emissions tax.
It is possible to fully compensate all low- and moderate-
income families and there are several ways this could be
accomplished. To understand the impact on households, though,
it is essential to characterize a complete policy. One part is
the introduction of a price on CO2. This affects the
costs of energy directly and it affects indirectly the costs of
goods and services throughout the economy.
The second part of the policy is how the CO2
allowance value, or equivalently the revenue collected under
the tax, is distributed in the economy. That is because the
cost of CO2 allowances is the lion's share of the
cost that's imposed on households.
For example, under the Liebermann-Warner proposal, by 2015
the CO2 price would be $21 per ton. Households would
feel an average impact of $928 per year from changes in energy
prices and the costs of goods and services.
The value of allowances constitutes $843 of this sum, or 90
percent of the total impact on households. The different is the
real cost to the economy, just $86 per household, or less than
10 percent of the total cost on households.
So, allowances can be given away, or they can be auctioned,
but the key is how their value is distributed.
For this reason, you might say that the distribution of
allowance value or tax revenue is more important for
determining the cost on households than the actual stringency
of the policy.
One might be most concerned about the impact on lower
income households, because they spend a large fraction of the
their income on energy and are less able to make investments
that might soften the blow from changing energy prices.
Options such as either expansion of the earned income tax
credit or dividends from auction revenues per capita to
households would be strongly progressive and would protect low-
and moderate-income households.
In fact, the entire bottom half of the income distribution
could expect to come out ahead under these climate policies.
That is, the revenue they receive back would be greater than
their change in costs at the household level.
Another option would be reducing the income tax. This is
unfortunately very regressive. Households in the bottom eight
deciles of the income distribution would remain worse off under
the policy.
We've also assessed the regional impacts of different
policies. There are differences, especially for low-income
households. The Mid-Atlantic and Ohio Valley regions could be
most hard-hit. In comparison to the nation as a whole, where
about 50 percent of households on average benefit from a cap
and dividend policy, in these regions only roughly the bottom
30 percent of households on the income ladder would benefit.
Next, in the Northeast and plains States, the figure is
about 35 percent.
Finally, I will comment on some other approaches to
allocation. Free allocation to incumbent emitters or
grandfather, would be regressive because the value of free
allowances accrues primarily to higher-income households that
own a relatively higher portion of shareholder equity.
In addition it directs about 10 percent of the allowance
value overseas to foreign owners of shareholder equity.
Other options would provide special treatment for some
types of energy use, such as personal transportation or home
heating. This leads to higher allowance prices, because greater
emission reductions would have to be achieved in other sectors.
In the case of free allocation to electricity consumers
through allocation to the local distribution companies, our
research indicates this could cause the allowance price to rise
by 15 percent, raising the cost of using other fuels even
further. It is not obvious whether this will diminish or
amplify regional differences or make households better off.
In closing, Federal climate policy could be designed to
benefit most households or it could impose potentially
significant costs on most households. Most certainly the
distribution of allowance value can safeguard the majority of
low- and moderate-income households. There are a variety of
ways to accomplish this.
Cap and dividend across the population may offer an
advantage in that it suggests an equal franchise in the
climate, something economists call a common pool resource
potentially creating more durable political support, and a more
stable long-run climate policy.
More broadly, however, I think it is critical that the
goals of transparency and simplicity be front and center in the
design of climate policy.
Thank you.
[The prepared statement of Dr. Burtraw follows:]

Statement of Dallas Burtraw, Ph. D., Senior Fellow, Resources for the
Future

Mr. Chairman, thank you for the opportunity to testify before the
House Committee on Ways and Means' Subcommittee on Income Security and
Family Support. My name is Dallas Burtraw, and I am a senior fellow at
Resources for the Future (RFF), a 57-year-old research institution
based in Washington, D.C., that focuses on energy, environmental, and
natural resource issues. RFF is independent and nonpartisan, and shares
the results of its economic and policy analyses with environmental and
business advocates, academics, government agencies and legislative
staff, members of the press, and interested citizens. RFF neither
lobbies nor takes positions on specific legislative or regulatory
proposals. I emphasize that the views I present today are my own.
I have studied the performance of emissions cap-and-trade programs
from both scholarly and practical perspectives, including evaluation of
the sulfur dioxide (SO2) emissions allowance trading program
created by the 1990 Clean Air Act Amendments, the nitrogen oxide
(NOX) trading program in the northeastern United States, and
the European Union Emission Trading Scheme (EU ETS). I have conducted
analysis and modeling to support the state and regional efforts to
design trading programs, and I served on California's Market Advisory
Board overseeing the state's greenhouse gas initiative. Recently, with
colleagues at Resources for the Future, I have conducted economic
analysis to understand the distributional impacts of climate policy on
households, paying close attention to differences across regions and
income groups.

* * *

The leading proposal to reduce emissions of greenhouse gases is a
cap-and-trade policy whereby the economy is subject to an overall cap
on total emissions. Emissions permits, or allowances, would be
distributed into the economy. Polluters could buy, sell, or trade with
one another while still maintaining the overall cap. There are many
similarities between cap and trade and an emissions tax, in that both
place a scarcity value on carbon dioxide (CO2) emissions and
thereby provide a price signal that is expected to encourage innovation
and investment in lower-emitting technologies and also to trigger
changes in consumer behavior.
In order to understand the effects of such a policy on households,
it is essential to characterize the complete policy, which has two main
components. One is the introduction of a price on CO2. The
way that households are affected by this aspect of the policy will
depend on the CO2 emissions embodied in their economic
activities--both the emissions embodied in the direct energy use in the
home and the emissions embodied in their indirect purchase of goods and
services.
The second component of the policy is the way this new value
associated with placing a price on CO2 is distributed in the
economy. It is a big error to evaluate this policy by focusing on the
first component alone, because it implicitly assumes that the value
disappears. In fact, the value is substantial, and its assignment is a
central decision facing policymakers in the design of climate policy.
For example, a cap-and-trade policy in which the allowances are
auctioned and the auction revenues returned to households in a lump-sum
manner leads to quite different impacts on households than a policy in
which the auction revenues are used to reduce income taxes or a policy
in which there is no auction but rather the allowances are distributed
for free to existing emitters. To assess the full impacts of carbon
policy, both the impacts of the price and the impacts of the
distribution scheme are of critical importance.
Before addressing several specific questions, I want to draw
attention to the magnitude of the value that would be created by
placing a price on CO2 in the United States. A
CO2 cap-and-trade program would constitute the greatest
creation of government-enforced property rights since the 19th century.
Depending on the stringency of the cap and breadth of the program, the
annual market value of these property rights will range from $100
billion to $370 billion, depending on the coverage and stringency of
the program. The means by which these rights are organized and
initially distributed each year is of historic significance for the
economy as well as the environment. Policymakers might frame the
decision about allocating emissions allowances in the following way:
Imagine we are implementing a new program that will create well over a
trillion dollars in value in the next decade. Now, how do you want to
allocate that value? The answer to this question will determine the
answer to the main questions facing this committee, including the
effect on low- and moderate-income families.
I would like to make one additional point. The value of emissions
allowances under a cap-and-trade program (or the tax revenue collected
under an emissions tax) would be substantially greater than the cost of
the resources actually used to achieve emissions reductions. For this
reason, you might say the distribution of the value of emission
allowances is more important to the cost on households than is the
actual stringency of the program.
For example, implementation of the Lieberman-Warner level goals can
be expected to result in an economywide CO2 allowance price
of $20.91 per metric ton by 2015 (2006 dollars), according to modeling
from the Energy Information Administration.\1\ This price is expected
to accomplish a 13 percent reduction in emissions from 2006 levels, and
16.5 percent reduction from the forecast business as usual levels for
2015. A first-order estimate of the costs of achieving this reduction
is $11.3 billion, but the estimated value of the allowances is $114
billion (2006 dollars). Thus, the real economic loss comprises just 10
percent of the cost of the program on households, and the allowance
value (or tax revenue) comprises about 90 percent of the cost on
households. The allowance value would be available to achieve a range
of potential goals, including achieving desirable distributional
outcomes. This fact highlights the important role played by the
allocation of emissions allowances, or the distribution of carbon tax
revenues, in determining the distributional outcome of climate policy
under cap-and-trade or a carbon tax.
---------------------------------------------------------------------------
\1\ Energy Information Administration, Energy Market and Economic
Impacts of S.2191, the Lieberman-Warner Climate Security Act of 2007,
SR/OIAF/2008-01 (Washington, DC, April 2008), web site http://
www.eia.doe.gov/oiaf/servicerpt/s2191/pdf/sroiaf(2008)01.pdf. See
supplementary spreadsheet National Energy Modeling System run
S2191.D031708A.
---------------------------------------------------------------------------
With this information as background, I will address questions that
frame the agenda for this hearing.

1. In what ways might climate control legislation disproportionately
impact low- and moderate-income households?
Climate control legislation implemented through the introduction of
a price on CO2 emissions can be expected to affect household
expenditures and disposable income in several ways. One is through the
change in prices for direct energy expenditures. Second is through the
change in prices of other goods and services in the economy. Third is
through the change in government's own expenditures associated with an
increase in the price of fuels, which has implications for the tax
burden of households. Fourth, there is a possibility that a household
could be affected by changes in employment and income possibilities as
a result of changing forces in the economy. I focus only on the effect
on household expenditures.
Low-income households spend a larger share of their income on
direct energy expenditures than do households at higher-income levels.
This suggests that unmitigated changes in energy prices could most
seriously impact low-income families. For example, my analysis shows
that households in the bottom decile spend about 24 percent of their
disposable income on direct energy purchases (electricity, personal
transportation, home heating), while their counterparts in the top
decile only spend 3.6 percent.
There are a variety of reasons that one might be most concerned
about the impact on lower-income households, in addition to the fact
that they bear a relatively larger burden from climate policy. These
households have less discretionary income that can be directed to
investments that might soften the blow from changing energy prices.
Hence, they may be less able to adapt to a changing economy. Moreover,
lower-income households may be subject to greater effects from a
changing climate because of the location and condition of the
neighborhoods and housing in which they live.
This does not mean that lower-income households necessarily will be
made worse off from climate policy. In fact, lower-income households
can easily benefit relative to richer households depending on how
carbon revenue is allocated. That is because the absolute value of the
change in costs is less for lower-income households than for others, so
it takes relatively less to compensate them.

2. What factors should the Committee consider when attempting to
mitigate any costs for low-and moderate-income consumers that
may result from climate control legislation?
First, the introduction of a price on CO2 would be
fairly regressive, meaning that it would disproportionately affect
lower-income households, which spend a larger portion of their income
on energy expenditures. Second, the assignment of the value from the
CO2 price--either the value of emissions allowances, if
allocated for free or the government revenue collected under an
allowance auction--has a major influence on how the burden is
ultimately shared.
Similarly, the economic costs will not be uniform across different
regions. Different parts of the country have both different levels and
patterns of energy expenditures. In the Northeast and the Mid-Atlantic
area, home heating contributes importantly to expenditures, but not so
in the South. In contrast, on average electricity and gasoline
expenditures are substantially greater as a percentage of income in the
South than for other regions. Moreover, the CO2 emissions
associated with electricity use varies greatly in different parts of
the country because the fuel used to generate electricity varies.
Most existing research on the distributional ramifications of
climate policy examines only the effects of putting a price on
CO2. We have analyzed 10 climate policy scenarios that vary
in the manner that they assign the allowance value that is created
under the program. Five scenarios we have considered address the use of
revenue directly, including returning the revenue directly to
households as taxable income on a per capita (or per adult) basis,
returning the revenue as nontaxable income, or using the revenue to
reduce the income tax, the payroll tax, or to expand the Earned Income
Tax Credit (EITC). Five other scenarios examine options for the
electricity sector including free allocation to local distribution
companies and expenditure of allowance value on energy efficiency,
exemption of particular sectors--specifically home heating and personal
transportation--and finally, free allocation to incumbent emitters.
``Cap-and-dividend'' options
Per-capita (taxable) dividend of allowance revenues to
households (e.g. income taxes would be paid on those dividends)
Per-capita (nontaxable) dividend of allowance revenues to
households
Adjustments to preexisting taxes
Reduction in income taxes
Reduction in payroll taxes
Expansion of the Earned Income Tax Credit
Energy and fuel sector options
Free allocation of allowances to consumers in the
electricity sector (accomplished by allocation to local distribution
companies, namely retail utilities)
Exemption of the transportation sector from the cap-and-
trade program
Exemption of the home heating sector from the cap-and-
trade program
Investment in end-use energy efficiency
Free allocation to emitters
Grandfathering to incumbent emitters.

(Note that several of these policies would not use all of the
allowance value. The ultimate distributional consequence of the policy
will depend on how all the value is distributed. We consider the
incremental effect of each type of allocation.)
We find expansion of the EITC, and the cap-and-dividend programs
that directly return revenue to households are strongly progressive. In
contrast, three policies appear severely regressive, even more so than
before accounting for the use of the revenue. These include free
allocation to incumbent emitters (grandfathering), reducing income
taxes, and reducing payroll taxes. Free allocation to emitters directs
about 10 percent of the allowance value overseas to foreign owners of
shareholder equity and therefore not available to any income group in
the United States. Additionally, this option is decidedly regressive
because the value of the free allowances accrues primarily to higher-
income households which own a relatively higher portion of shareholder
equity.
While the case for equity across income groups is straightforward,
interregional equity is more complicated due to differences in
preexisting policies and incurred costs, energy prices, resources, and
lifestyle choices. Some regions have already enacted policies to reduce
their carbon footprint, with California being the prime example.
Nonetheless, important differences emerge and the biggest regional
differences affect poor households. Low-income households in the bottom
quintile of the income distribution in Texas, California, and the
Northwest are the least vulnerable, while low-income households in the
Northeast, Ohio Valley, followed by the Mid-Atlantic and Plains states
are the most vulnerable.
We examined five policies in detail that use revenue to return
allowance value directly to households or to reduce the income tax, the
payroll tax, or to expand the EITC. (We assume that 14 percent of
allowance value accrues to government to pay for its own increase in
expenditures.) We examined the effects on households in 2015, from a
policy equivalent in stringency to the Lieberman-Warner proposal. This
would yield a CO2 allowance price of $20.91 (2006 dollars)
and emission reductions of 16.5 percent from a business-as-usual
baseline for 2015, or 13 percent from 2006, according to the Energy
Information Administration.
Under this policy, we estimate that households would feel an
average impact of $928 from changes in energy prices and indirect
changes in the costs of other goods and services. We estimate the real
economic cost on an average household basis would be $86. The
difference is the value of emissions allowances, equal to about $843
per household (2006 dollars). Consequently, the actual effect on
household well being will depend crucially on the distribution of that
allowance value.
As noted already, three of these policies would be progressive in
that the costs would not fall heavily on low-income households. These
include cap-and-dividend policies (either taxable or nontaxable
dividends) and an expansion of the EITC. In fact, in these three cases
low- and moderate-income households could expect to benefit from the
policy. One way to consider this is to ask what percentage of
households, when measured along the income distribution would benefit.
For all three policies we find that half of all households in the
nation would benefit--that is, after returning revenues either as a
lump-sum payment or as an expansion of the EITC, about half of
households come out ahead under these climate policies. The crossover
point where households would begin to be worse off is in the sixth
income decile. Measured in this way, a slightly larger share of
households benefit from cap and dividend than from expansion of the
EITC because the credit removes some dividend from all households and
concentrates it in households that qualify for it.
In contrast, reducing income tax is regressive. Households in the
bottom 8 deciles of the income distribution are made worse off, even
after accounting for the revenue. Households in the top two income
deciles are made better off. The reduction in the payroll tax is
somewhat less dramatic. Households in the bottom deciles are made worse
off. I hasten to add, however, that the policy we modeled is not the
same as the sketch reflected in the Obama administration's budget
proposal, because we assume all households benefit from the reduction
in their payments to the payroll tax while the administration's
proposal would provide a lump-sum payment to offset payroll taxes and
would phase that payment out at higher-income levels.
As noted already, there can be important differences across
regions. One way to consider this is to ask: what is the break-even
point in different regions of the country? We examined this for the
cap-and-taxable dividend case. On a national basis, slightly more than
half of households would benefit but that varies across regions. In the
most vulnerable regions, the Mid-Atlantic and Ohio Valley, roughly 30
percent of households would benefit from this climate policy. In the
Northeast and Plains states, only about 35 percent of households would
benefit.

3. What methods or policies might both mitigate costs for lower-income
populations and increase economic efficiency?
An important consideration is how the use of allowance value could
contribute to economic growth. Public finance economists have
emphasized that using the value to reduce pre-existing taxes would spur
economic growth and reduce the hidden costs associated with the policy.
Those hidden costs stem from the introduction of a new regulatory
burden in the economy that acts much like the introduction of a new
tax. It may provide a disincentive to work to the extent it reduces the
real wage. If revenue is used to reduce pre-existing taxes then it can
mitigate most of this effect. Much of the economics literature suggests
the efficiency gains from using emissions allowance value in this way
can be very significant. As we have indicated with respect to policies
to reduce the income tax, however, the effect can be very regressive
because most of the benefits would accrue to those who earn the most
income. We obtain similar, but less strong results for a reduction in
the payroll tax. Each of these approaches can be adjusted to alter this
affect, as the administration's budget proposal appears to attempt to
do. Nonetheless, our results highlight the tensions that may exist
between efficiency and equity in climate policy.
Expansion of the EITC does not suffer from the same tradeoff. It
may promote employment for lower-income households and may help
insulate those households from changes in energy prices.
One option that also might have the potential to be equitable and
potentially also economically efficient is investment in energy
efficiency. However, whether this actually is efficient or simply
constitutes a subsidy to the consumption energy services hinges on the
effectiveness of energy efficiency programs that reduce the cost of
meeting the cap. Implementation of energy efficiency programs has
proven uneven in the past.
Finally, it is important to note that exclusion of personal
transportation or home heating fuels leads to higher allowance prices
because greater emissions reductions would have to be achieved in other
sectors. The same is true if allowances are used to compensate
electricity consumers, and the ramifications are even greater. The
protection of any of these sectors from changing prices leads to less
consumer response. Consequently, greater emissions reductions have to
be achieved in other sectors. In the case of free distribution to
electricity consumers (through distribution to local distribution
companies), our research indicates this could cause the allowance price
to rise by 15 percent.\2\ This raises the cost of using other fuels
even further, and it is not obvious whether this will diminish or
amplify differences in the impact of the program across regions.
---------------------------------------------------------------------------
\2\ A. Paul, D. Burtraw and K. Palmer. 2008. ``Free Allocation to
Electricity Consumers under a U.S. CO2 Emissions Cap,''
Resources for the Future Discussion Paper 08-25.
---------------------------------------------------------------------------
The subsidy to offset allowance costs associated with consumption
of any one fuel leads to a violation of the ``law of one price'' that
is necessary to achieve economic efficiency. As with the allocation of
any scarce resource, efficiency requires that one price consistently
reflects the scarcity value of emission allowances. A lower electricity
price means that electricity consumers would have less incentive to
purchase energy-efficient air conditioners and refrigerators. In
practical terms, if you drive a car, or use natural gas to heat your
home or run your industrial facility, you might be concerned that a
subsidy to electricity consumers comes at the cost of higher prices for
other uses of energy.
In sum, the idea of softening any sudden change in electricity
prices is compelling but it has an efficiency cost. One may acknowledge
that, in the short run, consumers have an existing capital stock of
refrigerators and air conditioners and are constrained in their ability
to reduce energy use. To achieve emissions reductions, it is important
to establish the expectation that future prices will rise to reflect
the scarcity value of CO2 emissions because this would
provide an incentive for consumers to purchase new appliances, etc.
The imposition of sudden price changes may be disruptive to the
economy and perceived as unfair. However, if legislation goes down this
road, from the standpoint of efficiency it is important to acknowledge
that allocation to electricity consumers through their local
distribution companies should be phased out as soon as possible. I
would suggest a phase out of four years would be appropriate to ease
the transition. Coupled with two or three years of preparation before
the program takes effect, this represents close to half the useful life
of many household appliances.

4. Is it reasonable to presume that a policy can be designed to
compensate the large majority of low- and middle-income
Americans for the increased costs related to climate control?
There is one additional consideration I wish to mention. The
introduction of a price on CO2 in the U.S. economy
represents the introduction of a long-term institution. The way that
compensation to low- and moderate-income households is delivered, or
any group for that matter, may be subject to changes in political
priorities and may not be any more permanent than the tax cuts of the
last administration.\3\ My concern is that these changes and the
political struggles that might ensue can undermine the transparency of
climate policy and the sense that we pursue it for a common purpose. To
the extent possible, policy should be transparent and simple.
Economists would view the atmosphere as a common pooled resource. This
philosophical perspective suggests equal franchise in the resource and
equal sharing of its value. An equal dividend approach would be
consistent with this perspective and may solidify the sense of common
purpose, and the permanence of the way that value is assigned under
climate policy. As I see it, this is an added strength of the cap and
dividend approach. More broadly, however, I think it is critical that
the goals of transparency and simplicity be front and center in the
design of climate policy.
---------------------------------------------------------------------------
\3\ The Jobs and Growth Tax Relief Reconciliation Act of 2003 and
the Economic Growth and Tax Relief Reconciliation Act of 2001.
---------------------------------------------------------------------------
The decision about allocating emissions allowances involves a
familiar trade-off between efficiency and distributional outcomes.
Federal climate policy would impose potentially significant costs on
households that would vary depending on the policy enacted. Taken just
by itself, the introduction of a price on CO2 would be
regressive, meaning that it would disproportionately affect lower-
income households because they spend a larger portion of their income
on energy expenditures. But this is just one-half of the equation. The
ultimate impact of the policy would also depend on how the policy
distributes the value from the CO2 price--both the value of
emissions allowances, if allocated for free, and the government revenue
collected under an allowance auction. If done carefully, the
distribution of allowance value can safeguard the majority of low- and
moderate-income households in this country.
Thank you for the opportunity to testify today.
Dr. Burtaw is a senior fellow at Resources for the Future. He holds
a Ph.D. in economics and a master's in public policy from the
University of Michigan. Dr. Burtraw has conducted research in the
design of incentive-based environmental policies in the electricity
industry and written extensively on the performance of emissions
trading programs in the United States for sulfur dioxide and nitrogen
oxides and the European Union's Emission Trading System for carbon
dioxide. He also has advised on the design of climate policy for U.S.
state governments. He currently serves on the EPA Advisory Council on
Clean Air Compliance Analysis and on the National Academies of Science
Board on Environmental Studies and Toxicology.

