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How will a cap-and-trade policy affect low income families? What will it mean for the federal budget? During today's E&ETV Event Coverage, the Center on Budget and Policy Priorities presents a report on the importance of fiscal responsibility when creating a climate policy and the effect it could have on the poor. Panelists include, Robert Greenstein, founder and executive director of the Center on Budget and Policy Priorities; David Doniger, policy director of the Natural Resources Defense Council Climate Center; Chad Stone, chief economist at the Center on Budget and Policy Priorities; and Martha Coven, senior legislative associate at the Center on Budget and Policy Priorities.
Robert Greenstein: Good afternoon. I'm Bob Greenstein, director of the Center on Budget and Policy Priorities. Thank you for coming. We're here to highlight two aspects of climate change legislation that we think aren't getting enough attention; the impact on low income families, and on the budget.
For those of you who don't know the Center on Budget, we're a policy institute that works extensively on fiscal, that is budget and tax policy issues, and on issues affecting low and moderate income families. We're known for our expertise in these areas. We're not an environmental policy organization, but I'm pleased to say that a leading environmental policy expert is here with us today, David Doniger, who is the policy director of the Climate Change Center at the Natural Resources Defense Council. We will hear from him shortly.
Climate change is a major new area of work at the Center on Budget; in fact, it is now our fastest-growing area of new policy work. Why would that be? Three reasons. First, we think a very strong case can be made that affective climate change legislation is the highest priority for the nation, in fact, for the planet. Second, policymakers are increasingly recognizing that fact. Climate change legislation may begin to move on Capitol Hill in the next few weeks. So third, it's critical it be done right. Done right it would not only be effective in addressing global warming, but also ensure that low income households don't experience increased poverty or hardship and be fully fiscally responsible not increasing the deficit.
That can readily be done through a well-designed cap-and-trade system that treats the emissions allowances as a resource for public purposes rather than as windfalls for energy companies or through a carbon tax that uses resources for the same public purposes. Done wrong however, and there is a real risk that could occur, it could significantly increase poverty and hardship, increase the deficit or both.
A key issue is that efficient, effective policies to reduce greenhouse gas emissions work in part by putting a price on those emissions, ending the free use of the atmosphere, that dispose of pollution, and that raises prices for fossil fuel energy products. The higher prices operate as a market signal encouraging investment in energy efficiency and the development of cleaner energy. When energy prices rise households with limited incomes are affected the most, both because they spend a larger share of their budgets than better-off households do on energy, and because they're less able to afford investments that can reduce their energy demands such as buying a new, more efficient car or a new heating and cooling system. Fortunately, well-designed climate change policies can readily provide sufficient revenues to cushion the impact on vulnerable households and meet other legitimate needs, such as expanded research and alternative energy sources.
A cap-and-trade system can accomplish these goals so long as it treats the emissions allowance as a resource to be auctioned off for public purposes rather than handing them free of charge to energy companies as windfall profits. A carbon tax can accomplish those goals as well. If policymakers don't adequately protect vulnerable households we would see more poverty or if they take care of these and other public needs, but do so through deficit spending because they fail to auction enough of the emission allowances to cover the costs, then the federal budget deficit that's already on course to reach unsustainable levels in future decades would grow still larger. So the basic theme is all these matters can be addressed by well-designed policies.
We're going to hear now from our panel. We're going to hear first from David Doniger, whom I've introduced. We're going to hear then from Chad Stone, who is chief economist at the Center on Budget and formerly was chief economist for such institutions as the President's Council of Economic Advisers and the Joint Economic Committee. Chad is going to present findings from our research, including the impacts on low income households and the costs of protecting them. And then Martha Coven, the center's senior legislative associate, will close by outlining basic principles for how to protect low income Americans and do so in a way that is effective and highly efficient.
In coming days the Center on Budget will be issuing two papers, one presenting in more detail the findings Chad will discuss. The other taking the principles Martha will outline and translating them into specific climate change proposals related to shielding low income households. I'd also note that this afternoon Environmental Defense will be putting out a statement commenting on the material the center is putting out today. After the presentations we will be delighted to answer your questions. We start now with David Doniger of NRDC.
