The impacts of a climate bill that would place a cap on carbon emissions will vary across states and income brackets, according to a new study released by the Political Economy Research Institute (PERI) and Economics for Equity and the Environment Network (E3).
In this report, the authors estimate how family budgets would be affected by the increase in the price of fossil fuels expected to result from a cap on carbon emissions. They then estimate what would happen if, instead of being given away to firms under a “cap-and-trade” scenario, all carbon permits were auctioned and 80% of the revenue from these auctions were returned to the American public in the form of equal dividends. The authors find that in every state, low income households would see a net benefit from this type of “cap-and-dividend” system.
A cap-and-dividend system differs from a cap-and-trade system in how the permits are distributed. In cap-and-trade, all of the permits would be given away for free to corporations. The corporations that got more permits than they needed would then sell their extra permits to firms that got fewer than they wanted. In a cap-and-dividend system, however, 100% of the carbon permits would be sold at auction, making trading unnecessary. The revenues from these auctions would then be returned to the public as equal payments per person. President Obama made the case for 100% of permits to be auctioned in his FY10 budget proposal.
In order to determine the net impacts of a cap-and-dividend policy across income brackets, the authors first estimate the carbon footprints of households based on the carbon dioxide emissions resulting from their direct fuel consumption and the production and distribution of other goods that they consume. They split the population into 10 income deciles and find that carbon emissions per capita in the highest income decile are more than 6 times greater than in the lowest decile; however, as a share of their income, carbon per dollar of expenditure is more than twice as high in the poorest decile as in the richest. This means that while lower income households have a much smaller carbon footprint than higher-income households, they would be paying a larger share of their income on increased energy costs.
The next step in finding the net impact on households is to observe how the revenues from the permit auctions are redistributed. The authors analyze how households would be affected if 80% of the revenue were returned to the households as dividends (the other 20% could be spent on transitional assistance to communities, workers, or firms that would be adversely affected by decreasing reliance on fossil fuels). They find that the average annual cost of carbon to consumers for higher fossil fuel prices ranges from $135 per person in the lowest income decile to $618 per person in the highest-income decile.
If each household were to receive an equal dividend of $386, then the bottom seven deciles would all receive more in dividends than they pay in higher prices, the eight decile breaks even, and the top two deciles experience a net cost. As a percentage of income, this is a 6.5% gain for people in the lowest decile and a 0.3% loss for people in the highest decile, turning this into a progressive climate change policy.
The remainder of the report analyzes the impacts of higher energy prices and a cap-and-dividend policy on each state, and on the income deciles within each state. They find that inter-state differences are not that large. The annual cost to a median-income household ranges from $239 per person in Oregon to $349 per person in Indiana, with the net benefits of the cap-and-dividend ranging from $147 per person in Oregon to $37 per person in Indiana.
The full report, Cap and Dividend: A State-by-State Analysis, can be found here: http://www.e3network.org/papers/CAPDIVIDENDstates.pdf.