Chairman MCDERMOTT. Thank you very much for your testimony.
Dr. Stone is the chief economist for the Center for Budget
and Policy Priorities.
Dr. Stone.

STATEMENT OF CHAD STONE, PH.D., CHIEF ECONOMIST, CENTER ON
BUDGET AND POLICY PRIORITIES

Dr. STONE. Thank you.
Chairman McDermott, Ranking Member Linder, and other
Members of the Subcomittee, thank you for the opportunity to
testify on this important topic.
The main message of my testimony you heard in the
Chairman's opening statement and what my fellow witnesses have
already said, that it is indeed possible for climate change
legislation to fight global warming effectively, while also
protecting consumers.
That might seem like a contradiction, but you've heard how
the same policies that raise prices to consumers raise revenue
that can used to offset that impact.
Just to reiterate the impact of higher prices on consumers
and the opportunities for returning money to consumers are part
and parcel of climate policy.
What is important to remember is that the way to judge the
impact of climate change legislation on consumers at different
points in the income distribution is to look at the net impact
of, first, the hit to budgets from the higher prices, but
second, the offset to that hit from rebates or other methods of
using the revenue.
I'd like to spend the remainder of my remarks talking about
a concrete proposal developed by the Center on Budget and
Policy Priorities for using climate change revenues to shield
low- and moderate-income households from increased poverty and
hardship in a way that is effective in reaching those
households, using proven delivery mechanisms with a broad
reach, that is efficient, with low administrative costs, and
that is consistent with the goals of fighting global warming
effectively.
I will also talk about the Center's recent development of
options for modifying this proposal, to extend consumer relief
farther up the income scale while still protecting those who
are most vulnerable.
With the goals I laid out in mind, the Center has designed
a climate rebate that would efficiently offset the average
impact of higher energy-related prices arising from
restrictions on greenhouse gas emissions on low- and moderate-
income households.
The rebate would be delivered each month to very low-income
households through State electronic benefit transfer systems.
These EBT systems 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
some others.
That's the first component of our policy.
The second component of our policy would be to deliver the
rebate to low- and moderate-income working families in the form
of a higher earned income tax credit.
So, the EBT delivery mechanism for people outside the tax
system and the EITC for working families.
In proposals that would extent relief farther up the income
scale, 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 revenues that policy-makers 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.
How much would these proposals cost? The size of the impact
of higher energy prices on consumer budgets and the amount of
revenue that would be available to offset that impact rise
roughly together with the carbon tax rate, or the price of
emissions allowances in a cap-and-trade system, the cost can be
expressed as the percentage of the total revenues.
Our low-income proposal, which would fully offset the
impact in the bottom fifth of the population and extend into
the next fifth of the population, would cost about 14 to 15
percent of the revenue or allowance value.
Extending the relief farther up the income scale to fully
offset the loss in the middle fifth of the population and have
rebates phased out after that would cost about 55 percent of
the revenues.
These are illustrations. If you would like in questions or
later, we can talk about how the President's ``Making Work
Pay'' tax credit proposal would fit into this framework.
My organization, the Center on Budget and Policy
Priorities, strongly believes that this rebate approach to
providing consumer relief is superior to the alternatives we
have seen.
My written testimony lays out our concerns with other
approaches. Let me just flag two of them that we can explore
further in questions, if you're interested.
These are utilized-based approaches that give revenues to
local electric companies with instructions to use them for
consumer relief. Dallas talked about them. Cuts in tax rates,
as opposed to refundable tax credits. Terry mentioned them.
We believe that there are serious problems with those
approaches, compared with a rebate approach.
I would also note in closing that the alternative approach
that is closest in spirit to ours is the cap and dividend
approach, which would return all the revenues in the form of
per-capita dividends to the entire population.
One of our concerns there would be whether there are not
better uses for some of the revenue than returning dividends to
very high income individuals. So, we have a question about the
allocation.
With that, I would conclude my testimony. Thank you.
[The prepared statement of Mr. Stone follows:]

Statement of Chad Stone, Ph.D., Chief Economist, Center on Budget and
Policy Priorities

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.

The Economics of Cap and Trade: Fighting Global Warming Effectively
While Also Protecting Consumers Cap and Trade Is an Efficient
and Effective Way to Reduce Emissions
Economists agree that the most efficient way to reduce carbon
emissions is either to tax them directly or to put in place a ``cap-
and-trade system.'' \1\ Several northeastern states have already
implemented a cap-and-trade system on a regional basis as part of the
Regional Greenhouse Gas Initiative. In addition, the 27 nations of the
European Union have operated a cap-and-trade system since 2005.
---------------------------------------------------------------------------
\1\ Like a cap-and-trade system, a carbon tax--a government-imposed
charge on firms for every ton of greenhouse gas pollution they
produce--uses market forces to achieve cost-effective emissions
reductions. The two mechanisms operate in different ways, however. A
cap-and-trade system specifies the amount by which emissions must be
reduced and lets the market determine how high energy-related prices
need to rise to achieve that reduction. A carbon tax does the reverse:
it specifies the amount by which energy-related prices will rise, but
it lets the market determine how much of an emissions reduction that
price increase will cause.
Both mechanisms lead to pollution abatement and generate revenues
that can be used to offset the effects of the energy cost increases
that result.
---------------------------------------------------------------------------
A cap-and-trade system puts a limit (or ``cap'') on the overall
amount of greenhouse gases--mainly carbon dioxide from the burning of
fossil fuels--that businesses are allowed to emit each year. Electric
power plants, oil refineries, and other firms responsible for emissions
of carbon dioxide and other greenhouse gases are then required to
purchase permits (called allowances) for each ton of greenhouse gas
pollution they emit.
Over time, the number of emissions allowances would shrink in
order to achieve the substantial emissions reductions that scientists
say are necessary to curb global warming. This would force the economy
to gradually adapt by reducing emissions through energy conservation,
improved energy efficiency, and greater use of alternative clean energy
technologies.
Firms are free to buy and sell (i.e., to ``trade'') emission
allowances. The price for carbon depends on the level at which the cap
is set and the technology available to produce goods and services that
use less carbon. Companies that are able to reduce their emissions
easily can sell allowances to companies that have more trouble reducing
their emissions.
Thus, cap and trade would give firms incentives to pursue cost-
effective ways of cutting emissions. The less carbon a firm produces as
part of its normal operations, the less money it must spend on
purchasing allowances, or the more money it can make by selling its
allowances to firms that are not able to reduce their pollution
production as easily.

Cap and Trade Generates Revenues to Protect Consumers from Higher
Energy Prices
A cap-and-trade system would raise the prices of goods and services
whose production and use involve the emission of greenhouse gases. But
it would also generate revenues to offset the effects of these cost
increases.
Consumers would face higher prices both for home heating and
cooling and for gasoline, food, and other items made with or
transported by fossil fuels. These higher energy-related prices are
necessary to encourage emissions reductions. But they do not have to
reduce households' purchasing power. That depends on whether emissions
allowances are given away free to polluters or auctioned and the
proceeds then used to compensate consumers.
Auctioning the emission allowances rather than giving them to firms
free of charge will generate substantial revenue that can be used for a
variety of purposes, including offsetting the impact of higher energy-
related prices on low- and middle-income consumers. The federal
government would auction emissions allowances, and firms that emit
carbon dioxide or other greenhouse gases would be required to purchase
the permits. If instead, allowances were 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.
There is a misconception that giving allowances away for free to
emitters would be a way to lower the costs to consumers. That is
incorrect and flies in the face of the basic laws of supply and demand.
A cap on emissions will limit the amount of energy produced from fossil
fuels. Stated another way, it will lower the supply of energy that is
produced from fossil fuels. Regardless of whether the government gives
away or sells the allowances, market forces--i.e., the laws of supply
and demand--will raise the price of fossil-fuel energy to the point
where the amount demanded will fall to equal the amount supplied.
Whether energy companies have to pay for allowances or receive them for
free, they will be able to sell their products at the higher market
price that results from the reduction in the available supply of
fossil-fuel energy. This increase in prices is the source of the
windfall profits that would go to companies that received allowances
for free but were able to charge the higher price that the market would
bear.
The United States will incur some economic costs to change the way
we produce and consume energy in order to reduce greenhouse gas
emissions. But a broad consensus exists among scientists that reducing
carbon emissions is essential to protecting the planet--and our long-
term prosperity. In other words, failure to act is the more costly
policy economically.
Higher energy prices under a cap-and-trade system will give all
consumers the incentive to conserve energy and invest in energy
efficiency, while rebates make sure the typical consumer has the
necessary resources to respond appropriately to those higher prices
without taking a substantial hit to his or her budget.

How a Climate Rebate Would Work
To shield vulnerable households from higher energy costs in a
manner that is both effective and efficient, we recommend that
policymakers follow five basic principles.

1. Protect the most vulnerable households. Climate-change
legislation should not make poor families poorer or push more people
into poverty. To avoid that outcome, ``climate rebates'' should be
designed to fully offset higher energy-related costs for low-income
families. A good place to start is by fully protecting households in
the bottom fifth of the income spectrum--a group whose average
household income is only a little more than $15,000. Families at
somewhat higher income levels that struggle to make ends meet also will
need help in coping with the higher bills they will face.
2. Use mechanisms that reach all or nearly all low-income
households. Members of some low-income households work for low wages
and could receive a climate rebate through the tax code, such as
through an increase in the Earned Income Tax Credit. But others are
elderly, unemployed (especially during recessions), or have serious
disabilities and are not in the tax system--and experience at state and
federal levels shows that attempts to use the tax system to deliver
relief to such households have generally been unsuccessful.\2\ Yet
climate rebates need to reach these poor households as well.
---------------------------------------------------------------------------
\2\ Over the years, a number of states have established refundable
tax credits that are available to all low-income households, including
those that have no or little earnings and do not file state income tax
returns. These state tax credits are most commonly designed to provide
relief from state sales taxes or property taxes. In most such states
for which data are available, a large portion of the low-income
households that are not required to file state income tax returns fail
to file for these tax credits and thus do not receive them.
States have found it difficult to get the word out to the diverse
array of low-income people who are not otherwise connected to the
income tax system. In addition, many people apparently are reluctant to
have anything to do with state or federal revenue agencies and do not
file income tax returns if they are not required to do so.
Many of these state tax credits and the federal telephone tax
rebate are smaller than a federal climate-change tax credit would be,
and a larger tax credit would be expected to induce greater
participation. Even so, a significant percentage of low-income
households would likely be missed. For further discussion of these
issues, see Robert Greenstein, Sharon Parrott, and Arloc Sherman,''
``Designing Climate-Change Legislation that Shields Low-Income
Households From Increased Poverty and Hardship,'' Center on Budget and
Policy Priorities, revised March 21, 2008.
---------------------------------------------------------------------------
Fortunately, policymakers can tap existing mechanisms to reach
the large number of low-income households that are not reached through
a tax-rebate mechanism because their incomes are so low that they do
not file a tax return. For example, ``climate rebates'' could be
provided through the electronic benefit transfer (EBT) systems that
state human service agencies use to provide various types of assistance
to many poor people. (This is discussed further below.) Policymakers
could fill any remaining gaps, and provide weatherization assistance,
through some increases in the Low Income Home Energy Assistance
Program.
3. Minimize red tape. Funds set aside for low-income consumers
should go to intended beneficiaries, not to administrative costs or
profits. Accordingly, policymakers should provide assistance as much as
possible through existing, proven delivery mechanisms rather than new
public or private bureaucracies.
4. Preserve Economic Incentives to Reduce Energy Use Efficiently.
Policies that suppress price increases in an important sector such as
electricity blunt incentives to reduce fossil fuel use in that sector.
That keeps electricity demand somewhat elevated and puts a greater
burden on other sectors to provide the emissions reductions required
under the cap. The result is that emissions reductions are more costly
to achieve and allowance prices are higher. Consumers may pay less for
electricity but they will pay more for other things.
5. Do not focus solely on utility bills.
For households in the bottom fifth of the population, higher
home energy prices will account for less than half of the hit on their
budgets from a cap-and-trade system. (See Figure 1.) Furthermore, about
20 percent of the households in the bottom fifth have their utility
costs reflected in their rent, so they pay for utilities indirectly,
through the rents their landlords charge. Policymakers should structure
climate rebates so they can help such low-income families with the rent
increases they will face as a result of climate policies, as well as
with the higher prices low-income households will incur for gasoline
and other products and services that are sensitive to energy costs.
6. Adjust for family size. Larger households should receive more
help than smaller households because they have higher expenses.
Families with several children will generally consume more energy, and
consequently face larger burdens from increased energy costs, than
individuals living alone. Many other forms of assistance vary by
household size; this one should as well.

A ``Climate Rebate'' That Meets These Principles
A combination of an increase in the Earned Income Tax Credit and a
rebate delivered through state electronic benefit transfer systems
would reach the vast majority of low-income households, and would do so
without creating the need for a new bureaucracy or large administrative
costs.
The Earned Income Tax Credit is a powerful tool for reaching
millions of low-income working families; this committee (and Congress
and the relevant administrations) relied on EITC expansions in both
1990 and 1993 to offset the impacts on low-income working families of
the increases enacted in those years in gasoline and (in 1990) other
regressive excise taxes. Under cap-and-trade legislation, the EITC's
parameters could be designed to adjust automatically over time to
reflect the increasing consumer costs that result from the steady
tightening of the emissions cap. (This could be done through a formula
that ties the adjustments in the annual EITC parameters to annual data
from the Energy Information Agency indicating the impact of the
emissions cap on consumer purchasing power.)
If such EITC increases were all that was done, however, the result
would still be a substantial increase in poverty and hardship. About
half of those in the bottom fifth of the population do not qualify for
the EITC in any given year, in most cases because they are elderly,
have a serious disability, were unemployed in the prior year due to a
weak labor market, or are raising young children and are temporarily
out of the labor force. The group left out includes some of the poorest
children in the country. A tax-based strategy such as the EITC
consequently needs to be coupled with a form of assistance that is
available to other low-income households.
The best such mechanism is the Electronic Benefit Transfer system
that all state human service agencies use to provide food stamp
assistance--and in most states, other benefits (such as child care or
TANF assistance) as well--to a broad array of very low income
households. A climate rebate administered through existing state EBT
systems would be much less expensive to set up and administer than
virtually any alternative, because states already have the EBT system
in place. States could fairly easily issue a monthly rebate to the
millions of low-income households that are already enrolled in either
the Food Stamp Program or in the low-income subsidy for the Medicare
prescription drug benefit (which reaches a large share of the low-
income elderly and disabled population). Poor households that do not
receive either of those benefits but that meet the eligibility criteria
for food stamps (income below 130 percent of the poverty line and
limited assets) and wished to receive the climate-change rebate could
apply for the rebate through their state human services agency.
Some families that receive a rebate through the state human service
agency also will have earnings over the course of the year and qualify
for the EITC or climate-related tax credit. To ensure that families do
not receive an excessive climate rebate, benefits received through the
state human service mechanism would offset any climate-related tax
credit for which the family otherwise would qualify. States would
provide year-end information to families and the IRS on families'
rebate receipt through the EBT system, and this information would be
used to adjust the climate tax rebate a family would receive.
These two delivery mechanisms--an EBT climate-change rebate and an
expanded EITC--could be supplemented with a smaller increase in the
Low-Income Home Energy Assistance Program (LIHEAP) to help low-income
households that faced particular hardship because of extremely high
energy costs even after the EBT rebate or EITC boost was provided, and
to provide weatherization assistance and assistance with home energy
efficiency to low-income households. LIHEAP also would be a backstop
that could provide another way to help reach low-income elderly people
not picked up through the other mechanisms, since it disproportionately
serves the elderly.
By building off existing, effective programs, this approach would
succeed in reaching most low-income households. About three-fourths of
all households in the bottom fifth of the income spectrum would be
reached with little or no additional paperwork because they already
participate in the Food Stamp program, the EITC, or the low-income
subsidy under the Medicare prescription drug benefit. (An estimated 28
million low- and moderate-income households would receive assistance
automatically because they already have an EBT account through the Food
Stamp Program or receive the EITC. Another 7 million households receive
the Medicare low-income subsidy and do not receive food stamps; they
could be enrolled in the rebate program either automatically or with
little additional paperwork.)
We estimate that approximately 14 or 15 percent of the value of
emissions allowances in a cap-and-trade system would fund this
proposal.

Extending the Rebate to Middle-Income Consumers
This low-income rebate program could easily be modified so it also
provides relief to consumers with somewhat higher incomes, an approach
that we believe represents sound policy--and that also should enhance
prospects for the legislation's passage. Here is how climate rebates
for low- and middle-income households would work.
Retain the EBT rebate for very low-income households. Very-low-
income households that do not file tax returns would receive their
climate rebate in the same manner as they would under the Center's
original low-income proposal: as a monthly benefit delivered through
state EBT systems. Climate rebates could be provided directly to
seniors, veterans, and people with disabilities--individuals who may
not otherwise need to file an income tax return--by the Social Security
Administration, the Veterans Administration, and the administrator of
the Railroad Retirement program. Just as was done in the American
Recovery and Reinvestment Act, these entities can effectively and
efficiently deliver climate rebates to Social Security, SSI, VA, and
Railroad Retirement beneficiaries. For those who do file an income tax
return, these benefits would offset any climate related tax rebate for
which they would otherwise qualify.
Create a new ``climate tax credit'' for other households. For all
but very-low-income households and people on Social Security, SSI, VA,
and Railroad Retirement, a refundable income tax credit (i.e., one that
provides a refund check to families whose tax credit amount exceeds
their income tax liability) is the most efficient way to deliver a
climate rebate. Our original low-income proposal used the Earned Income
Tax Credit for this purpose. Doing so would provide for effective
targeting; the EITC phases out at moderate income levels. To reach
middle-income as well as low-income households, however, would require
a different vehicle: a new, refundable ``climate tax credit,'' rather
than an expansion of the EITC. The tax credit would go to anyone who
files a federal tax return and whose income is below the eligibility
limit set for the rebate; families would simply look up the size of
their credit in a table similar to the one used now for the EITC.
President Obama has proposed using the Making Work Pay tax credit
for this purpose. As proposed by the administration, that credit would
be a fixed dollar amount. It would need to be modified, or a
supplemental credit would have to be added, to take into account the
increased impact on consumers' budgets that would need to be offset as
the emissions cap tightened over time.
How big a rebate? As noted, under our original low-income proposal,
the rebate would equal the lost purchasing power for the average
household in the bottom quintile. The rebates would be scaled by family
size; larger families would receive more sizeable rebates. The dollar
amount of the rebate would go up over time as the emissions cap
tightened and energy prices rose. Annual data from the Energy
Information Administration on the impact of the emissions cap on
consumers' purchasing power would be used to set the size of the rebate
each year.
For a rebate also aimed at middle-income households, it would be
more appropriate to tie the rebate's size to the average loss in
purchasing power that households farther up the income scale would
face. While low-income households feel the squeeze of higher energy
prices more--they live on limited budgets, spend a larger share of
their budgets on energy, and are less able to afford investments that
can reduce their energy demand--the absolute dollar size of the
purchasing power loss is somewhat larger at higher levels of income.
Hence, a rebate set to offset the losses of middle-income families
would need to be larger than a rebate targeted solely on low-income
families. The rebate could, for example, be set equal to the average
impact of the emissions cap on the budgets of households in the middle
of the income scale.
How much would it cost? Because a rebate program aimed at middle-
income as well as low-income households would go to more people and
provide somewhat larger rebates, it would require more funding. The
Center's low-income rebate program can be funded with about 14 or 15
percent of the total market value of the emissions allowances under a
cap-and-trade program (or 14 or 15 percent of the revenues from a
carbon tax). A rebate that would offset the average purchasing power
loss of consumers in the next higher quintile would require about 35
percent of the total value of the allowances, and one that offset the
average loss of the middle 20 percent of the population would require
about 55 percent of the total allowance value.\3\
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\3\ The total cost of rebates as a percentage of the emissions
value is largely independent of how tight the cap is and what an
emissions allowance costs. As the emissions cap under a cap-and-trade
system tightens over time, this will increase the total value of the
emissions allowances by raising the price of those allowances. It also
will increase consumers' purchasing power losses by raising the price
of energy. Since both of these increases will occur at approximately
the same rate, the cost of climate rebates will stay approximately the
same as a percentage of the total allowance value.
---------------------------------------------------------------------------
With 55 percent of the total allowance value generated by a cap-
and-trade system used to fund rebates, 45 percent would remain
available to meet other important needs. These include basic research
and development on alternative energy, conservation efforts and energy
efficiency investments, transition assistance for workers and
communities harmed by the shift to a less carbon-intensive economy,
adaptation to the impacts of climate change here and abroad, green job
training, and offsetting impacts on federal, state, and local budgets.
(Note: the Congressional Budget Office has indicated that the Treasury
will need to retain approximately 25 percent of the auction proceeds to
ensure that a cap-and-trade bill does not increase the federal deficit.
This ``25-percent offset'' arises because CBO essentially assumes that
the additional revenue collected from imposing a charge on emissions
will result in a reduction of certain other federal revenues.\4\)
---------------------------------------------------------------------------
\4\ Chad Stone, Jim Horney, and Robert Greenstein, ``How CBO
Estimates the Cost of Climate Change Legislation: Explaining the 25%
Offset Rule,'' Center on Budget and Policy Priorities, May 13, 2008,
http://www.cbpp.org/5-13-08climate.pdf.
---------------------------------------------------------------------------
Why Rebates Are Superior to Other Forms of Consumer Relief
Rebates are an effective way to deliver consumer relief. They can
be provided easily through the federal tax system and state EBT
systems, with no need for new agencies or bureaucracy at the state or
federal level. Also, rebates protect households against the loss of
purchasing power from higher energy-related prices without blunting
consumers' incentives to respond to those higher prices by conserving
energy and investing in energy efficiency improvements. Because energy-
related products will cost more, households with the flexibility to
conserve energy or invest more in energy efficiency will get more value
for their budget dollar by taking these steps than by using their
rebate to maintain their old ways of consumption. At the same time,
rebates help households that cannot easily reduce their energy
consumption to avoid a reduction in their standard of living.
Other proposals for consumer relief generally lack one or more of
these advantages, pose other serious problems, or lack crucial details
needed to know how they would work in practice.