David Doniger: Thanks Bob. I'm happy to be here with the Center on Budget. And my role is to say a few words of context on the legislation.
We're getting to the point where serious policy choices are being made in legislation to address global warming. The science debate is over. We have passed many hurdles. The Supreme Court has spoken. The pressure is building to address global warming. Now is the time that the policy debate is beginning to focus on issues that have heretofore not got as much attention. And the distribution of the allowances, the currency of a cap-and-trade program, is this principle issue that's coming to the fore now.
A cap-and-trade system works by setting a limit on how much carbon dioxide and other greenhouse gas pollution would be allowed. And a number of allowances are issued equal to that cap. The cap declines over time. Each allowance is worth one ton. You have to turn in an allowance, if you are a covered polluter, at the end of the year in the amount of your CO2 equivalent emissions. And then the question becomes who should get these allowances at the start? And there's been a lot of research to show, by the Congressional Budget Office, by Resources for the Future, by others, that if all of the allowances were given away for free to thee incumbent polluters that the value of their stocks would actually go up, dramatically up. They would be vastly overcompensated for any costs that the program actually incurs on them. At the same time they'd be able to pass most of the costs of those allowances on to consumers. Especially low-income consumers, which is the subject of our discussion today, would be vulnerable to disproportionate impacts on their budgets.
So we are looking with the center at ways to design cap-and-trade legislation so that the allowances are captured for public purposes. And that if any of them are given away to companies, it's not beyond the notion of holding them harmless, it's not for the purposes of giving them windfalls that enrich them at the expense of others in this society. With that context I'd like to pass the baton to back to the center. Thank you.
Chad Stone: Thank you. I'm Chad Stone, the chief economist at the center.
As Bob said, the center takes very seriously the basic premise that the problem of climate change is real and that we need to take effective action to reduce greenhouse gas emissions in order to prevent costly and potentially catastrophic environmental and economic damages from greenhouse emissions and climate change. The center is not recommending how much we should be reducing greenhouse gas emissions. We'll leave that to Mr. Doniger and to other experts in the climate policy community.
What we're looking at is how potential climate change legislation could affect two things; one, the budgets of American families, especially those of modest means, and two, the federal budget. I'm happy to tell you that we're very optimistic. Our analysis shows that if climate policy is done right we can achieve a policy that is environmentally and economically sound, that is fiscally responsible, and that treats low and moderate income families fairly. But as you've heard, to achieve all three goals we need to design the policy right. That means that we must address the impact on vulnerable populations and that we need to have sufficient budget resources available to meet those needs and a host of other public purposes that arise in conjunction with climate change legislation.
In explaining our analysis I'm going to put four sets of numbers in front of you fairly quickly and then come back and talk about them in some detail. Let me first say that in your packets is a brochure that we've put together summarizing our results, copies of the charts that are around the room, and also two reports in the Congressional Budget Office. CBO reports have provided the analysis that we've relied on and that we draw on and they provide many of the conclusions that we are reinforcing with our analysis. I also at this point want to acknowledge one of my colleagues at the center, Matt Fiedler, who's been very important in developing our numbers. And without him we wouldn't be where we are in terms of the numbers.
So, turning to those numbers. The first number on this chart, $750 to $1,000 a year. If we leave low income houses to their own devices, so that they have to fend for themselves, this is what the cost could be for a family in the poorest 20 percent of the population. That's a family with an income of not quite $16,000 per year. That's how much they'd have to come up with to cover the higher cost resulting from a relatively modest 15 percent reduction in emissions. Second number, $50 billion to $300 billion a year, that's how much, depending upon the specifics, climate policy could generate for the federal government to use to compensate low and moderate income households for the impacts that we see in the first line, and to meet other legitimate purposes and other legitimate priorities associated with effective climate change legislation. Third number, this is an important number, 14 percent. That's how much of the amount of money that the policies could generate that would be required to offset the impact in the first line, the impact on low and moderate income households in a program like the sort that Martha will describe later. And fourth, less than 15 percent, that's the amount that CBO estimates that would needed to be made available to companies to offset losses that they might experience as a result of the restrictions on greenhouse gas limitations. That's 15 percent of the amount of money that could be generated.
