Climate:

Budget expert makes case for allotting cap-and-trade funds to workers

With the White House calling for cap-and-trade revenues to be distributed as tax credits to workers, Congress is juggling a series of proposals on how best to approach this and weighing whether or not it is an effective way to allocate funds. During today's OnPoint, Robert Greenstein, executive director of the Center on Budget and Policy Priorities, discusses the legislative steps that could be taken to minimize the effects of rising energy prices on consumers. Greenstein explains why he believes utilities should not be delivering price relief to low and moderate income customers. He also discusses whether allocating allowances to consumers would impair the effectiveness of a cap-and-trade plan.

Transcript

Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. With us today is Bob Greenstein, executive director of the Center on Budget and Policy Priorities. Bob, nice to see you. Thanks for coming on the show.

Robert Greenstein: Glad to be here.

Monica Trauzzi: Bob, one of the arguments we hear constantly against cap and trade is the economic argument. Basically that imposing a cap and trade will make energy expensive and it's going to drive the economy even deeper into a recession. And your organization has released two papers focusing on the legislative steps that could be taken to minimize the impact of rising energy prices on the consumer. Sort of walk us through what these two papers tell us and how what you're proposing can sort of be scaled up or down to impact different income levels.

Robert Greenstein: Well, I think there are two issues here. In terms of the impact on the economy no one is talking about instituting a cap-and-trade system in the middle of the current recession. It would take several years until it took effect and by then, hopefully, we should be on the road to economic recovery. And even over the long term, I think the best analysis shows very small impacts on economic growth, probably less than 1 percent of the size of the economy 20 years out. And that's not taking into account the potential large negative impacts on the economy if we do nothing and there are catastrophic effects from climate change. But the particular issue that we've been focusing on is the issue of what happens to consumers, because, after all, a cap or a carbon tax works by raising the price of fossil fuel energy products and, thereby, providing incentives to conserve and strong incentives for alternative cleaner forms of energy. The idea though that consumers, especially low and middle income consumers must necessarily be hurt isn't right. Because if you auction off the emissions permits you create a large stream of revenue, a substantial amount of which can be used to compensate consumers. What we've designed at the center are two proposals. One focuses just one low and moderate income consumers. If policymakers only provided enough consumer relief for people at the bottom of the income scale, how would you do that? And we have an efficient mechanism to fully offset the average impact on low income consumers. But the main proposal we're talking about now is one that covers low and middle income consumers. It's certainly my view and that of many other people that a cap-and-trade system a dozen offset the impact on middle income consumers will be attacked as a middle-class tax increase and will have less chance of success. So, what we propose, very simply, is that there be a broad tax credit. It would be what we call a refundable tax credit, which means it covers working poor families that work. They pay payroll tax, they don't earn enough to owe income tax, they get the credit. We have experience with this. It's how the current earned income tax credit works. And for people at the bottom of the income scale who aren't in the tax system, we provide a monthly rebate under our plan through the debit card systems that every state in the country already uses to provide an array of low income benefits. So, it's very simple, we take people who are on programs like food stamps that are already in the debit card system, you just program the monthly climate rebate on their debit card. For others you just have a credit in the tax code. No new program, no new bureaucracy and we can efficiently offset the impact on low and middle income households of the higher energy prices that a cap would bring.

Monica Trauzzi: Why aren't utilities well-suited to deliver this type of relief to low and middle income families that are going to be experiencing higher energy prices?

Robert Greenstein: Well, the main alternative, I think there's broad agreement, interestingly, on the Hill on the low income part of our proposal. There is an alternative proposal for middle income families, that instead of doing a broad tax credit as we suggest, to just give huge, some people say as many as 40 percent of the value of the permits, tens of billions of dollars to the 3300 or more local utility companies and that they would then keep rates down. They wouldn't raise electricity rates as much. There are a series of problems with this. First, you couldn't target it on just low or low and middle income families because utilities don't know people's incomes. Secondly, there would be no good mechanism to figure out how many permits does each of the 3300 utilities get? If you base it on how much electricity they provide, since affluent communities use more electricity per person than poorer ones you have a regressive impact. But the biggest problem is the following, if you keep electricity prices down you're reducing incentives to conserve. Electricity use doesn't fall that much. If you have an emissions cap that's here and you keep electricity prices from rising, then the cost of getting use down to the cap for fossil fuel energy overall is higher. The emissions allowances necessarily cost more. In consumer nuts and bolts terms what that means is the cost of other forms of energy other than electricity rise even more than they otherwise would. So consumers get protection on electricity, but they have to pay more for other things. The government has spent tens of billions of dollars giving money to utilities in a wasteful and highly inefficient way because the consumer protection doesn't work well. Lower electricity costs over here, higher increased energy costs over there. It may make sense to give utilities some allowances for energy efficiency, but when we're talking about helping consumers the goal is simple, you let the cap work by raising energy prices. You don't artificially depress them and then you use other mechanisms like the tax code and debit systems to make consumers whole. That way, you get the incentives to reduce energy use. You don't get distortions between electricity and other forms of fossil fuel energy and you get the job done for consumers.

Monica Trauzzi: Last year's Lieberman-Warner bill did not address low income relief as you believe a final cap and trade should. How has the discussion and the debate on this developed since of the Lieberman-Warner debate just one year ago? Where do things stand now?

Robert Greenstein: I think we're in the middle of the big debate. I think there's a great deal more interest in our proposals, both on the Hill and I think in the White House, than there was last year. As I say, I think we have moved to an understanding that there needs to be broad consumer relief. I think we're really increasingly down to these two broad approaches of doing it, dumping tens of billions of dollars on utility companies and directly providing a rebate or a refund or a dividend, use what word you will, to consumers. Now, it should be clear, our proposal is not the cap and dividends proposal per se, because under cap and dividend 100 percent of the auction proceeds are returned to consumers. We do think there are some other legitimate needs for the money.

Monica Trauzzi: So, you're saying maybe 35 percent?

Robert Greenstein: Well, under a postal that actually we designed for Congressman Markey and that he introduced last summer, about 55 percent of the permits would be used for low and middle income relief leaving 45 percent of the permit value for other purposes. But one can dial, there's no magic percentage. Policymakers have to decide how far up the income scale do we want to go?

Monica Trauzzi: How do you decide what's poor enough to be assisted by a program like this?

Robert Greenstein: In the proposal we designed it's just low and moderate income families, the smaller one, which costs about 15 percent of the value of the permits or so. We would fully offset the average impact on the poorest 60 million, the bottom fifth of Americans and partially offset it on the next fifth. But that leaves out the bulk of the middle class. Under the proposal we designed last summer for Mr. Markey what we did was we fully offset the average impact in energy costs on the bottom 60 percent of Americans. We partially offset it on the next 20 percent of Americans. And only people in the top 20 percent didn't get any consumer offset at all. That approach phased out at about $110,000 a year for married couples and costs about 55 percent of the permits. Now, policymakers can say I want to go to 60,000 a year, I want to go to 100,000 a year, I want to go higher. That's part of a larger discussion on what are the other needs? How many of the permits do we need for other things, adaptation, helping coal communities, new technologies, alternative energy research? We have to balance the other needs as well. So I think the decision on exactly how far up into the middle class you go is part of a larger set of policy decisions.

Monica Trauzzi: OK, we'll end it right there on that note. Thank you for coming on the show.

Robert Greenstein: Thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

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