Universal ``Cap and Dividend''
The proposal closest in spirit to rebates is the universal ``cap-
and-dividend'' proposal advocated by Peter Barnes, an energy
entrepreneur who has studied this issue for a number of years.\5\ Under
this proposal, all emissions allowances in a cap-and-trade system would
be auctioned and the proceeds divided evenly among all Americans on a
per capita basis, mirroring the concept that all Americans have an
equal stake in the planet's future.
---------------------------------------------------------------------------
\5\ See Testimony of Peter Barnes, before the Committee on Ways and
Means, U.S. House of Representatives, September 18, 2008, http://
waysandmeans.house.gov/media/pdf/110/barnes.pdf.
---------------------------------------------------------------------------
The dividend would equal the average per capita loss of purchasing
power that results from climate-change legislation. Therefore, the
dividend would be smaller than the actual losses that high-income
individuals would experience due to higher energy-related costs,
because they have above-average per capita energy expenditures. It
would be somewhat larger than the actual losses of low-income
individuals.
There are a number of similarities between cap and dividend and the
Center's rebate proposal. Both focus on consumer relief. The cap-and-
dividend approach has the advantage of simplicity: everyone would
secure a share of the revenues while still facing an incentive to
reduce their carbon emissions. Nevertheless, cap and dividend raises
several concerns.

The primary issue is that distributing all revenues from
the auction of emissions allowances as dividends would leave no money
for other climate-related priorities, which would have to be funded
from other sources. (Barnes treats the dividend as taxable income which
means that the CBO ``25-percent offset'' discussed earlier in this
paper would not be needed to keep the budget deficit from widening.)
On a more technical front, cap and dividend would require
an implementation mechanism. Barnes has suggested that households would
receive monthly payments, preferably into their bank accounts (as is
done with Social Security).\6\ This would entail a significant
expansion of the Social Security infrastructure or the creation of a
similar administrative system. It would also require ensuring that all
Americans are signed up with appropriate banking services or that a
more universal system of debit cards than currently exists is created.
While these are not necessarily insurmountable barriers, developing
such a system would be a considerable undertaking.
---------------------------------------------------------------------------
\6\ ibid.
---------------------------------------------------------------------------
Finally, under a per capita dividend, the size of a
family's dividend would be tied strictly to the number of people in the
family. The evidence suggests, however, that energy expenditures
increase lessthan in proportion to family size. (In other words a
family twice as large as another consumes less than twice as much
energy.) Rebates are better suited to providing a more appropriate
family-size adjustment.\7\
---------------------------------------------------------------------------
\7\ The climate tax credit discussed in this paper would adjust for
family size but would take into account ``economies of scale'' in
meeting families' needs. In other words, a family of four would get a
larger credit than a family of two, but not one that was twice as
large, as would be the case under a per-capita cap-and-dividend
approach.
---------------------------------------------------------------------------
Payroll or Income Tax Cuts
Some have proposed using climate change revenues to cut payroll tax
rates or individual or corporate income tax rates. Such options would
be far less effective than a refundable tax credit in preserving the
purchasing power of low- and middle-income consumers.
For example, in its analysis of trade-offs in the design of cap-
and-trade legislation, CBO found that if all the revenue from
auctioning emissions allowances were used to reduce payroll tax rates,
households in the bottom 60 percent of the distribution would get a
smaller benefit from the tax cut, on average, than they would lose from
higher energy prices.\8\ Those in the next 20 percent would come out
even and the top 20 percent of the population would get a tax cut that
exceeded their increase in energy costs. Using all the auction revenues
to cut corporate taxes would be even more regressive, since the
benefits of corporate tax cuts are concentrated still higher up the
income scale. Using auction revenues to provide households rebates that
vary by family size but do not increase as income climbs would not have
these regressive effects.
---------------------------------------------------------------------------
\8\ Congressional Budget Office, ``Tradeoffs in Allocating
Allowances for CO2 Emissions,'' April 25, 2007, http://
cbo.gov/ftpdocs/89xx/doc8946/04-25-Cap_Trade.pdf; and ``Options for
Offsetting the Economic Impact on Low-and Moderate-Income Households of
a Cap-and-Trade Program for Carbon Dioxide Emissions,'' letter to the
Honorable Jeff Bingaman, Chairman, Committee on Energy and Natural
Resources, United States Senate, June 17, 2008, http://www.cbo.gov/
ftpdocs/93xx/doc9319/06-17-ClimateChangeCosts.pdf.
---------------------------------------------------------------------------
The main argument for using climate change revenues to cut tax
rates rests on the concept of economic efficiency. Economic analysis
suggests that charging firms for emitting pollutants (as under a cap-
and-trade system) could dampen economic activity. By cutting tax rates
at the same time, policymakers could reduce these economic efficiency
losses. But, as the CBO analysis emphasizes, policymakers face a trade-
off between achieving efficiency gains and achieving distributional
goals. Moreover, the economic efficiency gains CBO identifies are
relatively modest, and the effect of the tax rate cuts that produce
those modest gains would almost surely be to leave low- and middle-
income consumers worse off and to cause inequality in the United States
to widen further.\9\
---------------------------------------------------------------------------
\9\ For low- and moderate-income consumers not to be worse off
under a proposal that uses all of the auction proceeds to lower tax
rates, the additional economic activity generated by the tax cut would
have to be so great that it raised workers' incomes by enough to
increase their after-tax income by more than what they lose due to
higher energy prices. Credible estimates of the economic efficiency
gains from using climate change revenues for tax-rate reductions show
those gains to be very small, however, compared with what would be
needed to produce such a result. For example, in the analysis that CBO
has relied upon to estimate the efficiency gains under an approach that
uses all of the auction proceeds to cut tax rates, the efficiency gains
would be equal to only 0.3 percent of GDP. That is far too small to
offset the net loss that low- and middle-income consumers would bear as
a result of losing more from higher energy prices than they would gain
from the reduction in tax rates.
---------------------------------------------------------------------------
A recent study by Resources for the Future reinforces the CBO
analysis.\10\ The study finds that the benefits of cutting marginal tax
rates would mainly go to upper-income individuals. In contrast,
providing rebates to low- and middle-income consumers would result in
the best outcome for those consumers.
---------------------------------------------------------------------------
\10\ Dallas Burtraw, Rich Sweeney, and Margaret Walls, ``The
Incidence of U.S. Climate Change Policy: Where You Stand Depends on
Where You Sit,'' Resources for the Future, September 2008, http://
www.rff.org/News/Features/Pages/ClimatePolicyOptions.aspx.
---------------------------------------------------------------------------
A reduction in payroll tax rates does not fare as well as a flat
rebate on distributional grounds: the size of the benefit from a
payroll tax cut is higher for those with higher earnings, and seniors
and others without earnings would receive no rebate. The first concern
can be partially addressed by switching from a cut in payroll tax rates
to a rebate of payroll taxes paid up to a fixed cap. Workers above a
certain modest level of earnings would all receive the same size
rebate. Workers with very low earnings, however, would receive only a
partial rebate, and people with no earnings would still be left out.
Those problems can partly addressed by switching to a refundable
income tax credit based on the amount of payroll taxes paid (up to a
maximum amount) and making seniors and people receiving federal
disability benefits eligible for a similar size tax credit.\11\ At that
point, the modified payroll tax proposal would look a lot like our
proposed low- and-middle-income rebate, although it still would leave
out people who lack earnings and are not elderly or have disabilities,
such as people who are unemployed during a recession and single mothers
with very young children who are temporarily out of the workforce. That
could be addressed by including our low-income EBT proposal and by
making direct payments to people receiving Social Security, SSI, VA, or
Railroad Retirement.
---------------------------------------------------------------------------
\11\ Gilbert E. Metcalf, ``A Proposal for a U.S. Carbon Tax Swap:
An Equitable Tax Reform to Address Global Climate Change,'' The
Brookings Institution (Hamilton Project), October 2007.
---------------------------------------------------------------------------
A similar outcome could be built around President Obama's Making
Work Pay tax credit. That credit would have to be paired with payments
to people on Social Security, SSI, VA, and Railroad Retirement as was
done in the economic recovery legislation and with our EBT proposal so
as to include people who do not file tax returns. Finally, there would
need to be a supplement to the Making Work Pay credit so there is an
adjustment for family size and an increase in the tax credit as the
emissions cap tightens and the consumer impacts consequently grow
larger.

Energy Efficiency Programs
Measures to encourage or require investments in economic efficiency
can reduce the overall demand for energy, thereby limiting the size of
the hit to consumers' pocketbooks from increased energy-related prices
under an emissions cap. But energy efficiency programs are not a
credible substitute for rebates as a means of addressing the impact of
climate change legislation on consumers' budgets.
There are two main reasons why. First, existing weatherization and
other energy efficiency programs now operate on a small scale and would
likely take years to scale up to reach a substantial portion of the
population. Until now, the Weatherization Assistance Program, which
helps low-income households make their homes more energy efficient
through measures such as better insulation and newer appliances, has
served only a few hundred thousand homes a year.\12\ Even if the
program is expanded to the point that it reaches 1 million households a
year, which would require a huge buildup in effort, it would take
decades just to reach the 37 million low-income households that are
eligible for LIHEAP assistance. Rebates, in contrast, can reach tens of
millions of low- and middle-income people immediately.
---------------------------------------------------------------------------
\12\ See the LIHEAP Annual Report to Congress for Federal Fiscal
Year 2005.
---------------------------------------------------------------------------
Second, the commonly discussed energy efficiency programs generally
focus on home energy efficiency. Yet higher home energy costs account
for less than half of the loss in household purchasing power that would
be caused by an emissions cap. To provide full relief to households,
the energy efficiency measures would have to be so effective as to
compensate not only for the increased costs in home energy but also for
the increase in the cost of gasoline and other products. That is far
beyond what is realistic.
Using Utility Companies to Provide Consumer Relief
The Lieberman-Warner Climate Security Act of 2008 (S. 3036) would
have assisted low- and middle-income households by routing funds
through local utility distribution companies (LDCs). Some other
proposals have taken this approach as well.\13\ While relying on LDCs
may seem reasonable at first blush in light of concerns about increased
electricity bills, this approach is fundamentally unsound for several
reasons.\14\
---------------------------------------------------------------------------
\13\ One of the options included in the Dingell-Boucher discussion
draft legislation on climate change released in October 2008 also would
have relied on LDCs to provide consumer relief, and LDC provision
figures prominently in the blueprint for legislative action issued by
the United States Climate Action Partnership in January 2009.
\14\ See Chad Stone and Robert Greenstein, ``Why Utilities Are Not
Well-Suited to Deliver Relief to Low- and Moderate-Income Consumers in
a Climate Bill,'' Center on Budget and Policy Priorities, February 18,
2008.
---------------------------------------------------------------------------
First, utility companies do not routinely collect information on
their customers' incomes. To target assistance at customers within a
particular income range, utility companies would therefore have to set
up new bureaucracies to collect and audit income information. Covering
the large costs of building an infrastructure at each utility company
to gather and verify income information for millions of customers would
require substantial government subsidies. Such subsidies would pay for
an infrastructure that essentially duplicates what public agencies
already do. Making households of all income levels eligible for utility
company assistance would avoid this particular difficulty. But that
approach would spread the funds much more thinly across the population
and make it far less likely that low- and moderate-income consumers
would be adequately protected from higher prices.
Second, past experience suggests that utility company programs will
miss large numbers of consumers. The only existing federal program that
delivers assistance to low-income households through utility companies
is the ``Lifeline'' telephone discount program, administered through
local phone companies. That program reaches just one-third of eligible
low-income households.\15\ In addition, the sizeable share of Americans
whose utilities are built into their rents could be left out if climate
assistance were delivered primarily through utility companies.
---------------------------------------------------------------------------
\15\ Matt Fiedler, ``Lessons from The Telephone Lifeline Program,''
Center on Budget and Policy Priorities, July 18, 2008. Available at
http://www.cbpp.org/7-18-08climate.pdf.
---------------------------------------------------------------------------
Third, a utility company approach is aimed at electricity and
natural gas bills, and hence fails to address the full impact of
climate legislation on consumer budgets. With over half of the impact
of climate change legislation on consumer budgets coming as a result of
higher prices for a range of other goods and services, including
gasoline and food, relying on utilities to deliver consumer relief
would leave many low- and middle-income consumers with a large
uncompensated hole in their budgets.
Fourth, routing consumer assistance through utility companies
artificially lowers households' utility bills and blunts the ``sticker
shock'' of higher bills. People who do not realize that energy costs
are going up will be much less likely to take steps to conserve energy
or seek out energy efficiency improvements. A rebate, in contrast,
protects consumers' purchasing power without blunting the incentives
created by higher energy prices.
Fifth, establishing a formula for allocating emissions allowances
equitably among utilities would be fraught with severe difficulties.
There are roughly 3,300 LDCs in the electricity sector (plus additional
natural gas retail distributors not affiliated with electric
utilities). As discussed above, information does not exist on the
relative incomes of their customer bases, making it impossible to
distribute allowances among LDCs in proportion to each LDC's share of
the population being targeted for consumer relief. Making matters
worse, basing the allocations to LDCs on each utility's share of total
electricity delivered or total emissions--an approach often taken by
legislative proposals that rely on LDCs to provide consumer relief--
would shortchange utilities that serve a disproportionate number of
low- and moderate--income consumers, because their consumers' per-
capita energy consumption is likely to be lower than the per-capita
energy consumption of more affluent households.
Sixth, a major obstacle to relying on utilities to deliver consumer
relief, either through reductions in consumers' bills or through energy
efficiency measures, is the uneven quality of regulation and
enforcement of utilities across the states. Most utility customers are
served by investor-owned utilities whose rates and practices are
regulated by state public utilities commissions. Regulators have to
work closely with the industry they oversee, and states vary
considerably in the degree to which the regulators have successfully
avoided being ``captured'' by the industry. In such a heterogeneous
regulatory regime, it would be difficult to provide the federal
oversight necessary to make sure that the federal revenues from
auctioning emissions allowances are used appropriately to protect
consumers and invest in cost-effective energy efficiency improvements.
Finally, policies that suppress consumer price increases in the
electricity sector--as the utility company approach would do--blunt
incentives to reduce fossil fuel use in that sector. That keeps
electricity demand elevated and puts a greater burden on other sectors
to provide the emissions reductions required to meet the cap. The
result is that emissions reductions would be more costly to achieve,
and allowance prices consequently would be higher. Consumers would pay
less for electricity, but they would pay more for other forms of energy
and energy-related products. In the worst case, the overall hit to
consumers' budgets would be mitigated little or not at all despite the
federal government's having devoted a substantial amount of allowance
value, totaling tens of billions of dollars, to this effort.

Conclusion
Climate change legislation that limits greenhouse gas emissions
need not squeeze the budgets of low- and middle-income families. Well-
designed consumer relief can restore to these families the purchasing
power that they would lose as a result of higher prices for energy-
related products. In addition, consumer relief can be financed with a
portion of the revenues from the auctioning of emissions allowances
under a cap-and-trade system, leaving significant auction revenues
available for other climate-related priorities.
A new refundable climate tax credit (including a modified version
of the President's Making Work Pay tax credit), coupled with Electronic
Benefit Transfers for the lowest-income households, would be the most
effective way to provide consumer relief to low- and middle-income
households. Other proposed mechanisms suffer from significant flaws.
Cutting income or payroll tax rates would not have large enough effects
on economic activity to offset the fact that these approaches would be
quite regressive, providing the largest benefits to higher income
households and leaving low- and middle-income households worse off as a
result of the emissions cap.
Filtering consumer assistance through utility companies--or relying
solely on weatherization and related efforts to make homes more energy
efficient--also would have very serious weaknesses, as these approaches
would either bypass many families affected by higher home energy costs
or provide them with inadequate relief. Moreover, such approaches would
not address the increases that would occur, as a result of climate
change measures, in prices for energy-related products other than
household utilities. Both approaches also would require substantial
expansions in government regulation.

Chairman MCDERMOTT. Thank you very much.
Now, Sir Monckton from Great Britain?

STATEMENT OF LORD CHRISTOPHER MONCKTON, CHIEF POLICY ADVISOR,
SCIENCE AND PUBLIC POLICY INSTITUTE

Lord MONCKTON. Sir, I bring you warmest fraternal greetings
from the Mother of Parliament to the Congress of your great
athletic democracy, and I pray that God's blessing may rest
upon your counsels.
As a prime ministerial policy advisor to Margaret Thatcher,
inter alia I modeled the economic interactions of taxes and
benefits on low-income households with the aim of eradicating
poverty and investigated scientific frauds.
I have written and lectured about the mathematics and
physics of climate sensitivity, and I advise institutions on
climate change.
I should like to warn this honorable House that any
proposal to inflict billions of dollars of new taxation on all
citizens by charging selectively disfavored industries who
arbitrarily rationed permits to emit a harmless and beneficial
trace gas that is necessary to all life on Earth and has little
effect on its surface temperature, will fall cruelly and
disproportionately upon the poor; will threaten their very
lives; will gravely diminish the liberty that is the glory of
your great nation; will render difficult, if not impossible,
the pursuit of happiness;
Will raise little net revenue if the poor are adequately
compensated by the subsidies of which we have heard; will
damagingly distort the labor market by widening and deepening
the unemployment trap that already gives millions of your most
helpless citizens a better income on welfare than in work; will
imprison the poorest earners in a perpetual poverty trap by
inflicting upon them a crippling marginal taxation and benefit
withdrawal rate that powerfully deters them from increasing
their earnings;
Will be complex, extravagant, and costly; will savagely
compound the adverse effects of recession of excessive public
and private indebtedness, of fiscal incontinence, of monetary
laxity on industries and employment; will create soi-disant
``green'' jobs by the thousand, while destroying real jobs by
the million; will establish an unstable and artificial
derivatives market in hot air that will enrich a handful of
portly middle-men, while impoverishing the people; will
automatically and ineluctably defeat its own objective by so
depressing economic activity that the market price of carbon
dioxide will tend rapidly to fall as close to zero as it has
now done in both of Europe's attempt at a cap-and-trade scheme;
Will directly encourage fraud by incentivizing not only
both parties to every transaction, but also the regulatory
authorities, recklessly to overstate the magnitude of every
transaction; will set your enterprises at a profound
competitive disadvantage against nations that stare wisely
clear of purposely restrictions on or taxation of the very air
we breath out;
Will accelerate the transfer of wealth from your citizens'
pockets to other nations' governments by way of boondoggles,
such as the UN's clean development mechanism, and will
appreciably increase global carbon dioxide emissions by
transferring U.S. jobs and manufacturers to less efficient
nations, whose emissions per unit of production are many times
greater than your own, and by increasing poverty and
consequently birth rates, and consequently carbon dioxide
emissions world-wide, thereby exerting a prodigious and tragic
cost, a double influence on the global climate that will be
precisely the opposite of that which was, however piously,
intended.
Any restriction on the emission of carbon dioxide is
unnecessary. It is simple to establish theoretically, and has
been so established, that the UN's climate panel has
exaggerated the true effect of carbon dioxide's enrichment on
global temperature sevenfold.
To confirm that theoretical result, it is simple to verify
empirically and has been so verified by direct and repeated
satellite observation that the diminution over time and the
outgoing long-wave radiation from the Earth is one-seventh of
that which the UN's computer games to which we have heard
referred by your Ranking Member, had been instructed to
predict.
As you will see, global temperatures have fallen for seven
straight years. That fall in temperatures on all measures has
gone largely unreported.
Next slide, please.
Carbon dioxide is accumulating in the air at less than half
the rate the UN had imagined. You can see it there. Not one of
the UN's games had predicted the rapid global cooling to which
I've just referred. Sea surface temperatures have fallen for 5
years.
Could I have the next slide, please?
Sea level has risen not at all for the last 3 years and is
predicted to rise by little more than one foot this century,
even on the forecasts of the UN's climate panel.
Next slide, please.
Worldwide hurricane intensity in October 2008 in the
Northern Hemisphere was at its least for the 30 years of the
entire satellite record.
Next slide, please.
Global sea ice--this is the Arctic sea ice you see here in
purple--shows little trend in 30 years: 1980 on the left and
2009 on the right.
Next slide, please.
You will also see that in the southern hemisphere, the sea
ice extent reached a maximum as recently as October 2007, at
the same time as a much more widely reported minimum occurred
in the Northern Hemisphere.
The ice sheets of Greenland and Antarctica are thickening.
The Sahara is greening. There is no climate crisis.
The correct policy response to the non-problem of global
warming is not to cap or tax carbon dioxide emissions. It is to
have the courage to do nothing.
[The prepared statement of Lord Monckton follows:]