Now, as you've heard, the goal of climate change policy is to reduce greenhouse gas emissions. Our estimates of the impact are based on some updating and some refining of the methods that CBO has used in a similar analysis of a 15 percent reduction in emissions. As I'll explain in a minute, that's pretty conservative by the standards of current policy proposals. Effective policies will reduce greenhouse gas emissions by doing two things simultaneously. First, restricting how much the burning of fossil fuels and other activities that produce greenhouse gases can take place and, second, raising the cost of continuing to do those things. As David explained, we can do that with a cap-and-trade system and he explained the mechanics of cap-and-trade. We could also do it with a carbon tax. Carbon tax would collect a fee from energy producers based on the amount of emissions that get dumped into the atmosphere when fossil fuels are burned. They are two routes to the same outcome. They have some different aspects. Cap and trade we will focus on because that's the mechanism that's envisioned in most legislative proposals that are out there. When you restrict an activity by taxing it or by putting an overall cap on it, the price goes up. In the case of fossil fuels the higher price provides an important incentive to conserve energy and to look for alternative clean sources. But it also does something else, it raises the cost of goods and services that continue to be produced using carbon based energy. Those costs show up directly in home heating bills and gasoline prices. And they show up indirectly in a range of products where energy inputs or transportation costs are important, like food, mass transit as examples. Low income families will be particularly hard hit by those price increases because they spend a disproportionate amount of their budget on energy and energy related products than higher income families do. And they have less room in their budgets to come up with additional resources to meet those costs. So let me go back to the numbers and talk about them in a little more detail.
Our first number, that's where this comes in, the impact on low income families. As I said, we estimate that families in the poorest 20 percent of the population, where the average income is not quite $16,000 a year, will pay an additional $750 to $1000 a year due to the higher prices from the policy. And that's based on our updating and refining of analysis by the Congressional Budget Office. Just say that in today's dollars, it's over and above any cost-of-living adjustments that households might receive on some part of their income, for example the annual Social Security quota. And as I said before, it's based on a conservative emissions target, one that at least on the basis of specifications that have been made public, that would be achieved in 2017, roughly five years into the Lieberman-Warner plan that we expect to see unveiled later this week. Those costs would be lower in the early stages when the cap is looser and they would rise and become higher in the later stages when the cap is tighter.
Well, fortunately, this is where the second number comes in, we can raise the necessary budget resources to offset those impacts on low and moderate income families and to meet other legitimate priorities arising from climate change legislation. The $50 billion to $300 billion per year, that is CBO's estimate of the total value of the emissions permits under various cap-and-trade proposals that have been floating around in recent years. It's the amount the government could raise if it were to auction off all of those resources. And by the way, carbon tax could generate comparable amounts of revenue for comparable emissions targets. The $50 billion to $300 billion is far more than enough to offset the impact on low income families. In fact, the third number is our estimate and it says that it would take just 14 percent of the amount of money that could be generated to offset the impact on low income families. This money that could be generated if we auctioned off the permits, or a high proportion of the permits, is also more than enough to compensate companies for the costs that they would directly experience from the restrictions on greenhouse gas emissions. That's CBO's estimate that I mentioned earlier, less than 15percent of the permits are needed for that. Unfortunately, most current legislative proposals envision giving away a much larger share of the allowances to existing emitters than that 15 percent. This is where the windfall profits that David mentioned, that's CBO's term. If it takes about 15 percent of the permits to compensate you for your costs, and you're given substantially more than that, the difference goes into your bottom line. Your costs haven't changed. The price is higher. Those are your windfall profits.
The pie chart over there illustrates the 15 percent, the 14 percent, and the fact that there are a lot of other budget priorities associated with climate change that are the kinds of social purposes that we've been talking about as other uses for the allowances. And so we can afford those things, but we can't afford them if we're giving away a large percentage of the permits.
