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Options for Offsetting the Economic Impact on Low- and Moderate-Income Households [i] (June 17, 2008)

handle is hein.congrec/cbo1017 and id is 1 raw text is: O CONGRESSIONAL BUDGET OFFICE Peter R. Orszag, Director U.S. Congress Washington, DC 20515 June 17, 2008 Honorable Jeff Bingaman Chairman Committee on Energy and Natural Resources United States Senate Washington, DC 20510 Dear Mr. Chairman: Global climate change poses one of the most significant long-term policy challenges for the nation. Reducing greenhouse-gas emissions would be beneficial in limiting the degree of damage associated with climate change, especially the risk of significant damage. However, decreasing those emissions would also impose costs on the economy-in the case of carbon dioxide (C02), because much economic activity is based on fossil fuels, which release that gas when burned. Under a cap-and-trade program for CO2 emissions, the government would set gradually tightening limits on emissions, issue rights (or allowances) corresponding to those limits, and then allow firms to trade the allowances among themselves. The net financial impact of such a program on low- and moderate- income households would depend in large part on how the value of emission allowances was allocated. By itself, a cap-and-trade program would lead to higher prices for energy and energy-intensive goods. Those price increases would impose a larger burden, relative to either income or household consumption, on low- and moderate-income households than on higher-income households. Lawmakers could choose to offset the price increases experienced by low- and moderate-income households by providing for the sale of some or all of the CO2 emission allowances and using the revenues to compensate such households. In response to your letter of June 4, 2008, the Congressional Budget Office (CBO) has prepared the attached analysis of options for offsetting the economic impact on low- and moderate-income households of a cap-and-trade program for CO2 emissions. As you requested, the analysis also explores the use of tax incentives for households that invest in energy-saving technologies. The analysis presented here is qualitative in nature; CBO will provide a more detailed analysis when it releases an update, which you have also requested, to its 2000 study of the distributional effects of a cap-and trade program. In keeping with CBO's mandate to provide objective, impartial analysis, the analysis includes no recommendations. www.cbo.gov

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