Statement of Lord Christopher Monckton, Chief Policy Advisor, Science
and Public Policy Institute

As a Prime Ministerial policy advisor to Margaret Thatcher, inter
alia I modeled the economic interactions of taxes and benefits on low-
income households with the aim of eradicating poverty, and investigated
scientific frauds. I have written and lectured about the mathematics
and physics of climate sensitivity. I advise institutions on climate
change.
I warn this honorable House that any proposal to inflict billions
of dollars of new taxation on all citizens by charging selectively-
disfavored industries for arbitrarily-rationed permits to emit a
harmless and beneficial trace gas that is necessary to all life on
Earth and has little effect on its surface temperature will fall
cruelly and disproportionately upon the poor, will threaten their very
lives, will gravely diminish the liberty that is the glory of your
great nation, will render difficult if not unlawful the pursuit of
happiness, will raise little net revenue if the poor are adequately
compensated by subsidy, will damagingly distort the labor market by
widening and deepening the unemployment trap that already gives
millions of your most helpless citizens a better income on welfare than
in work, will imprison the poorest earners in a perpetual poverty trap
by inflicting upon them a crippling marginal taxation and benefit-
withdrawal rate that powerfully deters them from increasing their
earnings, will be complex, extravagant, and costly, will savagely
compound the adverse effects of recession, of excessive public and
private indebtedness, of fiscal incontinence, and of monetary laxity on
industries and employment, will create soi-disant ``green'' jobs by the
thousand while destroying real jobs by the million, will establish an
unstable and artificial derivatives market in hot air that will enrich
a handful of portly middle-men while impoverishing the people, will
automatically and ineluctably defeat its own objective by so depressing
economic activity that the ``market'' price of carbon dioxide will tend
rapidly to fall as close to zero as it has done in both of Europe's
attempts at a cap-and-trade scheme, will directly encourage fraud by
incentivizing not only both parties to every transaction but also the
regulatory authorities recklessly to overstate the magnitude of that
transaction, will set your enterprises at a profound competitive
disadvantage against nations that steer wisely clear of purposeless
restrictions on or taxation of the very air we breathe out, will
accelerate the transfer of wealth from your citizens' pockets to other
nations' governments by way of boondoggles such as the UN's ``Clean
Development Mechanism'', and will appreciably increase global carbon-
dioxide emissions by transferring U.S. jobs and manufactures to less
efficient nations whose emissions per unit of production are many times
greater than your own, and by increasing poverty and consequently
birth-rates and consequently carbon-dioxide emissions worldwide,
thereby exerting at prodigious and tragic cost a double influence on
the global climate that will be precisely the opposite of that which
was, however piously, intended.
Any restriction on the emission of carbon dioxide is unnecessary.
It is simple to establish theoretically, and has been so established,
that the UN's climate panel has exaggerated the true effect of carbon
dioxide enrichment on global temperature sevenfold. To confirm that
theoretical result it is simple to verify empirically, and has been so
verified by direct and repeated satellite observation, that the
diminution over time in the outgoing long-wave radiation from the Earth
is one-seventh of that which the UN's computer games had been
instructed to predict. Carbon dioxide is accumulating in the air at
less than half the rate the UN had imagined. Not one of its games had
predicted the rapid global cooling of the past seven years. Sea surface
temperatures have fallen for five years. Sea level has not risen for
three years, and is predicted to rise by little more than a foot this
century. Worldwide hurricane intensity in October 2008 was at its least
for 30 years. Global sea ice shows little trend in 30 years. The ice
sheets of Greenland and Antarctica are thickening. The Sahara is
greening. There is no ``climate crisis''. The correct policy response
to the non-problem of ``global warming'' is not to cap or tax carbon
dioxide emissions. It is to have the courage to do nothing.

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Chairman MCDERMOTT. Thank you for your testimony.
We will now move to questions. I guess we could mark you
down as doubtful.
[Laughter.]
Chairman MCDERMOTT. I'm going to talk to the other
witnesses here, because I think something's going to happen
here. I assume that all of you think it doesn't make any
difference whether it's a carbon tax or cap-and-trade.
Does anyone have any particular feeling about that
particular issue, in terms of how it affects the poor, or the
people on the bottom of the economic scale?
Dr. DINAN. Either a tax or a cap-and-trade program if they
were designed to have equivalent--that the price of the
allowance under a cap-and-trade program was the same as a tax,
would create the same price effects. As I said before, that's
essential to the success of the policy.
Chairman MCDERMOTT. Yes?
Dr. BURTRAW. The one nuance to that is in the electricity
sector where, depending on how emission allowances are
distributed initially, there could be differential effects. We
can come back to that.
Chairman MCDERMOTT. Is there a preferable way to put out
the money with the most social justice, to distribute the money
to the people at the bottom? I'd like to hear your all three
answers. What would you put your nickel down for?
Dr. DINAN. Well, I think inevitably there's tradeoffs in
the choices that policy-makers----
Chairman MCDERMOTT. I know, but we're going to have to vote
``Yes'' on one way to do it. So, what I want you to do is be a
Member of Congress for just a moment. It's like how economists
always talk--Henry Jackson one time said, ``I wish I could find
a one-armed economist,'' because they say on the one hand this
and on the other hand that.
I want you to make a choice.
Dr. DINAN. The CBO does not make policy recommendations.
[Laughter.]
Dr. DINAN. I can only tell you the tradeoffs that you face,
but it's not our place to give recommendations----
Chairman MCDERMOTT. Okay. So, I'll let you slide out. Yes?
Dr. STONE. Here's my one arm.
Chairman MCDERMOTT. Okay.
Dr. STONE. My testimony laid out our bet. We're putting our
whole stake into the pot on the rebate-oriented proposal with
EBT system for low income----
Chairman MCDERMOTT. The enemies who will come--give the
other side of that argument. Somebody's going to come in and
say, ``Oh, that doesn't work, it won't work. Let me hear what
they're going to say about that.
Dr. STONE. What the other side would say?
Chairman MCDERMOTT. Yes.
Dr. STONE. What--okay, that's an interesting position to
put me in. Now, what the other side would say is that it's an
expansion of the welfare system. We saw a chart that showed
that, but it's not, because it's putting money back into
people's pockets, that came out as a result of the tax. It
gives people the ability to maintain their standard of living
while still facing higher energy prices, and respond to them
appropriately with conservation, but without being pushed
farther into poverty.
They might say that it can't possibly work, but we have
worked hard to have effective delivery mechanisms that rely on
programs that are already in place to do it.
Dr. BURTRAW. RFF does not take positions. They don't pay me
the big bucks they pay you to make the hard choices.
I do have an opinion about this in the final analysis. Cap
and dividend has the advantage that it establishes a common
franchise in what economists call a common pool resource. I
think it's a signal that we are all in this together, and we're
building an institution that may have to last for a century,
and that means it's going to need to have broad public support,
and the needs are going to need to be simple and transparent,
and I think cap and dividend is an approach that has the
longest legs to help us get through this.
Chairman MCDERMOTT. Are you talking about the President's
plan that's in his budget?
Dr. BURTRAW. Not exactly. The plan that's in the
President's budget is just a sketch. It's I think the beginning
of a conversation that accomplishes a lot of good things, but
it's not very detailed.
I think a broad-based and simple cap and dividend would be
as a couple of us have described it, and similar to the
legislation proposed by Representative Van Hollen, would just
be a per-capita or per-adult redistribution of all or a vast
majority of the allowance value or tax revenue raised under the
program.
Chairman MCDERMOTT. The Make Work Pay proposal only goes
for 2 years. So, if you put this money through that mechanism,
the public will never recognize that we have continued
something. They will think it's something that was created and
brought down by Moses and that's the way it's going to be.
Is there a real reason for taking that proposal from the
White House?
Dr. STONE. One reason is that the budget situation is
really, really difficult and the President made a commitment to
Making Work Pay. If he were to make Making Work Pay permanent
and also have to come up with a way to provide the kind of
offset to consumer costs we're talking about, that would make
the budget situation nearly impossible.
Now Make Work Pay does not fully satisfy the needs of
offsetting consumer relief to especially low-income consumers.
It would need to be supplemented with something like our EBT
proposal to deal with people that don't file income tax
returns.
It also doesn't go up over time and the cost of the energy
price increases, that cost of allowances, or the price of a
carbon tax might have to go up over time, to tighten up on the
emissions cap.
So, Make Work Pay would also have to be supplemented with
an additional climate payment, and pretty soon it would be more
than just Make Work Pay.
Chairman MCDERMOTT. Mr. Linder will inquire.
Mr. LINDER. Lord Monckton?
Lord MONCKTON. Sir?
Mr. LINDER. To provide this huge amount of money for the
lower income or middle income, or 80 percent of the households,
whatever we choose to do, to mitigate against their increasing
energy costs, there's got to be some money coming from
somewhere. Under cap-and-trade, my understanding is we auction
off excess carbon credits or emissions, and that money
generated goes to pay for the aid to the low-income people.
Lord MONCKTON. That would certainly be one mechanism, yes.
Mr. LINDER. Well, how has Europe's system been working so
far?
Lord MONCKTON. The European system has collapsed twice.
It's actually in the middle of its second collapse now.
I should explain that the European Union, which is not as
you splendidly are, a democracy, but a bureaucratic centralist
dictatorship, takes all its decisions without real reference to
the needs of ordinary people.
So, what happened was that each of the countries in the
European Union decided that it would vote itself a larger
amount of emissions under the scheme--free emissions under the
scheme--than they were emitting in total before.
So, they tried that, and of course immediately the price of
carbon on the market on which it is traded, which is an
artificial rigged market, fell to the market-clearing level,
which of course in those circumstances was zero.
So, within three or 4 months, the entire system had
collapsed and had to be re-jigged. There was then another
meeting of, again, bureaucrats--elected representatives have
very little to do with any of this--and they decided that this
time they had better try to allocate rather fewer emissions
permits to each country, in the hope that that would
artificially increase the price at which these permits would be
traded.
However, by that stage, fiscal and monetary incontinence
had caused an economic collapse worldwide, and the downturn in
economic activity, once again drove the price of carbon credits
down, and now I think it's somewhere $5 and $8 per ton, which
is not a disincentive to the emission of carbon.
So, the system has now failed twice.
There is a particular problem when you try to introduce any
form of additional taxation, for that is what this essentially
is, when you already have an outrageously growing money supply,
a collapse in government revenues, and huge increases already
in social costs.
If you try to compound those three extremely serious
difficulties by adding a fourth extremely serious difficulty,
you will drive your Nation very rapidly into bankruptcy. You
will do it alone, for we are not going to do this again.
Mr. LINDER. Reference has been made to jobs and emissions
moving into other nations. How do you envision the future for
the United States of these jobs?
Lord MONCKTON. I fear for the poor of the United States. We
already have some evidence in from California, where they
decided under Governor Schwarzenegger to get ahead of the pack,
and introduce various restrictions. That has led to a mass
exodus from California, and a collapse in the State's revenues,
and it's becoming one of the least attractive places in the
nation to do business.
The more you pile taxes on at a time when actually what
should be happening is a reduction in the Federal and State's
spending so as to discipline things, and not take too much
money as--if you go on this way, then the private sector of the
economy will implode.
If you listen to these three and you try to say that only
the top 40 percent or 60 percent of the economy should pay for
all this extra cost--which is understandable, because otherwise
you will hurt the poor, I can understand exactly where they're
coming from--then those top 40 or 60 percent will do what the
Californians are already beginning to do. They will get out,
and your economy will go down.
This is a catastrophically dangerous proposal. I want you
all to understand this. If you really want to help the poor,
you will not go there.
Mr. LINDER. Do you expect other nations to follow suit if
we, acting in our best wisdom, decide that we have to do
something about climate change?
Lord MONCKTON. Well, you may wish to do something about
climate change. It is, of course, now a demonstrated non-
problem.
You only have to look at the temperature record for the
last 7 years, the CO2 rising at half the rate they
predicted it to rise. That alone requires all their temperature
forecasts to 2100 to be halved.
If you do this, I think you will be doing it alone. America
will be damaging her own economy uniquely, and she will be
transferring her jobs and her industries to countries such as
China, Russia, Indonesia, India, and Brazil, where they do not
control emissions and pollution in the way that you do, where
their emissions per unit of production are considerably higher
than yours, and the net effect of this scheme will be directly
counter to its intention, because you will actually increase
worldwide carbon emissions by shipping your economic carbon
emissions in your manufacturers overseas, with the consequence
that the emissions will actually increase worldwide.
That is not what you intend. I hope therefore it is not
what you will do.
Mr. LINDER. Thank you.
Thank you, Mr. Chairman.
Chairman MCDERMOTT. Ms. Berkley will inquire.
Ms. BERKLEY. Thank you, Mr. Chairman, for holding this
hearing. Thank you all for being here. I appreciate the input
and the divergence of opinions.
I'm a former utility attorney for a gas company in Las
Vegas in the last 1970s, and even though I thought I had a good
handle on issues that affect energy, energy consumption,
renewable energy, I can say that the issues that I dealt with
as a utility attorney in the 1970s is quite dramatically
different from the issues that we're grappling with as a Member
of Congress.
Nevada, which is the State that I represent, is in the
forefront of the climate change debate. In 1997 the State of
Nevada enacted a renewable energy portfolio standard, requiring
that 20 percent of our electricity comes from renewable sources
by the year 2015.
Southern Nevada's solar potential coupled with our State's
geothermal and wind resources, which are among the strongest in
the United States, can make Nevada a leader in the use and
production of clean energy.
Our utility companies are rapidly moving in that direction,
and they have been good partners with our government in moving
us forward.
Focusing on clean and renewable energy gets us closer to
our goal of becoming energy independent while also being cost-
effective.
It is incomprehensible to me, as a member of Congress of
the strongest country on the planet, that we have to rely on
countries like the Saudis, the Venezuelans, the Nigerians, to
have our energy needs met.
I think moving toward renewable energy and energy
independence is not only an environmental issue, which I
believe it is, not only an economic issue, which I believe it
is, but it's a national security imperative.
Now some might be tempted to jump on the nuclear power
bandwagon as a potential solution to climate change dilemma. I
would caution my colleagues against this. Nuclear power is not
a clean source of energy, because it has a toxic, lethal,
radioactive byproduct, which is nuclear waste, that this nation
has not figured out what it's going to do with.
Yucca Mountain is not an option, and I would submit to you
that the State of Nevada will never be a repository for this
nation's energy nuclear waste.
Burying that waste in the middle of the desert, 90 miles
from Las Vegas, where we have ground water problems, seismic
activity, and volcanic activity, where we have no canisters
that currently exist that will not corrode, and the radio-
active nuclear waste that has a shelf life of 300,000 years of
radioactivity, there is no way to prevent it from leaching into
our ground water.
There is not enough water in the State of Nevada, and it
takes lots and lots of water in order to produce a nuclear
waste dump. This is unsafe, not an option, and not going to
happen.
Without a safe solution to the nuclear issue, our attention
should be on how to produce more clean energy, like solar,
wind, and geothermal.
Now while we must address the issue of climate change,
which I believe is real, with all due respect--although I must
say I don't agree with what you're saying, but I love hearing
you say it--it's just wonderful.
Lord MONCKTON. Thank you, madame.
[Laughter.]
Ms. BERKLEY. We must find a way to mitigate the economic
impact on low- and middle-income families, which will face a
disproportionate burden, and I look forward to being a part of
the process.
I cannot thank you all enough for giving us information
that I need in order to make these difficult decisions and
choices.
Thank you very much.
Chairman MCDERMOTT. Mr. Boustany will inquire.
Mr. BOUSTANY. Thank you, Mr. Chairman. The title of this is
hearing is protecting low income families while addressing
climate change, and I want to address my initial line of
inquiry to the three of you on my left here. In your verbal
testimony none of you have mentioned any other aspect of
protecting low-income families other than a transfer back from
this tax.
I want to congratulate you in your written testimony, Dr.
Burtraw, that at least you gave lip service to other aspects of
what the impact would be on low income on page four of your
testimony. I represent some very hardworking individuals and
small businesses along the Gulf Coast of the United States.
Many of these are directly involved in the energy industry and
there are many, many thousands of jobs indirectly related to
those energy producing jobs. So, I would like to ask the three
of you how many jobs are we going to kill with this type of
proposal.
Dr. Dinan.
Dr. DINAN. CBO has never provided an estimate of the number
of jobs that are lost. It depends in part on the actual policy,
how quickly caps are phased in. Job losses tend to be
transitional costs.
Mr. BOUSTANY. I understand that, but we are looking at some
fairly specific proposals here without the phase-in time. We
need information before we jump off on this. This is critical.
We are seeing massive unemployment today with the remaining
areas of employment in an area that is vital to our National
security, the energy sector. Without an adequate transition
strategy, we need to know how many jobs these types of
proposals will kill. So, with all due respect I would ask CBO
to get to work on this.
Dr. Burtraw, would you like to discuss this?
Dr. BURTRAW. Yes, very briefly I am familiar with some work
in this area, and some work has been done at Resources for the
Future. There are some facilities and industries that may be
severely affected, and they are affected in two ways. One is
sort of the natural outcome and what we would expect, and over
a transition would want to have happen, which is a transition
away from carbon intensive to less carbon intensive activities.
The second is the kind we want to avoid, which is exposure
to unfair import and export competition with other countries
that are not part of the international climate regime.
Mr. BOUSTANY. Well, you are right. I think in addition to
the energy jobs that I mentioned on the Gulf Coast of
Louisiana, Mississippi, Alabama, export jobs I think will be
severely impacted by this.
Dr. BURTRAW. The estimates that we have developed suggest
that for those facilities that are subject to unfair
competition that they could be held whole with about three to 4
percent of the total allowance pie; that is, a rebate system,
for example, to those facilities to ``alleve'' them of their
allowance burden would maintain their competitiveness on the
international market. Finally, as other speakers said today,
there still will be leakage.
We estimate that that leakage that is the movement of
omissions offshore, even as we are doing what we want to do, we
cannot close that down entirely; and, that may run up to as
much as 10 percent of the overall omission reductions that we
were able to achieve on-shore, but that could be held in-check
with a well-designed program to 10 percent.
Mr. BOUSTANY. Dr. Stone.
Dr. STONE. Yes, thank you.
There will be transition losses in specific industries, and
as Dallas said, there is allowance value. It is not that
expensive to try to address them in terms of the allowance.
Mr. BOUSTANY. So, in other words, we're going to have a
massive increase in unemployment and at the same time we will
be transferring money from this tax to these folks who are
unemployed. How does that protect families?
Dr. STONE. Well, it is very unlikely that we will have a
massive increase in unemployment. There will be changes in
where the jobs are.
Mr. BOUSTANY. Nobody has modeled that, and nobody has given
us an estimate, so I think you are speculating. I think we need
numbers.
Lord Monckton, would you like to comment?
Lord MONCKTON. Yes. You will increase employment about 200
percent if you pursue this measure over and above what it will
rise to anyway. That's our experience in the U.K. I have done
some modeling on this and the consequences will be very severe
indeed if you attempt to impose any measure of this kind on
your economy.
Mr. BOUSTANY. Lord Monckton, you said 200 percent?
Lord MONCKTON. Yes.
Mr. BOUSTANY. You said employment or unemployment?
Lord MONCKTON. I said unemployment.
Mr. BOUSTANY. Unemployment, just for clarification.
Lord MONCKTON. So, if you take unemployment as 'x', it will
be 3x by the time you will finish this process. That's if you
want the carbon tax to be at a level which will have any sort
of disincentive effect at all and thereby to try and reduce
your own emissions. Though of course you will then increase the
emissions of everybody else and you will merely get greater
worldwide emissions. No cash benefit, massive unemployment
here; I'm afraid that cap and trade is a remarkably stupid
proposal. I just pray that everyone on this Committee will
think very, very carefully and examine the consciences before
they expose the fault of the catastrophe that this tax would
entail.
Mr. BOUSTANY. Thank you, sir.
Dr. Dinan, did you want to make a final comment?
Dr. DINAN. I want to add something to what Dr. Burtraw
mentioned. The free allocation of allowances that would benefit
workers would not be the same kind of lump sum rebate that we
have been talking about in our testimony. It would be an
allocation of allowances that would be linked to their actual
level of production, and that way it would help prevent these
trade-exposed industries from being less competitive. So, the
idea was not to use the allowances to pay unemployed workers,
but to reduce the actual loss in jobs.
Mr. BOUSTANY. Thank you. My time is up.
Chairman MCDERMOTT. Mr. Davis of Alabama.
Mr. DAVIS of Alabama. Thank you, Mr. Chairman.
I was wondering who got the extra allowances from Ms.
Berkley being so concise, speaking of cap and trade here. Let
me begin with you Dr. Burtraw. You talked about the impact on
household burdens in particular regions based on utility rates
going up. What are the numbers for the south for the Georgia,
Alabama, Mississippi, Louisiana neck of the woods?
Dr. BURTRAW. Try though I might, I can't come prepared to
give you all the numbers for different parts of the country
directly. Let me just characterize the problem for you in this
way. The impacts that occur around the nation are more similar
than they are different by region. What is really different by
region is the component parts of the way that households use
energy.
In some regions, it is for home hearing. For other regions
it is for air conditioning load under electricity. Some
regions, there is more transportation expense, et cetera. It is
interesting that it adds up to be fairly similar across the
nation geographically. So, therefore, the design of the program
could have differential effects, because of the attempt to
treat certain energy uses in this special way.
Now, in the Southeast, the fact that I think is a usual
point of orientation is there are some regions that are going
to see the larger change in electricity prices, and the
Southeast is not in front of that, but it is on the top half of
where electricity prices will increase. What is interesting
about that, with the exception of the Pacific-Northwest.
Mr. DAVIS of Alabama. Well, slow down for 1 second, because
I am not from the Northwest or from the Southeast, so I want 1
second.
What would you expect, based on your model, what would you
expect to happen to rates in the Southeast?
Dr. BURTRAW. Well, on a national average, let's say 20
years out from now on a national average, in order to do what
most models suggests has to be done to achieve climate goals
we'll see an increase of about 30 percent on a national average
electricity rates.
Mr. DAVIS of Alabama. Does anybody have a number to venture
when it comes to the Southeast, and does anybody have a number
more than the 5- to 6-year range, 5 to 6 years after
implementation?
Dr. BURTRAW. I can give that to you in 1 minute.
Mr. DAVIS of Alabama. Okay. All right. Well, I've got about
2 minutes 49, so you have got some time to look for that,
because I would like an answer to that.
Dr. Stone, let me turn to you, because you've been the most
descriptive in terms of speaking about the rebate concept
that's gotten a lot of play in some circles. Let me ask you,
how do you define low income? You used the term ``low income''
several times. How do you define low income?
Dr. STONE. The low income rebate that we are talking about
is one that would off-set the average.
Mr. DAVIS of Alabama. Give me a number in terms of the
income level. What do you define as low income? What percentage
of the median income?
Dr. STONE. What percentage of the median income? Okay. The
income we are talking about with our low-income proposal is
going up to 130 percent of poverty. The earned income tax cut
fully phases out at a little over $43,000 for a married couple
with two children.
Mr. DAVIS of Alabama. Okay. So, 130 percent of poverty
would be, give me a number. The poverty line is $21,000 for a
family of how many, three or four?
Dr. STONE. I don't have that readily at hand. I'll get
those numbers too.
Mr. DAVIS of Alabama. So, 130 percent of that would be
around $29-30,000?
Dr. STONE. The top of the bottom fifth of the population.
The income cut-off for a family of three is about $27,500; and
so our rebate proposal will go a little farther up.
Mr. DAVIS of Alabama. What do we say to someone who is
making $45,000 who is not affluent by any stretch of the
imagination, but is outside that zone you described and well
outside it. What would we say to them if their utility rates
went up substantially?
Dr. STONE. Well, we would say to them if we as
policymakers, if you as policymakers want to extend the rebate
proposal further up the income scale you can do that. I talked
about a proposal that would go all the way up into the middle
that would still leave.
Mr. DAVIS of Alabama. Of course, if you did that, you would
eat away a lot of the whole rationale for doing this in terms
of alternative energy investment.
Do you have that number yet, Dr. Burtraw?
Dr. BURTRAW. No. I'm going to have to send it to your
staff. I'll do that.
Mr. DAVIS of Alabama. Well, let me just make this
observation. Let me pose one more question to Dr. Burtraw and
Dr. Stone.
What are the specific industries, other than the obvious?
Obviously, the petroleum producing industry would be
substantially affected. Beyond the petroleum producing
industry, what are some other industries that would be most
significantly affected by a cap and trade regime in terms of
job loss?
What are the next two or three big industry losers? Anybody
can answer that.
Dr. BURTRAW. I can't go very deep on that subject, because
I don't really know what's at the front of the cue. Again, my
colleagues have been working on this.
Lord MONCKTON. May I assist, Congressman?
Steel construction, heavy industries of every kind, any
heavy user of energy, as well as of course all the producers,
the coal industry, in particular, will be very badly affected.
These will be the first to go, but then it will be spread out
from there, because energy is a very big cost for most
industries; and, therefore, all industries that use energy will
be adversely affected at a time when more and more industries
are marginal anyway. You will push quite a large percentage of
your industries or all kinds over the edge.
Mr. DAVIS of Alabama. Well, my time is up, but I'd like to
add 15 seconds of observations. I think, there's a temptation
to see this as a little bit of a partisan debate, because
that's the way it often tends to play out in Committee and
Subcommittee. I think it is a little bit more nuanced than
that.
The second big observation I would make is that I think we
do have to be concerned about the impact on particular
industries and the fact that those industries aren't
proportionately located around the country. They are
disproportionately located in the Midwest and the South.
My final point, Dr. Stone, is that any kind of a rebate
regime is going to have a basic problem that there are going to
be major numbers of people who simply aren't covered by it but
who still are paying higher utility rates; and, frankly, they
are turning to Washington, D.C. at that point and blaming
Washington, D.C., which is ratcheting up their animosity and
their anti-government attitude toward a region they are not
crazy about anyway. To some of us that is an acceptable
political cost; but, I yield back my time.
Chairman MCDERMOTT. Mr. Heller will inquire.
Mr. HELLER. Thank you, Mr. Chairman.
Sir Monckton, I have a couple questions.
Lord MONCKTON. Sir?
Mr. HELLER. Specifically, in your opening comments you
mentioned scientific fraud. We saw two charts here in the
opening presentations. One showing the global mean temperatures
going up, one showing the global mean temperatures going down,
these are your charts.
Lord MONCKTON. Yes.
Mr. HELLER. Could you explain to us what the end-point
fallacy concept is?
Lord MONCKTON. Yes, certainly. I didn't show those charts
to the Committee, but I did show them to you beforehand.
Mr. HELLER. Do you have copies of those?
Lord MONCKTON. I don't know if we have got them on the
slides here. No, but, yes, what I was pointing out is that the
U.N. in one of its documents tries to show that there has been
an accelerating increase in the rate of warming over the past
150 years. So, that from every shorter time scale, as you come
toward our own time, temperatures have been increasing.
That, however, is merely a consequence of a statistical
piece of prestidigitation. It is the end-point fallacy where
when you are dealing with data which is doodling up and down
and you choose your start and end points very carefully, as the
U.N. I am afraid in a rather deliberate way did, you can
artificially show a problem which in fact doesn't exist. As I
showed in here, the temperatures for the past 7 years,
globally, have been falling extremely fast; and indeed over the
past 4 years, they have been falling at a rate equivalent to
eleven degrees Fahrenheit per century, which would give us an
ice age within about 50 years.
I am not saying this is going to happen, but I am saying
not to take account of the fact that there has been 7 years of
very strong global cooling casting extremely strong doubt on
the U.N.'s calculations, would be most unwise of this
Committee.
Mr. HELLER. Thank you.
Mr. Chairman, could I request that those charts be put in
the record that he has on this end-point fallacy?
Chairman MCDERMOTT. Without objection, it is ordered.
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T9410A.008

