Designing a Climate Policy that's Easy on the Federal Budget (And Wallet)

Charts courtesy of the CBPP

Global warming naysayers have often invoked the strawman argument of an excessive cost burden, particularly on lower-income individuals, in arguing against any substantive climate policy. And while it's true that a poorly designed policy could prove especially onerous for poor and middle-income families, there exist many effective options that could both significantly reduce emissions production and offset the higher costs by raising enough revenues to address their needs.

The Center for Budget and Policy Priorities lays out some of these options in its excellent climate change policy primer, making the case for either a carbon tax or a cap-and-trade system with 100% auction allowance.

The benefits of a carbon tax have already been well dissected here and in other publications: By making polluters pay for every ton of carbon emitted, a tax encourages higher energy efficiency, cleaner energy technologies and, most importantly, provides a large new stream of revenues that can be returned to taxpayers to offset the increased costs. A cap-and-trade system can do that same, but only if it auctions off the pollution permits to make polluters pay the full price -- rather than just handed off to energy companies with no strings attached. This approach was partly the reason for why the EU's cap-and-trade system failed so spectacularly.

As the CBPP's report explains, for such policies to hold up over the longterm the government will need to attend to the needs of poorer families to prevent them from falling behind (see chart above):

A cap-and-trade system could eventually generate $50 billion to $300 billion a year, depending on its design and the stringency of the caps, according to the nonpartisan Congressional Budget Office (CBO). (A carbon tax that reduced greenhouse-gas emissions by comparable amounts would raise comparable amounts of revenue.)

This is certainly sufficient money to: offset the effect of higher energy prices on vulnerable households; offset the effects of those price increases on federal, state, and local government budgets; assist the industries, workers, and communities affected by climate-change policies; and address other legitimate claims, such as promoting basic research on alternative energy sources.

The report concludes with a short, but helpful list on some of the principles the government should consider when designing a climate policy that provides sufficient assistance to poor families:

Protect the most vulnerable households. For households in the bottom fifth of the income spectrum, climate rebates should fully offset the average impact of higher energy-related costs resulting from climate-change legislation. No climate-change legislation should make poor families poorer or push more people into poverty.

Use mechanisms that can actually reach all or nearly all low-income households. Many low-income people work for low wages and could receive their 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. Climate rebates must reach all of them.

Minimize red tape. Funds set aside for climate rebates should go to intended beneficiaries, not administrative costs or profits. Accordingly, policymakers should provide relief as much as possible through existing, proven delivery mechanisms — such as the EITC and state EBT systems — rather than new public or private bureaucracies, which entail very substantial administrative costs.

Don’t focus solely on utility bills. For households in the bottom fifth of the population, higher home energy costs will account for less than half of the hit on their budgets from increased energy prices. (See Figure 3.) Policymakers should structure climate rebates so they can also help low-income families with higher prices for gasoline and other products and services that are sensitive to energy costs.

So how are the presidential candidates proposing to tackle these challenging issues? Democratic nominee-in-waiting Barack Obama's proposed cap-and-trade system would go furthest in providing assistance to low- and middle-income families while still slashing emissions levels by a significant amount -- 80% by 2050; John McCain's cap-and-trade plan, on the other hand, would start off by giving away allowances for free to energy firms, gradually reducing that number and replacing them with auctioned allowances, and would allow companies to purchase offsets to mitigate their carbon impact -- both less than desirable provisions.

Obama's proposals to foster further investment in clean energy and energy efficiency technologies, in addition to his ambitious plan to generate millions of green-collar jobs and "green" our lagging infrastructure, help make his plan stand out. We should have a better idea of where McCain stands on his energy policy in a few weeks when he delivers a detailed speech on the issue.

See also: ::Climate Versus Economy: Yale Model Allows You to Decide, ::Economic Impact Of California Climate Plan In Line With Stern Report