Recent CBPP Reports Explain How House Climate Change Bill Could Be Improved in the Senate

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Does the "cap-and-trade" bill (H.R. 2454, the American Clean Energy and Security Act of 2009) passed out of the House of Representatives in June do enough to protect consumers, or is it too riddled with give-aways to corporate America to be worth enacting? The question of how much the legislation does to protect consumers is a complicated one, but two things are certain. First, if this Congress fails to enact climate change legislation (even imperfect legislation) the consequences could be terrible. Second, when the Senate takes up climate change in September, it will have an opportunity to significantly improve the legislation, as explained by recent reports from the Center on Budget and Policy Priorities.

What the Recent House-Passed Bill Would Do

Under H.R. 2454, companies would need to have allowances to emit greenhouse gases, and the amount of allowances would be capped at a level that would decline for several years. The total level of emissions allowed in 2050 would be only 17 percent of the amount emitted in 2005.

The right to pollute would therefore become scarce, as its supply would decrease, and when the supply of anything decreases, its price generally goes up. Energy from oil, gas or coal and any products made or transported in ways that involve oil, gas or coal would therefore become more expensive. For consumers, the effects of a cap-and-trade system would be similar to those of a carbon tax. The question is whether the extra cash paid by consumers will go towards increased corporate profits or be routed back to the consumers.

For this reason, the President proposed in his first budget that Congress create a cap-and-trade system in which ALL of the emissions allowances are auctioned off to companies rather than given away freely. The revenue raised could be largely used, the President reasoned, for a refundable tax credit that would offset the impact of the resulting higher energy costs for low- and middle-income families.

The bill passed out of the House at the end of June only auctions off 15 percent of the allowances, and the revenue raised would help offset the costs for the poorest fifth of families.

Free Allowances for Utilities -- in Return for Promise to Pass Savings on to Consumers

85 percent of the allowances would not be auctioned off, but neither would they be doled out for free to corporations (not all of them anyway). There would be strings attached for some. For example, local utility companies would initially get almost half of the allowances, but in return they would be required to pass savings onto consumers.

There are many reasons why this is an inefficient way to protect consumers. If it doesn't work, Congress could feel pressure in the future to clamp down on the utilities until it does work. But even if utilities pass savings onto their customers, they would be split between their residential customers and their business customers. As one of the Center on Budget reports explains, the Congressional Budget Office finds that most of the savings for businesses would go to the stockholders, who are very disproportionately among the wealthy.

Better Protection for the Poor

The provisions to shield the poorest fifth of families from the resulting increased energy costs are stronger. An agency within the Energy Department would determine what the average increase in energy costs would be for a family of a given size, after accounting for the offset in costs that will (in theory) be provided by the utilities.

Most families with incomes at 150 percent of the official poverty line or lower would receive a monthly energy refund based on this calculation. Families participating in certain programs (like food stamps) would be automatically enrolled. The monthly refund would usually be delivered through the Electronic Benefit Transfer (EBT) cards that states already use to deliver food stamps and other benefits, further streamlining the administration of the refund.

Since poor working-age adults without children typically do not participate in these other programs or even have a EBT card, they would be helped by an increase in the (very meager) maximum Earned Income Tax Credit (EITC) available for childless adults.

What the Senate Should Do

The increased costs that middle-income families would see if the House bill becomes law are not gigantic ($235 a year according to the Congressional Budget Office). But Congress needs to decide whether the increased prices paid for energy should go largely towards corporate profits (which seems to be the potential result of the House-passed bill) or be redirected back to consumers.

The obvious way to make the latter happen would be to auction off more than 15 percent of the allowances and use the revenue to offset the increased energy costs more effectively for both low- and middle-income families. The Center on Budget points out that refundable tax credits, combined with more use of EBT cards, would be an effective way to deliver the necessary energy refund to the vast majority of low- and middle-income families.

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And this would make for better environmental policy anyway. Families would clearly see the costs of energy rising and have an incentive to curb their energy consumption, even though their total purchasing power would be unchanged.

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