Mr. HELLER. Okay. Thank you.
Lord MONCKTON. Thank you.
Mr. HELLER. I'll yield back.
Chairman MCDERMOTT. Mr. Levin?
Mr. LEVIN. Well the title of this hearing is ``Protecting
Low Income Families While Fighting Global Warming.'' I think
the problem is if one doesn't think there is global warming
then I guess nothing happens.
Lord MONCKTON. Yes, sir.
Mr. LEVIN. So, I want to spend a few minutes on this.
Mr. Davis, Mr. Chairman indicated that there should be
bipartisanship and I think that's very true, but this is the
second hearing that Ways and Means has held on this issue; and
at both hearings the witness called by you, the minority, has
denied there is a problem. Most of you, if not all of you, have
essentially credited that conclusion with your questions.
I said at the first hearing that I find that worrisome,
because if there is that basic split to start with, you
essentially, on the minority side, are leaving yourself out of
any useful dialog about how we would implement a program that
relates to the issue of global warming; and, I think that would
be unfortunate. When you adopt a position that there is no
problem, you are not going to be able to be effectively
participate in discussion of its solution. Lord Monckton?
Mr. BOUSTANY. Would the gentleman yield?
Mr. LEVIN. Yes, sure.
Mr. BOUSTANY. I think my line of inquiry was about the
impact on unemployment. It had nothing to do with whether or
not there's global warming.
Mr. LEVIN. Well, your's was, but that wasn't true of the
others and that wasn't true at the hearing we had.
Mr. BOUSTANY. Would the gentleman yield?
Mr. LEVIN. I just want to say that, Lord Monckton, your
position is essentially a very small tiny position among
scientists and you're not a scientist.
Lord MONCKTON. May I answer that, sir?
Mr. LEVIN. So, I just want to say, with due respect, that
when you say your description here in your paragraph about
charging selectively disfavored industries for arbitrarily
rationing permits to admit a harmless and beneficial trace gas
that is necessary to all life on Earth and has little effect on
its surface temperature will fall cruelly and
disproportionately upon the poor.
That isn't the purpose of our hearing to argue that, but
once that position is taken, essentially it leaves the
proponents out of a meaningful participation in how we put into
place a program that addresses a problem that most say does
exist. I'm telling you what has bothered me for years about
this. I don't understand why there is that line-up. I don't
understand it.
Does it stem in part from those who feel that if you accept
the fact--and there's a statement that came out that was in our
testimony of the scientists in the United States. They've come
together. I think it was 1700 scientists who just made it clear
there is a problem in May 2008. More than 1700 scientists and
economists, and they cross the spectrum, released a joint
statement calling on this nation's leaders to swiftly establish
and implement policies to bring about deep reductions in heat
trapping emissions. I come from Michigan. I'm worried about the
impact on the industrial sector.
We have to face this. I am clearly worried about the impact
on low-income people, but, if the position of the minority is
to essentially embrace your position, which is a microscopic
minority of people who look at this.
Mr. LINDER. Would the gentleman yield for a moment?
Mr. LEVIN. Yes.
Mr. LINDER. Are you aware that 32,000 scientists, 10,000 of
whom have PhDs in the sciences and the rest of whom have
masters have signed a position that's opposite to the one that
you hold, that your 1700 people hold? They hold a press
conference in this town, and 12 people showed up and no one
wrote about it?
Lord MONCKTON. Mr. Chairman, I wonder if I might make a
constructive suggestion?
Mr. LEVIN. I am. I am aware of that, and I raise it, Mr.
Chairman, because if this is the way the line was began, if
that's where we are, it is going to make it difficult for us to
have what is necessary, and that is an effort on a bipartisan
basis to work out a program that will address global warming.
So, maybe my time is up.
Chairman MCDERMOTT. It is.
Lord MONCKTON. May I briefly respond, sir?
Chairman MCDERMOTT. I am going to move to Mr. Roskam. Maybe
he will give you a moment to speak. Mr. Roskam.
Lord MONCKTON. Thank you so much.
Mr. ROSKAM. Thank you, Mr. Chairman.
Two years ago my wife and I were on a holiday in Ireland
and we were on one of these walking tours where you spend a lot
of time outdoors, out in the countryside, and noticed how
robust the economy was. You just looked around and could see it
was very, very prosperous, very dynamic and very exciting. One
morning at one of the bed and breakfasts we asked the young guy
that's presenting us with our meal, ``Hey, what's going on in
Ireland?'' He said, ``Well, the government did an interesting
thing. They decided to cut taxes, lower regulation, and people
decided to come.''
It was a revelation to this young man that government
policy was driving investment. So, the question that I have for
the panel is what is the implication. Sir Monckton, let's start
with you.
What is the implication from an economic point of view for
the United States if we go it alone. Let's accept Mr. Levin's
premise that there is a catastrophic problem. There is not
unanimity on that, but let's accept this premise today that
there is a catastrophic problem that's got to be dealt with.
Mr. LEVIN. Well, it is not catastrophic. It's a major
problem, okay?
Mr. ROSKAM. A major problem--I will let him unyield and
amend my time--that there is a major problem that needs to be
dealt with but that the United States goes it alone, that China
doesn't participate, that India doesn't participate, that
Europe for one reason or another doesn't participate. Could you
comment in the brief time that you have on the geopolitical
implications and also the economic implications for the United
States in light of that.
Lord MONCKTON. Yes, I would be delighted.
You raise, very fairly sir the point about China and India.
They have both made it explicitly clear; and, indeed, in
India's case with the endorsement of railway engineer Pachourie
who is the chairman of the U.N.'s climate science pattern. He
too is not a climate scientist.
They have made it very clear they will not be participating
in emissions reductions, because they know very well that to
reduce carbon emissions is the quickest way to keep their
countries in poverty and prevent them from bringing themselves
out of poverty, thereby stabilizing their emissions and thereby
eventually getting things into balance.
So, they will not be participating. If you disadvantage
your own industries selectively when major competing countries
in China and India are now major competing countries, are not
going to reduce their emissions, because they cannot leave
their poor people in poverty. Then, of course, you will get
what I have called here the California effect. We already have
an example in California of people moving out of California to
other States in quite large numbers in the last couple of
years. As the carbon dioxide-drive restrictions imposed by the
Governor have begun to bite, we can already see this happening
internally within your own country. If you go for a selective
unilateral shooting of yourselves in the economic foot,
economic self-immolation, then the consequences will of course
been very bad.
Who are the people who will be affected first? Not us, the
rich; it will be the poor. It always is, and it is very
important. Your story about Ireland is a very good one.
Deregulation was something that I and others in Margaret
Thatcher's Administration spend a lot of time on. We simplified
the law. We reduced substantives. We reduced handouts, and yet
we reduced poverty. We reduced homelessness. We reduced
unemployment because we increased economic activity.
Every time you tamper with the free market or try to set up
a rigged market, or try to inflict economic cost upon
yourselves, but others are not inflicting upon their selves.
However pious your intention, not only will that intention
fail, but you will do appalling damage particularly to the
poor. If I may very briefly answer, Mr. Levin, I was moved by
what he said. I think he raised a very fair point in saying
should be a bipartisan approach on these. In that spirit, I
should like to offer to him and to any of his colleagues. I
will arrange that certain very senior scientists will visit Mr.
Levin and his colleagues and give them a briefing to explain
why it is that we have very severe doubts about the likelihood
that there is any threat from global warming, I should say.
We could give you the scientific evidence, which lies
behind the graphs which I showed you and those are not my
graphs. Those are official graphs which are available, very
widely, from recognized sources, most of them in the United
States. The global warming that is foretold has not happened,
is not happening, and will not happen. We should be very happy
sir, in a bipartisan spirit, to explain to you in some depth,
perhaps at an hour or two-briefing, exactly why that is the
case, if you would like it.
Mr. ROSKAM. Thank you.
Lord MONCKTON. Thank you very much, sir.
Mr. ROSKAM. My time has expired.
Chairman MCDERMOTT. Your time has expired.
Mr. Davis of Illinois.
Mr. DAVIS of Illinois. Thank you very much, Mr. Chairman.
Let me thank you for calling this hearing.
Dr. Dinan, some of the Members have criticized refundable
tax credits by saying that these credits go to people who don't
pay taxes. Could you tell us what taxes low-income people pay,
even if they don't pay Federal income taxes?
Dr. DINAN. Well, as the CBO analysis that I showed the
figure indicated, over half of households in the lowest fifth
of the income distribution have payroll taxes. They have
earnings, so they're contributing to payroll taxes. I think the
estimate was 54 percent of low-income households.
In addition, low-income households would bear other types
of household taxes as well, including sales taxes, some local
property tax burdens.
Mr. DAVIS of Illinois. So, when individuals make that
statement for practical purposes, they are actually inaccurate.
It is not true that these individuals do not pay taxes. They
may not pay one kind of tax, but they pay other taxes, and
that's my point.
Lord Monckton, you talked about the fear that you had for
low income, well, you said poor people?
Lord MONCKTON. Yes.
Mr. DAVIS of Illinois. Could you expound a bit more?
Lord MONCKTON. Yes, certainly. The modeling that I did at
10 Downing Street on this subject showed how very sensitive, in
particular, low income families are even to very small, even to
very temporary, increases in their costs. This is a very severe
problem, and the difficulty that you face, if you are trying to
introduce what I am afraid is effectively a reverse poor tax,
which selectively hits the poor worst.
As you have heard, even from the other witnesses, and we
are all on agreement on this, it is the poor. I use the poor as
a shorter term than low-income families. I mean no disrespect
to anyone. They suffer worst because they use energy the most.
By the time you've tried to work out a rebate scheme that is
sufficiently simple to administer, unfortunately, there will be
large numbers of families who don't quite fit into the pattern
that was envisaged and they will go cold or go unheeded, or go
unlighted, because they simply won't be able to afford basic
energy.
Mr. DAVIS of Illinois. Let me just ask.
Lord MONCKTON. Yes, sir.
Mr. DAVIS of Illinois. Dr. Stone, you wanted?
Dr. STONE. Yes, our rebate scheme automatically brings in
75 percent of the low-income population without any effort at
outreach and expansion. Many more would come in as a result of
the availability of the rebates. What we learned in the
stimulus rebates a year ago that there weren't people outside
who didn't file taxes, elderly, if you reach out to them you
can get a lot of them to file for the rebate. So, I think this
notion that large numbers of low-income people would be left
out of a rebate scheme, because it is too hard to design. It is
just not what we have found inside of our program.
Mr. DAVIS of Illinois. Well, let me ask you, Dr. Burtraw.
Congress and the President have just made a substantial
commitment to decrease energy costs and increase energy
efficiency through weatherization and other kinds of programs.
What other steps could families take that would also help
lower costs?
Dr. BURTRAW. The main steps the family can take is the
turnover of appliances and household capital. That takes money
to be able to accomplish that, to achieve energy efficiency,
weatherization programs, and turnover appliances. One idea that
has been suggested under the notion of a cap and dividends
approach would be to provide incentives, sort of like the 529
plan for college savings, to encourage families to try to
accrue, and then perhaps take advantage of matching funds, zero
interest loans from the existing State efficiency programs, or
to take advantage of other investment programs to encourage new
clients, purchases.
Mr. DAVIS of Illinois. So, then it is actually advantageous
for individuals after a period of time to replenish equipment
that they use. I mean that you are losing if you hang on to it
because your energy costs are constantly either going up or
certainly not diminishing.
Dr. BURTRAW. Yes, sir. It is widely recognized that because
of cash-flow constraints, low income households hold an
inefficient stock of appliances, and it should be a concern
that raising energy prices isn't going to help that situation
directly. If some kind of rebate program were to provide
capital available to homeowners, we could accelerate the
turnover of household appliances.
Mr. DAVIS of Illinois. Would this also be a way to perhaps
create new jobs and work opportunity as we make greater use of
new equipment?
Dr. BURTRAW. Well, sir, the only thing I can speak to
specifically is the employment effects of weatherization
programs, and there it is widely understand they have a very
positive, local beneficial effect that takes a lot of labor to
run weatherization programs.
Mr. DAVIS of Illinois. Thank you very much, Mr. Chairman.
Chairman MCDERMOTT. Mr. Tiberi will inquire.
Mr. TIBERI. Thank you. Thank you, Mr. Chairman. I submit
for the record an EPA analysis that was done the last session
of congress on the Warner-Lieberman bill and the decline in
output per sector and job growth.
Chairman MCDERMOTT. Without objection; so ordered.
[The information follows:]