So why is it that we're in a situation where we might be giving away a large number of permits? We think that giving away a large percentage of the permits, larger than this 15 percent, rests on two myths about how a cap-and-trade system would work. The first myth is that prices will not go up if you give away the allowances. But that's not true, when you restrict quantity price goes up. That's supply and demand and it's no different from when the price of bananas goes up when there's a banana shortage. When the cap is in place there won't be enough permits to meet the old level of demand. Prices will rise. Energy companies won't pass up profitable opportunities in that situation. And since their costs haven't changed and the prices are higher they'll be receiving windfall profits. The second myth is that energy companies need to get permits for free in order to offset their costs. But as I previously mentioned, the amount of permits to cover that is less than 15 percent and if you're giving away many more than that you're going way beyond what's necessary to cover costs. So those are the two myths that we think play an important role in why there seems to be an impetus to give away permits. Without those myths the case for giving away a large number of permits to existing emitters doesn't have a leg to stand on. So here's the bottom line of our analysis. We can restrict emissions without hurting the budgets of low and moderate income families and without hurting the federal budget. But if we're going to institute a cap-and-trade system we need to auction off a large portion of the permits and use the proceeds wisely.
I'm going to turn it over to Martha now to talk about how to do that in connection with low and moderate income families.
Martha Coven: So half of the battle is making sure that adequate resources are set aside to help low income consumers and Chad has just outlined for you how one might go about doing that, whether it's through auctioning or a carbon tax. But simply coming up with the money isn't enough.
The other half of the battle is making sure that assistance actually gets delivered to low income consumers. After all you can't just snap your fingers and magically deliver a climate rebate to millions of low income people. So policymakers will have to pay careful attention to the design of a climate change rebate.
Here are five principles that we'd like to recommend that they follow in doing so. The first principle is that the most vulnerable households should be fully protected. The fundamental premise here is that climate change legislation should not push poor people deeper into poverty or to push additional people into poverty. In order to avoid that outcome climate change rebates have to be designed to fully offset the higher energy related costs that low income consumers will be facing. A good place to start, we think, is by protecting the households in the bottom fifth of the income spectrum. These are people, as Chad mentioned, with average incomes of $16,000 a year. For a family of three that's less than $30,000 a year.
The second principle is that climate rebates should be designed to reach as many low income households as possible. Low income consumers are a very diverse group and some of the ideas that are floating around for how to help them do a very good job at helping certain groups while leaving others out entirely. For example, many people's first instinct is to create some new kind of tax credit to deliver climate change rebates. And tax credits are indeed a good way to help middle income families, but many low income people don't earn enough to file a federal income tax return. There are elderly people or people with disabilities living on fixed incomes. They include some very low-wage workers or unemployed workers, particularly during recessionary times. And the federal government, thankfully, doesn't tax people into poverty, yet these people still face utility bills and pay for gas at the pump and so on. So you can't rely exclusively on a tax credit if you want to do a good job of reaching a substantial number of low income consumers.
Our third principle is simply that you should minimize the red tape. It would be unfortunate if a significant share of the money that was set aside for low income consumers were siphoned off in unnecessary administrative costs. Policymakers can avoid this by using existing proven systems to deliver climate change rebates, such as the electronic benefit transfer systems that states already use and already have in place rather than setting up new private or public bureaucracies.
Our fourth principle is that just reducing your utility bill is not the answer. Some people assume that you can hold low income consumers harmless from the effects of climate change policy simply by reducing their utility bills. But the impact of climate change legislation will reach far beyond home energy costs. In fact, as the pie graph right here shows you, less than half of the squeeze on family budgets from reducing greenhouse gas emissions comes from higher home energy costs. Gasoline prices will be impacted substantially, as will a variety of other goods and services. In addition, many low income consumers don't directly pay a utility bill. They're renters that have utilities already built into their rent. So the higher cost of home energy will be reflected in higher rents that they'll be paying, not in a utility bill that they're facing. So climate rebates, we think, should not be tied directly to a utility bill.
Our fifth and final principle is that climate rebates should be designed so that they rise and fall with changing needs. The climate rebates for low income consumers should be designed so that they're smaller in the beginning, when a cap-and-trade system or a carbon tax is just phasing in and the impact on energy prices is not as significant, and grow more substantial after the climate change policies are fully in effect. Thanks.
[End of Audio]
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