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Response to Questions about Estimating the Budgetary Impact of a Bill Similar to S.2877, the Carbon Limits and Energy for America's Renewal (CLEAR) Act 1 (September 2011)

handle is hein.congrec/cbo10591 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director U.S. Congress Washington, DC 20515 September 29, 2011 Honorable Maria Cantwell United States Senate Washington, DC 20510 Dear Senator: This letter responds to your request for information about the methodology the Congressional Budget Office (CBO) would use to estimate the budgetary impact of a bill similar to S. 2877, the Carbon Limits and Energy for America's Renewal (CLEAR) Act, which was introduced in the 111th Congress. In particular, you asked about how CBO would apply the revenue offset to the estimate of net revenues that would result from enacting the bill. Although CBO did not prepare a cost estimate for S. 2877, we can provide some general information about how the agency has projected the budgetary impact of similar legislation that would limit the emission of greenhouse gases through the issuance of tradable allowances or permits. Budgetary Treatment of Proceeds from Auctioning Emission Permits Under the CLEAR Act or similar legislation, the government would collect revenues from auctioning emission permits to companies that would have to comply with a cap on carbon emissions. The cost of purchasing those permits would become an additional business expense for such companies that would reduce taxable income somewhere in the economy. The result would be a loss of government revenue from income and payroll taxes that would partially offset the revenue the government would receive from auctioning the permits. By long-standing convention, CBO would estimate that revenue loss to be 25 percent of the auction revenues. The 25 percent offset would apply whether the cost of purchasing the permits was borne by a business (including its employees) or passed on to consumers. To see why, consider a company that purchases $100 worth of permits from the federal government: * If the company could not pass that expense on to its customers, either its profits or the wages it pays to employees, or perhaps both, would decline by a total of $100. On 1 For more detailed discussions about such estimates, see Congressional Budget Office, letter to~ the H onorable Joe Barton, abou t preliminary information on the budgetary impact of distributing carbon~ emission allowlances (May 21, 2009); and letter to the Honorable H enry A. Waxman concerning an assessment of potential budgetary impacts from the introduction of carbon dioxide cap-and-trade policies (May 15, 2009).

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