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Mr. TIBERI. Thank you. Thank you very much. Thank you
ladies and gentleman for being here. I am from Ohio. In Ohio we
have lost hundreds of thousands of jobs, many in manufacturing
over the last several years. In your written testimony, CBO
acknowledges that almost all goods and services will rise in
this proposed bill, not just energy. In fact, Mr. Burtraw, in
your testimony you say roughly only 30 percent of households in
the Ohio Valley region would benefit under a cap and trade
system. In other words, 70 percent would not benefit in the
Ohio Valley under a cap and trade system.
I spoke to a manufacturer in Ohio, third generation
manufacturer, yesterday; and his company, a family owned
business, analyzed what this would do to them. He said simply,
``We would move. We would move and we would move to South
America or somewhere else in the world.'' While we are in a
deep recession, the last thing we need to do is have
manufacturers in Ohio who have not left leave because this
piece of legislation. We would put more people in the poverty
line, not less people in the poverty line.
To answer, Mr. Levin--I wish he was still here--as someone
whose dad lost his job in manufacturing, because of high energy
prices in the 1970s--that company went to Alabama, I wish Mr.
Davis were here, they stole our jobs--and who ended up on the
free introduced lunch program with no healthcare, and a dad who
worked who lost his pension. I will say that's where we are
concerned. We are concerned about what harm will this do, not
only to the poor, but to working families today that might end
up in the poor line.
With that I'd like to ask a question. In Kentucky, there is
a new steel manufacturing plant that came from Europe and it
was publicized as a plant that came there from Europe because
of the impacts of cap and trade. There is another manufacturer
from Europe that is looking at Ohio right now. Jobs will be
coming from Europe to Ohio, which is kind of a reverse to be
honest with you. I don't want to mention the name, because I
don't want to jinx them and have them not come to Ohio, but
they are also looking at South America.
My question to you sir is under the law in the European
Union today, are these anecdotes, or have you seen,
particularly in the manufacturing area, because of cap and
trade, job losses in manufacturing, jobs not coming to the
United States, maybe, but leaving the European Union to go
elsewhere?
Lord MONCKTON. Yes, this has been a continuing trend,
really, over the last 10 years, because the European Union has
become increasingly heavily regulated in many ways. The trickle
has now become a flood directly as a result of the cap and
trade program.
Fortunately, since the cap and trade program has now
collapsed for a second time, that particular disincentive has
at least been temporarily removed. However, we are expecting
that by December the European Union will once again have tried
to find a way of making this failed thing work for a third
time, and we think that will drive several.
Once again, it is particularly the heavy industries. It's
heavy transportation. It's heavy construction, heavy
engineering of every kind, steel-making, of course, is a
classic, heavy consumer of electrical energy in particular. All
of these industries are uniquely vulnerable, and now these
days, uniquely ready to move.
Since we know that Brazil is not going to participate in
any meaningful way in cap and trade or any other such
restrictions, we know that Russia, Indonesia, China, and India
are not going to either. All of these countries have declared
that they are not going to do it. If you do it, then your
business is your people's jobs, your low-income families jobs
will go away from here and end up there. Your people who are in
low incomes, they won't necessarily be able to afford to travel
to those other countries to keep their jobs. So, you will keep
your low income families here with no work.
Mr. TIBERI. Dr. Stone, you mentioned in your written
testimony the EITC, which I am a supporter of, as being a model
for this program. We have had hearings and oversight in the
past showing, demonstrating that program is not a hundred
percent effective; and, it has been around for thirty years and
we still can't make it a hundred percent effective. I would
like to make it a hundred percent effective before we throw
more weight onto the program.
Nevertheless, my question to you is as my mom and dad are
low-income retirees with fixed income, not eligible for the
EITC, the way I look at this budget proposal today, they are
going to get higher taxes on electricity. They are going to get
higher taxes on their natural gas. They are going to get higher
taxes on their car for gasoline, and they are not going to get
a dime back from the Make Work Pay, and they are not going to
get a dime back from EITC. They can't be the only people in
America that are going to be screwed by this program.
Dr. STONE. No. We recognize your point that there are
groups that would not be in the EITC. When we talk about
extending the rebate fund, first of all, our low-income
proposal we do deal with the low-income elderly who would not
be on the EITC. If they were eligible for the low-income drug
subsidy through Medicare, but for a broader program that would
go farther up the income scale, we would look to what we did in
the Recovery Act and look at Social Security recipients, SSI
recipients, recipients of Veterans Benefits, and recipients of
Railroad Retirement Benefits. That would have to be added on to
the making work pay to cover just the issue you raised.
Chairman MCDERMOTT. Mr. Van Hollen will inquire.
Mr. VAN HOLLEN. Thank you, Mr. Chairman. Let me thank all
the witnesses for their testimony.
I don't want to dwell on the issue of the scientific basis
of global warming. We have had other hearings. Other Committees
have had hearings. I do think it is important too as we debate
to figure out, as that is a threshold question, if you don't
believe that's a problem. Then, obviously, the whole
conversation here is how you structure global climate change
program goes out the window.
I would point out that President Bush, who was a skeptic in
his last address to Congress, conceded that it was a problem,
but I don't want to go there. Here is where I want to go in
terms of questions. Number one, there are obviously very
legitimate questions that are raised. You have raised them;
other panelists have raised them in terms of the impact on
industry, on the impact of consumers.
It is important as we talk about the potential job loss,
also to talk about the potential job creation. The fact of the
matter is there are opportunities for new industries in the
clean energy sector. We now export hundreds of billions of
dollars overseas in terms of purchasing foreign oil and to the
extent that we can get more homegrown, clean energy businesses
here, we are all better off in terms of employment in terms of
the impact as a result of the higher energy cost. It is
something we only need to address.
Dr. Burtraw referred to a proposal that we are going to
introduce soon, which would essentially have a universal rebate
program, because it recognizes that every user of energy out
there, especially carbon intensive energy users, will face
additional costs as we make the transition to cleaner energies.
It's fair and simple, and we can have a mechanism to get the
funds back on a realtime basis to draw a real connection in the
consumer's mind to the fact they are being compensated for
whatever additional costs.
Of course, they have an incentive then to go out and use
cleaner energy or conserve energy, but at the same time being
compensated for any additional costs. So, I would ask all our
colleagues to take a look at that essentially universal rebate
proposal. It also provides for some additional funds that would
go to the areas and regions and industries that were hardest
hit, because there is obviously a regional impact here.
What I want to ask relates to the trade issue--not the cap
and trade issue--but the issue of trade, which is in the
jurisdiction of the Ways and Means Committee. As everyone has
said, it is to the extent that India and China continue to
produce with carbon intensive energy sources, number one, it
does of course put people who are here using carbon at a
competitive disadvantage. It also doesn't address the issue to
the extent that they keep omitting carbon.
So, there are a number of ways to address that. One is to
try and use the permit process to help subsidize industries
here. Of course that doesn't stop India and China from
continuing to emit carbon and continuing to contribute to the
problem. So, from a trade basis and there are a number of
proposals that are being looked at, the question is how would
you design a system consistent with international trade rules.
Then, again, I am going to ask everyone to answer that.
Lord Monckton, for the purposes of this question, if you
could just assume that there is a problem and that we are
trying to figure out the best way to deal with it, but I am
asking you if you were to design a trade regime, whether it's
increased tariffs or whatever, on carbon-based products coming
into the United States. So, number one, you provided
disincentive to those industries overseas from using carbon;
and, after all, we are trying to get a climate change. Number
two, you don't put the domestic industries at a competitive
disadvantage.
If each of you could just take a crack at that, I'd
appreciate it.
Lord MONCKTON. Should I go first?
Mr. VAN HOLLEN. Sure.
Lord MONCKTON. Very well, sir. What I should also counsel
very strongly against, and of course four-fifths of my
testimony directly addressed the economic question and not the
scientific one, but if you go for any form of protectionism,
because that is what imposing tariffs is, you will immediately
be in breach of your treaty obligations. Treaties in this
country have the first of constitutional law under the World
Trade Organization Treaty.
So, tariffs, I think, are not a lawful option. Even if they
were, they are certainly not an economically sensible one,
because as has been established in various ways in the past.
Mr. VAN HOLLEN. Lord, I don't have much time.
Lord MONCKTON. Yes.
Mr. VAN HOLLEN. This is the problem. Your argument has two
components. One is you don't think it's a problem, global
climate change. I am assuming for the purposes of my question
global climate change is a question we have to tackle on a
global basis.
Lord MONCKTON. Absolutely, I am saying.
Mr. VAN HOLLEN. Do you have a solution, assuming that
there's a problem?
Lord MONCKTON. Yes, sir, I do.
Mr. VAN HOLLEN. Okay.
Lord MONCKTON. The solution is not in any way to impose cap
and trade; not in any way to tax carbon, but instead to
dedicate yourselves to increasing the efficiency of energy use
to reducing the cost of government, which is the largest
emitter of carbon dioxide in this country and bringing down
overall waste in the economy.
Certainly, there have been mention from one or two
congressmen here of insulating homes more efficiently, more
economical energy use. All of those things are very sensible
and focuses on those things would achieve perhaps as much as
you can achieve, which is relatively little. Even if, and I am
prepared to go along with you, ad argumentum, even if there
were a problem, there isn't practice remarkably little that
humanity can do about it.
Lord MONCKTON. All right.
Mr. VAN HOLLEN. If I could ask the others, Mr. Chairman, if
they can't answer now, to submit something?
Chairman MCDERMOTT. Perhaps you could submit something in
writing that would be useful of the Committee if that would
serve your purpose.
Mr. VAN HOLLEN. Thank you, Mr. Chairman.
Chairman MCDERMOTT. Mr. Meek will inquire.
Mr. MEEK. Mr. Chairman, I will yield 2 minutes to Mr. Van
Hollen so he can get a response from the other panel.
Dr. STONE. Right. I am going to defer on the trade issue,
but just let the free market do it issue, and do all that
energy efficiency investment, it's sort of the fundamental
principle of economics is that's not going to work.
Mr. VAN HOLLEN. Yes, we obviously can't get to where we
want if we believe there is a serious problem just by doing
what we are doing.
Dr. BURTRAW. Conceptually, there is two approaches that
have been discussed. One is a border tax adjustment. The other
is the use of an allowance value to relieve U.S. industries of
the kind of unfair competition situation that they might be
placed in. There's a lot of difference of opinion out there. I
think tax adjustment is the most talked about.
I think in all sorts of analysis I've read, it runs into
all sorts of problems with respect to the WTO. I think a much
more careful look should be given as the use of rebates as Dr.
Dinan has also mentioned, because that can essentially level
the playingfield for those severely exposed U.S. industries,
level the playingfield on an international basis.
That can be bench-marked to a best practice, so you still
provide an incentive to achieve emission reductions and those
industries also. As I mentioned earlier, an analysis suggest
that would require about three to 4 percent of the total
allowance pie in order to protect those exposed industries. Dr.
DINAN. I don't have anything really to add substantive to Dr.
Burtraw's comments. I agree with his observation that there's
basically these two fundamentally different approaches--either
trying to subject imports to some kind of a comparable
allowance requirement--or to provide an allowance exemption
basically for exports of trade-exposed goods that are produced
here.
Mr. VAN HOLLEN. Thank you.
The second doesn't provide any incentive obviously for the
foreign manufacturer to try to reduce their carbon emissions.
It does help address the playingfield issue, so.
Dr. DINAN. Yes.
Mr. VAN HOLLEN. Thank you.
Mr. MEEK. So, I want just the rest of my time.
Chairman MCDERMOTT. Mr. Meek, you claim your time.
Mr. MEEK. Thank you. I would like to answer the question
along with food safety, food security, when we look at this
issue in the report, because we haven't really talked about
that today. We have a lot of the low income families in
Florida--almost forty to sixty percent in some cases, 20
percent of Florida. They actually have incomes under $12,000 a
year, but as we look at climate change, I am going to go ahead
and just jump on the side.
If climate change does have an effect on our economy and
our future; and, as you know, as we look at this cap and trade
piece, we have to look at some of the extreme weather events
that we have experienced in Florida and throughout the nation,
and I want to see as we reach this issue as we talk about this,
that we talk about crops being wiped out in the future, what
kind of effect in a positive sense can we think about when we
look at this whole issue of what it's costing or what it will
cost U.S. farmers and the Federal Government and the taxpayers
as it relates to crop loss.
As you know, the President is looking at this whole farming
issue in a different way and/or as it relates to world hunger.
So, if anyone can take that up I would appreciate it.
Lord MONCKTON. Certainly, sir.
The IPCC, which is the U.N.'s climate panel, which is
regarded by many as authoritative, says that individuals'
extreme weather event cannot be ascribed to global warming.
Mr. MEEK. Okay. Thank you.
Lord MONCKTON. Certainly during the first two Celsius.
Mr. MEEK. Will you suspend, please? Will you suspend?
Lord MONCKTON. Sorry. Yes, sir.
Mr. MEEK. Suspend. Thank you. Thank you for your input. Do
we have anyone else?
Dr. STONE. Your question goes to something that's important
to bring up at this hearing which is we have been talking about
the costs.
Mr. MEEK. Hit your mic.
Dr. STONE. Sorry. It's on.
Mr. MEEK. Yes, okay.
Dr. STONE. We have been talking about the costs that
mitigation strategies have imposed, but there are benefits in
return and you are pointing out there are avoided costs of the
damage from climate change, and that's a really important part
of the conversation that we should account for.
Mr. MEEK. Well, we're looking.
Dr. STONE. I don't have specifics on your food.
Mr. MEEK. I understand what you are saying, and what I am
looking at is the other side of it, because I come from
Florida. A lot of folks are talking about moving, converting
homes to our great witness here in the first seat.
That costs money, but we know over the long term that it
will have a good effect in the long term.
Yes, sir?
Dr. BURTRAW. Well, sir, the point that should be added,
we've been talking about mitigation and the costs of that, but
the disproportionate effects of climate change, if we will
concede that there is a change in climate, fall
disproportionately on the poor. Whether it is in the delta, the
Sacramento valley or low income residents in Texas or in the
Southeast who would have to rely increasingly on air
conditioning and a change in climate, or disease vectors that
affect those populations most specifically. The poor are the
most exposed to the change in climate in the United States and
internationally.
Mr. MEEK. Okay. You're good? Okay. Thank you very much.
Mr. Chairman, as we look at this, we know when we have
events and we have food shortages that it hits those who are
hit the most even in regular life, even as we call here in
Congress regular order, but as their everyday lives are
affected, and in Florida, Hurricane season, which are now
hurricanes on steroids, we find ourselves in a very difficult
situation.
I want to deal with the arguments against doing something,
versus not doing anything at all.
Thank you, sir.
Chairman MCDERMOTT. Mr. Crowley, although you are not a
Member of the Subcommittee, I believe that Members that are on
the Ways and Means Committee ought to have the opportunity to
come in and sit, watch and listen. If you have a question, I
yield some time to you.
Mr. CROWLEY. I appreciate your follow-up with the last
sentence, in particular, if you have a question that
dissipates, so thank you. I do a lot of listening, so if I
could, just a follow-up on my friend from Ohio's comments, and
I have a great deal of respect for him. I too have concerns
about the cost affiliated with climate change for our seniors
and others who don't work and will not qualify for the Make
Work Pay tax credit, or for the earned income tax credits.
There are some discussions about providing for free
allowances to energy companies and that they would follow by
passing on those savings to their consumers. So, my question
is, would 100 percent of the benefit of free allowances to
utility companies be passed down to consumers; and, if not, are
the Tax Code and rebate checks like those in the 2009 economic
stimulus bill, the best way to cushion seniors and others who
otherwise are not covered by those with tax benefits to be
buffered as a result to climate change legislation. I'd ask Dr.
Burtraw and Dr. Stone if you could answer that question.
Dr. BURTRAW. I will take the first part of your question.
so basically the U.S. electricity industry exists under two
basic types of regulation and so free allocation to companies
as you describe it, we have to be very careful about the type
of free allocation we are talking about.
Mr. CROWLEY. So, the State jurisdiction you are talking
about?
Dr. BURTRAW. That's right. So, the kind of grandfathering
we saw in the SO2 program would not achieve on a
nationwide basis the kind of outcome you suggest, but
increasingly, for example, on the Dingell/Boucher discussion
last year, there's a discussion of a different type of approach
which would be free allocation to local distribution companies,
who could then be charged to act as trustees on behalf of
customers and to roll that allowance value into reducing retail
electricity prices. So, you would see an increase in the
wholesale electricity price by a commensurate reduction in the
retail electricity price.
It would really offset the vast majority of changes on
electricity price. This is virtuous from the standpoint of how
it protects electricity to consumers, but as I mentioned in my
opening remarks it has the disadvantage that it raises
allowance prices economy-wide by about 15 percent. That means
if you happen to drive a car or happen to use a natural gas to
heat your home, et cetera, you are going to see even greater
increases in those other fuels.
Mr. CROWLEY. Dr. Stone.
Dr. STONE. Yes. To follow-up on that first, we are very
critical of the proposal to give it to the local distribution
companies as a sole means of delivering consumer relief because
for low income consumers, less than half of the total impact of
higher costs from climate change and legislation would be in
their home energy bills.
There is a bunch of it, about a quarter of it, that's from
gasoline; and then there's a part of it, the rest of it,
another near quarter, that comes indirectly from the fact that
it costs money to produce goods and services with energy. Your
food: energy goes into the production of food and the
transportation of food; and that fees also into cost. So, if
you focus just on utility bills, you're not getting at those.
As Dr. Burtraw just said, if you keep the price of electricity
down in a cap and trade system, that's going to force more
other sectors to bear more of the burden of meeting the cap;
and, prices are going to go up there in that other half of the
consumer pod.
Dr. STONE. So, that would be a concern. On the positive
side of the rebates, as I mentioned to representative Tiberi,
it's easy to bring seniors, veterans, people on railroad
retirement benefits, into a rebate-type system.
Mr. CROWLEY. Which we did in the last bill as well, so
you're advocating, if I'm reading correctly, through the
broader way in terms of Tax Code as opposed to the benefit
through the company.
Dr. STONE. Right, plus our proposal for getting people not
in the tax system for the electronic benefit transfer delivery
mechanism.
Mr. CROWLEY. Dr. Dinan, would you comment on that as well?
Dr. DINAN. I just wanted to point out that seniors that
receive Social Security benefits would receive some type of
compensation automatically through the COLA. So, to the extent
that their income is coming from Social Security and those
higher prices are reflected in the COLA, they would
automatically receive some compensation for those higher
prices.
Mr. CROWLEY. Thank you. Thank you for your comment.
I appreciate it and I yield back the balance of my time.
Chairman MCDERMOTT. Mr. Linder.
Mr. LINDER. Mr. Chairman, I ask unanimous consent to have
this gallop poll and its results inserted in the record. That
portion of the record I have exchanged with Mr. Levin.
Chairman MCDERMOTT. Without objection, so ordered.
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Chairman MCDERMOTT. Well, before we close, I said at the
beginning, half in jest to you, Lord Monckton, that I could
mark you down as doubtful. I want to just ask one question of
you, because it seems to me that we are dealing with a huge
problem about which there may be some controversy, which can
have long-term, perhaps catastrophic effects, on society. In
1987 you wrote in ``The American Spectator.''
Lord MONCKTON. Sir.
Chairman MCDERMOTT. I am sure you know this quote, but I
know you said there is only one way to stop AIDS, that is to
screen the entire population regularly and to quarantine all
carriers of the disease for life. Every member of the
population should be blood-tested every month. All those found
to be infected with the virus, even if only carriers, should be
compulsorily, immediately, and permanently confined.
Now, I understand in 1987 I was in Zaire, right in the
middle of the explosion of the AIDS epidemic, so I know the
time when this statement was made. Do you have any doubt
whatsoever that there is climate change going on that global
warming is caused by human beings, or are you as rock hard as
you seem in your testimony?
Lord MONCKTON. Right. Thank you for that question and I am
happy to answer it as follows.
First of all, since I wrote the standard public health
policy should have been applied to the AIDS virus just like any
other fatal infection, at least 25 million people have died
over the last 20 years who might not have died, had the usual
public health policies been followed.
So, there are consequences, if for whatever reason, however
emotional, one does not take the tough decisions that however
nasty they seem may be necessary to prevent a catastrophe. I
may also add on AIDS that in this country the current
prevalence is 0.7 percent and rising. When it reaches 1
percent, that's the epidemic threshold. It will then pass very
rapidly through the population and very large numbers even here
could die.
However, I am also trying to work on a cure, and we are
getting some very promising results, and I hope to come back to
you on that in due course. As to the climate, the climate is
defined by the United Nations panel on the subject. As a
nonlinear, complex, chaotic system about which no longer term
predictions can be reliably made, now, they're there citing a
paper 1963 by the late Edward Lorenz, one of your most
formidable numerical weather forecasters in the paper in which
he founded chaos theory in which he said that because we cannot
know the initial state of the climate to a sufficient degree of
precision, no long-run prediction on what will happen in the
climate can be made. I am therefore not going to try to attempt
to do what the U.N. then attempted to do and make long-term
climactic predictions.
What I can say is that there is a very considerable body of
evidence in the peer review scientific literature, which
establishes that what is called climate sensitivity, in other
words the effect of increased CO2 concentrations on
temperature is around one-seventh of what the U.N.'s climate
panel has said it is. If that is correct, and there's a growing
number of papers in the literature saying that it is of that
order, then on any view there is no climate problem. So, I will
give you that rather long scientific answer, because it is not
a yes or no answer.
Chairman MCDERMOTT. Your basic answer is you haven't
changed your mind on AIDS and you don't see any possibility
that global climate change can be affected by human beings
changing their behavior?
Lord MONCKTON. I am saying that one of the greatest
failures of my career was the failure to persuade governments
at the request of your U.S. Army Infectious Diseases Research
Institute because they begged me. I went to see them, and you
are one of the few people that will dare to say what needs to
be said on this. They said, ``Millions will die, unless we
treat this just like any other fatal infection and isolate the
carriers.''
That's the normal public health procedure. It wasn't done.
25 million people are on my conscience, because 25 million
people died. 40 million are infected and suffering, and I am
very unhappy about that. That is one reason why on this
particular question of climate change, where again millions are
dying, not because of warmer weather, but because it is colder
weather, not warmer weather, that tends to kill people more.
They are dying because the biofuel scam that arose out of
this scare has taken one-third of the agricultural land of the
United States out of production. It has taken a lot of
agricultural land elsewhere out of production; and, therefore,
instead of providing food for people who need it, we are
providing fuel for automobiles that don't. The consequence of
that has been major food riots in 12 different regions of the
world in the last 18 months alone as the price of food doubled,
because of the taking out of use of agriculture land.
There are very severe consequences in merely believing,
because it may be expedient or attractive, that global warming
is a problem, but there has now been 7 years of rapid global
cooling that is causing even the U.N. to rethink its figures. I
hope, therefore, that this Committee will also rethink whether
or not it is quite as certain as some of its Members seem to be
that we have a problem, when on the evidence, on the data, and
on the outturn, we do not.
Chairman MCDERMOTT. Thank you all for your testimony.
The hearing is adjourned.
[Whereupon, at 12:01 p.m., the Subcommittee was adjourned.]
[Submissions for the Record follow:]

Statement of H. Sterling Burnett, PhD, National Center for Policy
Analysis

Mr. Chairman and members of the Subcommittee, please accept my
comments for the record regarding the March 12 hearing on the effects
of climate change legislation on low- and moderate-income families. I
am Dr. Sterling Burnett, a senior fellow of the National Center for
Policy Analysis, a nonprofit, nonpartisan public policy research
organization dedicated to developing and promoting private alternatives
to government regulation and control, solving problems by relying on
the strength of the competitive, entrepreneurial private sector.
Current proposals to regulate greenhouse gas emissions will raise
energy prices, reduce economic growth, and disproportionately affect
low- and moderate-income families. As the Subcommittee considers the
potential harm to families, I urge you to carefully scrutinize the
regressive effects of the various climate change proposals.
Higher Energy Costs
Though current climate change bills with cap and trade provisions
have yet to be finalized, in previous sessions of Congress several
bills have been considered that would cap CO2 emissions and
allow the trading of excess allowances. The United States Environmental
Protection Agency (EPA) analyzed three bills that would cap and trade
greenhouse gas emissions \1\ The least restrictive, sponsored by
Senators Jeff Bingaman (D-NM) and Arlen Specter (R-PA), would have
required trimming U.S. emissions by less than 4 percent by the year
2050. A more stringent bill, by Senators Joe Lieberman (I-CT) and John
McCain (R-AZ), would have required reductions in U.S. emissions of
nearly 16 percent by 2050. One of the most restrictive bills,
introduced by Lieberman and John Warner (R-VA), would have forced
businesses and consumers to cut their emissions by 44 percent by 2050.
---------------------------------------------------------------------------
\1\ Environmental Protection Agency, Analysis of the Lieberman-
Warner Climate Security Act of 2008, March, 14, 2008.
---------------------------------------------------------------------------
According to EPA and the Congressional Budget Office (CBO), each of
these bills would substantially raise energy prices and reduce economic
growth. A June 2003 analysis by the U.S. Energy Information Agency of
the probable economic effects of McCain-Lieberman bill found that by
2025 \2\:
---------------------------------------------------------------------------
\2\ U.S. Energy Information Agency, Analysis of S. 139, the Climate
Stewardship Act of 2003, June 2003

Gasoline would cost 40 cents more per gallon than it would
otherwise.
The average household would spend $444.00 more per year on energy
including a 46% increase in electricity prices.
Gross domestic product would be $675 billion to $1.63 trillion
lower, in present dollars.

A study by an economic research institute, the American Council for
Capital Formation, underscored these findings, estimating that under
the McCain-Lieberman bill \3\:
---------------------------------------------------------------------------
\3\ American Council for Capital Formation, Estimated Costs of the
McCain-Lieberman Bill, July 2004

By 2020, gasoline prices would increase 30 to 50 cents per gallon.
Electricity prices would increase 43 percent and average household
income would fall by as much as $2,255 per year by 2020
By 2025, U.S. GDP would be reduced by $164 billion to $525 billion
per year.
More than 600,000 jobs could be lost in the U.S.

The EPA also documented severe economic consequences beyond
consumer energy prices. The agency found by 2050 the Bingaman-Specter
bill could cost the United States as much as $1.2 trillion annually (in
2005 dollars) from lost economic production. Lieberman-McCain could
cost as much as $1.3 trillion annually, and Lieberman-Warner could cost
nearly $3 trillion per year \4\
---------------------------------------------------------------------------
\4\ Environmental Protection Agency, Analysis of the Lieberman-
Warner Climate Security Act of 2008, March, 14, 2008
---------------------------------------------------------------------------
It should be noted that previously considered bills would have
given out all or most of the initial carbon emission credits to
affected industries. This stands in contrast to the bills currently,
according to press reports, being debated before Congress and what
President Obama assumes in his recently introduced budget proposal, in
which the initial credits would be auctioned off to industry. Charging
for the initial credits ensures that industry will face substantially
higher costs at the outset of the program, and much of these costs will
undoubtedly be passed onto consumers. Indeed, the Obama administration
assumes that the carbon credit auction could bring in more than $650
billion in revenue. That's a $650 billion dollar energy tax on top of
the costs estimated for previous bills. In addition, much of the
present discussion centers setting a goal of cutting carbon emissions
80 percent lower than 2006, a much more stringent goal than any bill
previously analyzed. Deeper cuts equal higher costs. Government gets
the gold (carbon credit income) and consumers get the shaft.
Disproportionately Hurts the Poor
Energy taxes are extremely regressive, disproportionately affecting
seniors and low income households. Analyses of previous bills confirm
that any cap and trade bill, acting as nothing less than an indirect
energy tax, will harm the poor the most. This is because the poor and
those on fixed incomes spend a greater portion of their disposable
income on food and fuel than the average household and are least able
to afford newer, more fuel-efficient technologies. Energy costs already
consume 15 percent of the poorest households' income, compared to only
3 percent for average households. CBO found that cutting carbon dioxide
emissions by merely 15 percent would reduce the disposable income of
the poor by an additional 3.3 percent, compared to a 1.7 drop for the
richest Americans \5\ Deeper carbon dioxide cuts would inflict still
more severe economic harm on low-income citizens.
---------------------------------------------------------------------------
\5\ Congressional Budget Office, Trade-Offs in Allocating
Allowances for CO2 Emissions, April 25, 2007
---------------------------------------------------------------------------
Recognizing that energy taxes disproportionately impact the poor,
the Obama administration has proposed giving some of the carbon auction
revenue back to middle income Americans to pay for the continuation of
the Administration's ``Making Work Pay'' refundable tax credit that has
already been enacted. However, this refund will only cover a portion of
the increased energy costs, for a portion of the citizenry--and does
nothing to mitigate the impact on the nation's energy providers. In
addition, since taxpayers are already receiving the tax credit, they
are unlikely to perceive the rebate starting in 2011 as recompense for
the new indirect tax imposed by a cap-and-trade regime as it comes
online.
Energy is the lifeblood of the economy, yet it is unclear whether
the Administration has considered the impact that increasing the costs
to energy providers will have on the overall economy. While we all
share the Administration's hope that the economy will have recovered
from its current downturn by the year 2011 when energy companies and
other industries will be required to purchase the initial round of
carbon credits at auction, it may well still be in recession. Raising
taxes on energy production and consumption during a recession is
virtually guaranteed to prolong it. On the other hand, if the economy
is just beginning to recover, or the recovery, underway for a while, is
tentative or fragile, low energy costs would be a critical factor in
continuing economic progress. As such imposing a substantial tax at
such a critical time could stall the recovery or at least slow it.
There is a third, rose colored glasses scenario (which few economists
are predicting), under which the economy has fully recovered and growth
is on the horizon for the foreseeable future. If this comes to pass,
energy prices will already likely be higher than at present and rising
as a result of increased demand from industry, the commercial and
retail sectors and consumers. At a time of rising energy prices, it is
doubtful that consumers will think kindly of a legislature that ladles
additional costs onto already higher energy prices. Just recently,
voters were calling on legislators to do something--almost anything--to
reduce high fuel and electricity prices. Voter's wrath will only
multiply if high energy prices driven by demand are exacerbated by new
costs, or worse, fuel scarcity, stemming from a new carbon cap-and-
trade scheme coming online.

Ineffective for Climate Change
Advocates of climate change legislation argue that avoiding the
cumulative environmental impacts of climate change--including higher
sea levels, more powerful hurricanes and the spread of tropical
diseases--far outweigh almost any economic costs. However, there is
little reason to believe the emission reductions called for in the
legislation would stop or even substantially slow global warming. Thus,
they will not prevent the harms warming is predicted to exacerbate.
For instance, research from the National Center for Atmospheric
Research reveals that even if all the signatories of the Kyoto treaty
met emissions targets by 2012, global temperatures would still be only
0.07 to 0.19 degrees Celsius cooler in 2100 than without Kyoto \6\ This
would not be enough to avoid the two to six degree increase in average
global temperatures some scientists claim will irreparably harm the
environment.
---------------------------------------------------------------------------
\6\ Wigley, T. M. L., 1998: The Kyoto Protocol: CO2, CH4
and Climate Implications. Geophysical Research Letters, 25, 2285-2288.
---------------------------------------------------------------------------
Of the three bills discussed above, only Lieberman-Warner would
provide more emission reductions than those required of the United
States under Kyoto--the others would fall far short. Yet, even
Lieberman-Warner would be ineffective because it is unilateral.
Developing countries--such as China, India, South Korea, Brazil and
Indonesia--are exempt from current international climate change
agreements and would not be covered by domestic legislation. Even if
all developed countries stopped using energy entirely, there would be
little impact on overall greenhouse gas emissions or atmospheric
concentrations. Why? Because fast-growing developing countries are
expected to account for 85 percent of emissions growth in the next two
decades and beyond. Indeed, China has already passed the United States
as the world's largest CO 2 emitter and its economic growth rate is
more than three times greater than ours.
The EPA's own analysis indicates that just to significantly slow
emissions growth (not even stabilize emissions), the United States
would have to meet its emission reduction targets under Lieberman-
Warner, other developed countries bound by Kyoto would have to slash
their emissions by more than 50 percent below their 1990 levels, and
developing countries would have to cut their emissions to 2000 levels
by 2035 \7\.
---------------------------------------------------------------------------
\7\ Environmental Protection Agency, Analysis of the Lieberman-
Warner Climate Security Act of 2008, March, 14, 2008
---------------------------------------------------------------------------
Conclusion
The benefit promised by recently proposed climate change
legislation--lower global temperature---is unlikely to materialize
because they don't include developing nations. Moreover, every economic
analysis to date indicates domestic legislation proposed to regulate
greenhouse gas emissions will harm the U.S. economy and specifically,
the most vulnerable in our society--the poor. Lawmakers should not
adopt laws that sacrifice the economic well-being0 of those living in
the United States for nonexistent environmental gains.
Thank you.

Statement of Stephen A. Smith, Southern Alliance for Clean Energy

My name is Stephen Smith. I am the Executive Director of the
Southern Alliance for Clean Energy (SACE). Since 1985, SACE has been
working on behalf of citizens in the Southeast to promote responsible
energy choices that create global warming solutions and ensure clean,
safe and healthy communities throughout the Southeast.
SACE applauds the work you have done to promote effective climate
change legislation and pledges to work with you and your staff to
ensure the bill ultimately adopted by Congress embraces the most
effective and responsible approach to reducing greenhouse gas
emissions.
In this statement, I would like to focus on one particular and
critical aspect of a well-designed cap-and-trade program for carbon
emissions--the need to auction 100 percent of the credits immediately
to offset the costs associated with mitigating carbon emissions. As
this statement will demonstrate, auctioning all the credits is a
critical predicate to ensuring the environmental, economic and
political success of a carbon cap-and-trade program.
Unprecedented Resources at Stake
The science of pollution mitigation has advanced significantly
since Congress enacted the first cap-and-trade program to address the
problem of acid rain back in 1990.
In the 18 years that followed, study after economic study have lent
critical support to the idea that a properly constructed cap-and-trade
program must auction 100 percent of the carbon credits. Anything less
than 100 percent auctions needlessly increases the cost of the program
to the economy and consumers, while potentially resulting in windfall
profits for shareholders and executives of electric utility companies
and other industries.
Recently, SACE, in conjunction with our regional partners, released
an economists statement detailing the need to auction credits in a cap-
and-trade program. The statement says, among other things, that any
free allocation of carbon credits to utilities is tantamount to
corporate welfare. To date, the statement has been signed by over 600
economists from across the country.
Under a cap-and-trade program, a carbon credit authorizes the
holder to emit one metric ton of carbon dioxide, or its equivalent, per
year. These credits will be extremely valuable--worth hundreds of
billions of dollars in revenue each year--and they represent an
important resource in our nation's efforts to address global warming.
In fact, President Obama and OMB Director Peter Orszag echo this
sentiment. According to OMB Director Orszag:
If you didn't auction permits, it would represent the largest
corporate welfare program that has ever been enacted in the history of
the United States--Whatever the value is would go in a sense almost
directly into corporate profits rather than being available to fund
energy efficiency investments and to provide a cushion or some
compensation to American households.
The cumulative value of these credits over the life of the program
is simply unprecedented, and any decision on the allocation these
resources should be made only after extensive examination of their
potential utility. Properly structured, these revenues could be used to
offset the cost of higher prices and to speed the development of
important renewable energy and energy efficiency technologies.
We have seen great progress over the past twelve months with regard
to climate legislation. Just last year, the Senate considered
legislation that would have freely allocated over 75 percent of carbon
permits to utilities. Now, we are pleased to see the approach taken by
Representative Chris Van Hollen who has introduced legislation calling
for a cap-and-trade program with 100 percent auctioning of the carbon
credits. This is the only economically viable approach to ensure that
Congress is able to protect low-income and vulnerable communities from
potentially higher energy costs associated with a cap-and-trade
program.

No Windfalls for Polluting Industries
Utilities and other greenhouse gas emitting industries argue that
Congress should allocate some or all of the credits to them for free to
minimize the energy costs they pass on to their ratepayers. Just last
month, the U.S. CAP proposal called for large amount of allocations at
the outset of a cap-and-trade program as a means to protect ratepayers
from higher energy prices. The proposal said:
Consequently, USCAP recommends allocating a significant portion of
emission allowance value (e.g. 40 percent directly to these entities
[LDCs] specifically to dampen the price impact of climate policy on
electricity and small natural gas consumers, particularly in the early
years of the carbon constraint.
USCAP's claim is misleading. Gifting billions of dollars in
pollution credits to utilities will not lower energy bills for
ratepayers because the marginal cost of abating a unit of greenhouse
gas is the same regardless of whether a firm buys the permits or is
allocated the permit for free. As the Congressional Budget Office
observed in their testimony before the Senate Energy and Natural

Resources Committee in May:
By attaching a cost to CO2 emissions, a cap-and-trade
program would thus lead to price increases for energy and energy-
intensive goods and services. Such price increases would stem from the
restriction on emissions and would occur regardless of whether the
government sold emission allowances or gave them away. Indeed, the
price increases would be essential to the success of a cap-and-trade
program because they would by the most important mechanism through
which businesses and households were encouraged to make investments and
change their behavior to reduce CO2 emissions.
Further, the CBO notes:
Giving all or most of the allowances to energy producers to offset
the potential losses of investors in those industries--as was done in
the cap-and-trade program for sulfur dioxide emissions--would also
exacerbate the regressivity of the price increases. On average, the
value of the CO2 allowances that producers received would
more than compensate them for any decline in profits caused by a drop
in demand for energy and energy-intensive goods and services. As a
result, the companies that received allowances could experience
windfall profits.
Harvard Economist Greg Mankiw accurately points out that freely
allocating carbon credits to polluting industries is nothing more than
corporate welfare.
To understand why this is the case, consider a utility that is
given credits equal to its historic level of carbon emissions, as many
utilities have suggested should happen. How will that allocation affect
the utility's behavior? Very little, as it turns out.
If the utility has a history of emitting 100 tons of carbon dioxide
or equivalent per year and is given 100 credits that can be used to
emit one ton of carbon each. The utility considers options for reducing
its carbon emissions and determines that the cost of reducing its
emissions from 100 to 99 tons is $10. If each credit is worth $15
dollars, then the utility will spend the $10 to reduce its carbon
emissions by one ton, sell the credit, making its shareholders $5 in
the transaction. The utility will continue to reduce its emissions and
sell its credits until the cost of reducing another ton of carbon
emissions is equal to the market value of the credit. If the cost of
reducing emissions from 60 to 59 tons is equal to $15, then the utility
will stop there. In the end, it uses 60 credits and sells 40.
Now consider the case where the utility is given zero credits, and
it has to buy them in order to continue operations. Once again, the
utility will have to balance the cost of credits verses the cost of
reducing its carbon emissions. In this case, the utility will buy
credits until the $15 cost of buying a credit is equal to the cost of
reducing the next ton of carbon emissions. Here, the utility buys 60
credits, and invests in mitigation technologies to reduce the other 40
tons of carbon.
The important point here is that the firm's behavior is the same
regardless of whether it is given the credits or it has to buy them
like everybody else. In both cases, the utility produces the same
amount of electricity as well as carbon. And ratepayers will face
similar costs.

What about Costs to Industry?
There is very little doubt that gifting permits to industry will do
little other than create windfall profits for utility executives. From
the Administration, to Wall Street, academia and the European Union's
experience with a cap-and-trade program, the general consensus is that
any economically-viable cap-and-trade program must start with 100
percent auctions of carbon credits. According to President Obama in his
FY2010 budget proposal:
This program will be implemented through a cap-and-trade system, a
policy approach that dramatically reduced acid rain at much lower costs
than the traditional government regulations and mandates of the past--
Through a 100 percent auction to ensure that the biggest polluters do
not enjoy windfall profits, this program will fund vital investments in
a clean energy future totaling $150 billion over 10 years, starting in
FY 2012--The balance of the auction revenues will be returned to the
people, especially vulnerable families, communities, and businesses to
help the transition to a clean energy economy.
In recent years, considerable research has gone into assessing what
level of credit allocation is necessary to ``compensate'' the owners of
utilities and other industries for losses associated with a carbon cap
and trade program. One study found that allocating between 9 and 21
percent of the credits under the Kyoto Protocol would be sufficient to
offset the agreement's costs to energy and electricity producers.
Other studies, however, found the regulatory regime of a cap-and-
trade program without auctions could increase the opportunity for
profits by affected industries. As Resources for the Future noted in a
2002 study:
By compelling fossil fuel suppliers to restrict their outputs, the
government effectively causes firms to behave like a cartel, leading to
higher prices and the potential for excess profit. To the extent that
the environmental policy enables firms to retain these rents--such is
the case under CO2 policy involving freely offered tradable
permits--the firms can make considerably higher profit under regulation
than in its absence.
Wall Street apparently agrees. The Wall Street Investment firm of
Bernstein Research reported its analysis of the potential impact of a
cap-and-trade program on utility industry financials. The title of the
report--``U.S. Utilities: Unregulated Generators' Profits Could Surge
Under Senate Bills to Cap CO2 Emissions''--reflects its
findings that implementing a cap-and-trade program could increase
profits for some utilities. As the report notes:
If the U.S., in implementing its own cap-and-trade regime for GHG
emissions, also allocates allowances for free, we can expect
unregulated power generators in this country to behave similarly,
passing through the value of allowances consumed to wholesale power
prices. And as these generators will bear no offsetting cost, their
earnings can be expected to increase materially.
Whatever the costs or benefits to industry, the more pertinent
question to ask is simply this: If a cap-and-trade program affects
everyone--energy consumers and producers alike--why should polluting
industries alone get compensated?
Global warming affects everyone. No industry should be given
special status and protected from the responsibilities that the rest of
us will face.
Economic Efficiency and Low-Income Families
Effectively addressing climate change will impose a certain level
of costs on the economy. The question before Congress is how to best
structure a cap-and-trade program to minimize the impact to the economy
while helping low-income families and other energy consumers most
vulnerable to changes in energy prices. The answer to this question,
again, is to auction the credits and use the revenues raised to reduce
the program's overall cost to the economy.
The CBO estimated that giving away credits under a cap-and-trade
program would cost nearly twice as much than if the credits were
auctioned and the revenues used to cut taxes. Who would bear the
additional costs of giving away credits to polluting industries?
Of the four allowance-allocation and revenue recycling scenarios
that CBO analyzed, the share of policy costs borne by households in the
lowest income quintile would be largest if the government gave
allowances away and used the revenue received--to reduce corporate
taxes.
Further, the CBO noted in their June 17, 2008 letter to Senate
Energy and Natural Resources Committee Chairman Bingaman that lawmakers
have several options for assisting those most effected by increased
energy costs, including collecting the resources from the auction of
carbon credits and issuing rebate checks to households across the
United States. The CBO noted that:
Lawmakers could choose to offset the price increases experienced by
low- and moderate-income households by providing for the sale of some
of all of the CO2 emission allowances and using a portion of
the revenues to compensate such households. For example, the
Congressional Budget Office (CBO) found that lower-income households
could be financially better off as a result of a cap-and-trade program
(compared with no program--and without consideration of any benefit in
terms of reduced risk of damage from climate change) if the government
chose to sell the allowances and used the revenues to pay an equal
lump-sum rebate to each household in the United States. In that case,
the size of the rebate would be larger than the average increase in
low-income households' spending on energy-intensive goods.
Different studies may suggest different optimal options, but they
are universal in finding that the free allocation of credits to
industry produces the worst outcome, both for the economy as a whole
and for at-risk populations. Freely allocating credits needlessly
surrenders resources that could be used to ensure the best outcome for
the economy and low-income families.

Auction, Not Allocation
Congress should auction all credits under a cap-and-trade program
and use those resources to assist consumers with their energy costs
while investing in the development of critical technologies necessary
to speed the future reduction of greenhouse gas emissions and using
remaining revenues to assist those most affected by increased energy
costs.
Such an approach represents the surest means of meeting emission
targets in the most equitable and economically efficient manner.
Anything less is simply corporate welfare to those industries that have
contributed the most to climate change.
I thank the Subcommittee for holding this hearing and for
advocating solutions for reducing our nation's global warming
pollution. SACE looks forward to working with the Subcommittee to
produce the most effective climate change legislation possible.
Southern Alliance for Clean Energy (SACE) is a nonprofit,
nonpartisan organization that promotes responsible energy choices that
create global warming solutions and ensure clean, safe and healthy
communities throughout the Southeast.
Since 1985 SACE has been working on behalf of citizens in the
Southeast to provide independent analysis of the energy supply system
in the region, help state utility commissions evaluate proposed energy
projects, work with state and local governments to develop new programs
to improve the energy efficiency of government facilities and vehicles,
and support the siting and development of clean, renewable energy
sources in our region.
SACE has been a leading voice for energy reform protecting our
communities and our region's natural resources for more than 20 years
with offices and staff throughout the Southeast.

Statement of the National Community Action Foundation

A fair Climate Change policy ensures reduction of greenhouse gas
emissions at the same time it protects small consumers, especially
vulnerable working families and retirees, from losing their purchasing
power or access to affordable home energy and transportation.
Many of the current proposals aim for such fairness, and, as
originators of the Fair Climate Change Principles endorsed by a wide
variety of consumer advocacy groups, we applaud the President's
proposal and others that auction all allowances. We are pleased with
the intent to seek mechanisms to ensure most households and small
businesses are held harmless from the substantial price increases
expected in fuels and most goods and services. We also support using a
share of revenues for the Weatherization Assistance Program and LIHEAP
and for developing more sustainable low-income communities.
However, we are concerned that neither the analyses available to
Congress so far nor the mechanisms proposed for implementing the
``hold-harmless'' or ``mitigation'' policy are adequate to the
challenge.
Consumers' expenditures on fuel vary today based on the kinds of
fuel they use at home and the distances they drive. Under a climate
change policy, the cheapest fuel--coal and the electricity it
generates--will cost far more relative to cleaner fuels; so will fuel
oil and liquid propane gas. That means some households will see their
bills change far more than others.
The only study of cost impacts that uses household energy usage
data, the 2007 review by Oak Ridge National Laboratory \1\ found low-
income residents of the South and Midwest would experience far larger
increases in household fuel bills than consumers in the Northeast and
West.
---------------------------------------------------------------------------
\1\ Eisenberg, J., 2008, ``The Impact of Carbon Control on
Electricity and Gasoline Expenditures of Low-Income Households,'' Oak
Ridge National Laboratory, Oak Ridge, TN. www.weatherization/ornl.gov
---------------------------------------------------------------------------
Further, while gasoline bills would rise in the same proportion
everywhere, rural households, would lose a far greater share of their
income than most because they drive 60% further yearly than others.
Clearly, rural residents of the South and Midwest will be particularly
hard-hit.
Unfortunately, the proposals for delivering rebates through today's
tax credit and income maintenance programs will provide essentially
uniform awards to households at the same income level, no matter where
they live. This can mean a majority of low- and moderate-income
households in one highly impacted region or a majority of rural
households everywhere will get rebates worth far less than the
increased costs they are paying. Others who live in urban areas,
especially those on the two coasts, would get significantly more back
in rebates than the increases in their expenditures. We urge the
Committee to devote more analysis and more complete consideration to
the ``how'' as well as the ``what'' of the question of revenue
recycling.
First, better impact analysis using energy bill and energy use data
is essential. The Department of Energy and EPA should be required to
support analysis that includes modeling of household impacts and
identifies variations in the patterns under different scenarios,
especially those affecting low-and moderate-income working families and
retirees.
Next, it is time to consider a fresh program design to ensure that
the climate change policy for the next generation does not rely on the
mechanisms for general family income support suitable for the early
21st century. Among the options we believe should be
considered are:

Provide a base, flat rebate that does not exceed the
costs that consumers in the least-affected geographic regions will
bear.
Use state grant mechanisms to direct incremental income
support resources through direct income transfers in highly impacted
states.
Design geographically targeted tax credits for rural
consumers.
Add funding to the state LIHEAP programs to assist
highly-impacted households in every state.

Of paramount importance is to have a policy ensuring that the
design of an auction revenue distribution regime remains responsive to
the sure-to-come, but unpredictable, changes in energy markets and
consumer conditions over the generation-long span of the legislation.
We have proposed that a governing body be responsible for evaluating
the impact and effectiveness of policies to protect consumers and for
making proposals to Congress regarding their implementation.
Attached are the Fair Climate Principles on which these comments
are based and a brief review of the technical analyses that indicate
cost impacts on consumers in one place may be very different from the
costs borne by those in a different place.
Thank you for considering these concerns.
Contact information for these organizations:
National Community Action Foundation, Washington, DC; David
Bradley, Exec. Director, davidbradley@ncaf.org
National Consumer Law Center, Boston, MA and Washington, DC; Olivia
Wein, Staff Atty., owein@nclcdc.org
Public Citizen, Washington, DC Tyson Slocum Energy Program
Director, tslocum@citizen.org
Friends of the Earth, Washington, DC, Erich Pica, epica@foe.org
__________
Attachment 1
National Community Action Foundation
National Consumer Law Center for its low-income clients Public Citizen
Friends of the Earth
FAIR CLIMATE CHANGE POLICY:
Principles for Protecting Low- and Moderate-Income Consumers from the
Costs of Climate Change Policy and for Re-building Their
Communities
The United States must meet its obligation to promote the common
good of all peoples and reduce its greenhouse gas emissions; the policy
framework for this change must fairly share the immediate economic
costs and future benefits of change. It must ensure that vulnerable
populations do not suffer greater hardship as a consequence of the
policy.
Policies to address climate change through mechanisms that raise
the price of carbon will directly raise the price consumers pay for the
use of energy and transportation and indirectly raise costs for other
products and services, such as food and medical care. Legislation must
ensure that low-income individuals and families do not find the cost of
basic necessities to be even further beyond their reach than before.
New climate change policies should be designed, implemented and
governed based on the following principles:
THE DESIGN of any climate change mitigation policy that raises the cost
of energy and other essential consumer goods must be fair to
all Americans. Climate change policies must:
Ensure that all consumers can afford the quantities of
residential and transportation energy that meet their basic needs;
Ensure that no households experience economic insecurity
as a consequence of climate change policies;
Ensure that vulnerable consumers who lack the capital or
credit to reduce or eliminate their use of carbon-based energy in their
homes and vehicles have access to cost mitigation programs such as
weatherization, energy efficiency programs and clean energy
technologies;
Ensure that disadvantaged communities have access to a
fair share of any funds designated for investments in infrastructure
such as green homes and buildings, renewable energy technologies and
easy access to low-emissions transit.
Ensure that emissions of greenhouse gases are subject to
regulation by government acting for the public and that any value
created by the regulation belongs entirely to the public.
THE IMPLEMENTATION of programs, policies and investments that achieve
these goals will include resources that are sufficient in size,
distributed in proportion to the anticipated impact of cost
increases, and available to affected low-income families and
communities in a timely and efficient manner, as follows:

Adequate resources: Funding must be adequate to hold low-
income consumers harmless against costs resulting directly or
indirectly from the climate change policy. Policies should reduce the
burden of fuel prices to affordable levels, and support complementary
policies, including significant reinvestments that adapt low-income
homes, community facilities and equipment to a low-carbon economy.
Proportional Distribution: The resources for mitigating
costs and adaptation must be distributed in direct proportion to the
economic burdens of climate change policies on vulnerable consumers and
communities and in inverse proportion to their ability to afford energy
and to make investments in sustainable buildings, equipment and
community improvements.
Timely Distribution

1. Investments to prevent harm due to rising energy costs and
changing climate conditions such as the low-income
weatherization program must begin in advance of the time that
added costs will be incurred;
2. Funds that mitigate harm from loss of purchasing power and
unaffordable bills for energy and transportation fuel must be
delivered in the period when the damage is sustained; and

Efficient Distribution: Assistance to vulnerable
consumers must be managed through proven, efficient program mechanisms
such as LIHEAP, the Weatherization Assistance program, EITC, and Social
Security, provided that such programs are administered so as to
distribute these resources proportionately and timely.
THE GOVERNANCE of climate change regulation and investment policy must
be fair and responsive to emerging conditions. Governance
mechanisms authorized must have sufficient flexibility to allow
for adjustments and policy changes to be considered over the
lifetime of any Greenhouse Gas regulatory framework.

An entity governed by Directors who represent the
interests of rural and urban low income consumers must be established
to direct, oversee and report to the President and Congress on the
operations and impact of programs for low- and moderate income
consumers and for redeveloping communities that are authorized by
climate change legislation. It should:
Develop standards for the distribution of funds and other
resources intended to mitigate cost impacts on low-and moderate-income
consumers and for reports on the uses of those resources, and
Develop strategies for integrating resources for
sustainable re-development of low- and moderate-income communities, and
Evaluate and make recommendations regarding the
effectiveness of the programs to mitigate adverse impacts of climate
change policy on vulnerable consumers;
All entities established to administer resources to
implement climate change policies should follow clearly defined
procedures for thorough and transparent public reporting of all
transactions and uses of funds, and for full compliance with federal
regulations for fiscal accountability.

Supporting Organizations 11/01/08:
State and Regional:
Community Action New Mexico, Connecticut Legal Services, Inc.,
Greater Hartford Legal Aid (CT), Iowa Community Action Association,
Illinois Association of Community Action Agencies, Missouri Association
of Community Action Agencies, Maine Community Action Association,
Massachusetts Association for Community Action, Ohio Partners for
Affordable Energy, Oklahoma Association of Community Action Agencies,
Tennessee Association of Community Action Agencies, Wisconsin
Association of Community Action Agencies, The Utility Reform Network
(CA),
Local and Other Organizations:
Tri-CAP, Malden, MA; CAA of Somerville (MA), Inc., Democracy and
Regulation (MA), A.W.I.S.H., Inc (WA)
__________

Attachment 2

ECONOMIC OPPORTUNITY STUDIES
400 NORTH CAPITOL STREET, SUITE G-80, WASHINGTON, D.C. 20001
E-mail info@opportunitystudies.org
Carbon Emission Auction Rebates for Working Families and Retirees:
Research Shows Uniform Payments Would Be Unfair
Lynn Schneider and Meg Power, PhD.
March 2009
Proposed cap-and-trade policies could harm America's working
families and retirees because their purchasing power drops as the cost
of energy rises. The lower a household's income, the more its capacity
to afford basic necessities will be impacted. Most major climate change
bills filed in the 110th Congress in some way acknowledges
the regressive impact of emission caps or taxes and proposed mechanisms
to alleviate the impact, as does the Obama Administration's policy
outline.
New proposals for ``recycling'' revenues or ``rebates'' from the
Treasury's auction revenues to consumers generally involve remitting
cash transfers or tax reductions that vary by income. In other words,
all households with a given income would receive the same rebate,
perhaps varied for household size. Very little research has been
conducted on the incidence of the consumer costs that will result from
an auction system, but all of that analysis suggests a ``flat'' rebate
is simple, but unfair. If the goal of a rebate or ``dividend''
mechanism is to mitigate the loss of purchasing power of the most
vulnerable households, one size does not fit all.
A rebate, even varied by family size, will significantly
overcompensate some and under-compensate others because of their
location and the fuels their utilities use. The key factors which were
found to cause significant variation in the costs of climate policy to
low-income households are: rural vs. non-rural residency and geographic
region. Further research is needed in this area in order to ensure
proposed revenue ``recycling'' is fair and progressive.
Study #1: Oak Ridge National Laboratory \1\
The Oak Ridge National Laboratory (ORNL) conducted a study on the
impact that the Climate Change Stewardship and Innovation Act of 2007
(S.280) \2\ would have on LIHEAP-eligible households' direct
expenditures on gasoline and residential energy across rural and non-
rural residencies, and across geographic regions.\3\ This remains the
only published analysis based on data that includes the fuels used in
homes. Of course, limits on CO2 emissions will raise the
price of fuel oil, propane, and coal-based electricity more than the
cost of other fuels. The bill analyzed, S.280, exempted natural gas
from caps and had longer-range horizons on reductions than subsequent
proposals; therefore, the costs to households seem low by contrast to
the later proposals.
---------------------------------------------------------------------------
\2\ S.280 was designed to reduce greenhouse gas emissions over time
through a cap-and-trade system that would begin in 2012. The cap would
be lowered drastically in 2020, 2030, and 2050. Some emission
allowances would be allocated freely to emitters, and an unspecified
number of allowances would be auctioned. The bill establishes that some
of the proceeds of the auctions would go toward cash rebates,
discounts, and subsidies for consumers to offset increasing costs of
energy, climate change adaptation and mitigation programs targeting
low-income populations, support of technology innovation and
deployment, assistance to dislocated workers and communities, among
other things.
\3\ ORNL developed projections of impacts on the expenditures of
low-income households on gasoline and residential energy by integrating
the Energy Information Administration (EIA) National Energy Modeling
System's price projections for electricity and gasoline under S.280
with the EIA Residential Energy Consumption Survey and the EIA National
Household Transportation Survey, both from 2001.
---------------------------------------------------------------------------
The important figures are the differences between groups of
households rather than the level of allocation values. Rural residence
may entail substantial price increases for delivered consumer goods and
food as well, but these prices are probably reflected in the base
period prices, which are higher in many rural areas. ORNL looked only
at the two types of direct household energy purchases: household fuels
and gasoline because variability was the subject under study and
inflation as an indirect result of energy price increases is not
thought to vary greatly.
Variation between Rural and Urban Area Households
Rural areas' residents in all regions drive far longer distances
than do others. Table 1 displays ORNL's findings that there will be
significant variation between rural and non-rural consumers' increased
gasoline expenditures and therefore in the percent of income they must
spend on transportation. Rural low-income households spend 45% more on
average per year on gasoline than other low-income households.
Table 1. Incease in Annual Gasoline Expenditures above Baseline by 2030

------------------------------------------------------------------------

------------------------------------------------------------------------
National Average $323
------------------------------------------------------------------------
Rural $424
------------------------------------------------------------------------
Non-rural $291
------------------------------------------------------------------------
Source: ORNL. p. 6-8.

Variation Among Regions
The carbon intensity of heating fuel and electricity generation
will lead to very different cost increases in different residential
fuels. As seen in Table 2, ORNL's findings reveal dramatic variation in
impacts across regions by 2030, with vulnerable consumers in the South
and Midwest incurring price increases more than double those of lower-
income consumers in the Northeast and West. This disparity appears to
be mainly due to the reliance of the South and Midwest on coal for
electricity, as well as the high use of coal-fired electric heating in
the South.
Table 2. Percent Increase in Annual Electricity Expenditures above
Baseline by 2030

------------------------------------------------------------------------

------------------------------------------------------------------------
National Average 20%
------------------------------------------------------------------------
West 14%
------------------------------------------------------------------------
Midwest 28%
------------------------------------------------------------------------
South 21%
------------------------------------------------------------------------
Northeast 12%
------------------------------------------------------------------------

Source: ORNL. P.4-6.
Study #2: Resources for the Future \4\
---------------------------------------------------------------------------
\4\ Burtraw, D., et al., 2008, ``The Incidence of U.S. Climate
Policy: Where You Stand Depends on Where You Sit,'' Resources for the
Future, Washington, D.C.
---------------------------------------------------------------------------
Resources for the Future (RFF) evaluated a variety of climate
policy mechanisms and their impacts on the 20% of households with the
lowest incomes. The analysis shows what happens first when a flat
rebate is provided (the ``dividend'' approach, which provides a uniform
rebate to all individuals) and then when other uses of auction revenues
are added to a flat rebate. The results are stated in terms of
percentage of annual income lost or added. No data on the type of fuel
used by the households was included.
Variation among Regions under Different Policy Scenarios
Table 3 shows the impact of five policies on households in the
lowest 20% of income and the range of impacts in percent of annual
income lost/gained for those households by state or grouping of
states.\5\ The percentages shown here are not comparable to the ORNL
results. However, these results compare the fairness of various rebate
proposals.
---------------------------------------------------------------------------
\5\ For these projections of impacts, RFF used data on household
expenditures from the U.S. Bureau of the Census Survey of Consumer
Expenditure 2004-2006. To develop their sample, RFF used a national
population sample from the Bureau of Labor Statistics, grouped
households by income decile, and aggregated those households into 11
regions. Those samples exclude Alaska and Hawaii, and due to a small
number of observations, five other states were excluded from the study
(Iowa, New Mexico, North Dakota, Vermont, Wyoming). The 11 regions into
which the remaining 43 states and District of Columbia were aggregated
are: Ohio Valley (IL, IN, KY, MI, MS, OH, WV, WI), Northeast (CT, ME,
MA, NH, RI), Mid-Atlantic (DE, MD, NJ, PA), Plains (KS, MN, NE, OK,
SD), Southeast(AL, AR, DC, GA, LA, MS, NC, SC, TN, VA), Northwest (ID,
MT, OR, UT, WA), Mountains (CO, AZ), California and Nevada, Florida,
Texas, and New York.

Table 3. Impact of Selected Policies on Annual Income in 2015
Loss or Gain on Percent of Annual Income for Bottom One-fifth of Households
----------------------------------------------------------------------------------------------------------------
Plus
Cap-and-Dividend Plus Free Plus Plus Exclude Exclude
(taxable) Allocation to Invest in Transportation Home
Emitters Efficiency Fuel Heating
----------------------------------------------------------------------------------------------------------------
National Average 1.97% -6.15% 7.81% 0.03% 1.59%
----------------------------------------------------------------------------------------------------------------
Range of Impact on Regions -1.23% (NE) to -9.04% (NE) TO -1.17% -2.74% (NE) TO -1.52%
3.80% (TX) 05.12% (NW) (NE) TO 1.72% (TX) (FL) TO
3.50 (TX) 2.81%
(TX)
----------------------------------------------------------------------------------------------------------------
Note: NE=New England
Source: RFF. 2008. The Incidence of U.S. Climate Policy: Where You Stand Depends on Where You Sit.

RFF found that Texas, the Northwest, California, and Nevada are the
only areas whose lower-income households incur net income gains under
all policies except free allocations to polluters. Under that scenario
all low-income consumers incur dramatic losses.
Low-income households in New England incur higher losses than those
in any other region under most policies, except the exclusion of home
heating fuels. If heating fuels are excluded, Floridians incur the
greatest real income losses. However, the losses in New England (not
shown) are only a little lower.
While ORNL found that low-income households in the entire Northeast
Census region, including New York and Pennsylvania, would be harmed
less by the direct cost of cap-and-trade relative to other regions, RFF
found that New Englanders would be most harmed under any variation of
cap-and-trade policy that returns a flat dividend. Texas' low-income
consumers are net winners under four of five RFF scenarios; their
collective real incomes would be 2-4% higher after the flat dividend is
distributed. This finding reflects that the Texas share of U.S.
families in the bottom 20% of income is much higher than New England's.
These variations do not change the fact that a flat rebate creates
unintended income transfers among low-income households in different
locations.
Consumer Mitigation Proposals and the Distribution of ``Mitigation''
Resources
The best-developed blueprint for a rebate to lower-income
households delivered through existing tax and income support systems
was proposed by the Center on Budget and Policy Priorities.\6\ The
analysis supporting the proposal does not examine how the direct cost
of fuels would lead to different household impacts.
---------------------------------------------------------------------------
\6\ Stone, C., et al., 2009, ``Cap and Trade Can Fight Global
Warming Effectively While Also Protecting Consumers,'' Center on Budget
and Policy Priorities, Washington, D.C.
---------------------------------------------------------------------------
Since today's tax credits and income support systems vary only by
adjusted income, family size and employment status, changes or new
approaches would be required to solve the re-distribution problem. The
Center proposes a small set-aside of auction revenues to provide to
states to use for offsetting household burdens in unspecified ways and
proportion.
Cap-and-dividend proposals circulated by several groups give every
individual in the nation the same ``climate dividend.'' Since low-
income households are smaller on average than others, the plan not only
locks in, but actually, exacerbates the regressive nature of the
increase in direct and indirect increases in the price of energy.
The Analysis Tools Limit Undersrtanding: or Better Thinking Comes from
Complete Information
The analyses of consumer impacts offered by CBO, the Center on
Budget and Policy Priorities, and RFF all use the Consumer Expenditure
Survey (CEX) to determine what low- and moderate-income
Americans spend on energy directly and also on other products whose
costs change because of the price of energy. The CEX is a snapshot of
the past, but using it limits the predictive power of these analyses
because it does not reflect the type of household fuel used. Those
homes with the highest CO2 content, including coal-fired
electricity, will cost far more proportionately than natural gas and
nuclear power. What's more, there will be a proportional shift among
the consumer groups based on fuel and location. Those now using coal-
based power have some of the lowest-cost electricity in the nation; it
will rapidly become the most expensive. Electric bills make up the
majority of low-income household expenditures today.
The 2005-2006 CEX data patterns will not be the burden distribution
in a carbon-constrained future. In fact, the residential energy
expenditures in those years were lower than normal so that expenditures
that were below normal weather requirements are the basis for those
analyses predictions about future needs.
The combination of the DOE Residential Energy Consumption Survey
and the National Energy Modeling System, as used by ORNL, can offer
fuels data that can be projected for different auction scenarios (and
different weather forecasts). It lacks the data on all expenditures
that would allow calculations of total household burden. However, those
increases will be essentially the same percentage increase nationwide.
Conclusion: The analysis of what a cap-and-trade policy will cost
households and what to do as a remedy is incomplete, and its tools are
too limited. The 30-year framework proposed for re-distributing
revenues requires imaginative and flexible policy tools; the analyses
result in recommendations that are limited by today's income
redistribution mechanisms and by the faulty analytic base.
A thorough investigation of the direct and indirect household
impacts of the major policy alternatives is an essential first step.
The second is to undertake a fresh approach to designing program tools,
including, but not limited to, targeted tax ``rebates'' to protect all
American consumers equally as well as the economy they support while a
future-directed climate change policy drives up the cost of all fossil
fuels.
Disclaimer: ``This report was prepared as an account of work
sponsored by an agency of the United States Government. Neither the
United States Government nor any agency thereof, nor any of their
employees, makes any warranty, express or implied, or assumes any legal
liability or responsibility for the accuracy, completeness, or
usefulness of any information, apparatus, product, or process
disclosed, or represents that its use would not infringe privately
owned rights. Reference herein to any specific commercial product,
process, or service by trade name, trademark, manufacturer, or
otherwise does not necessarily constitute or imply its endorsement,
recommendation, or favoring by the United States Government or any
agency thereof. The views and opinions of authors expressed herein do
not necessarily state or reflect those of the United States Government
or any agency thereof.''