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Letter to the Honorable Jeff Bingaman 1 (July 2007)

handle is hein.congrec/cbo8858 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Peter R. Orszag, Director U.S. Congress Washington, DC 20515 July 9, 2007 Honorable Jeff Bingaman Chairman Committee on Energy and Natural Resources United States Senate Washington, D.C. 20510 Dear Mr. Chairman: Thank you for your interest in the Congressional Budget Office's (CBO's) April 25 issue brief, Trade-Offs in Allocating Allowances for CO2 Emissions. The brief addressed some of the trade- offs that policymakers could face when deciding how to allocate allowances to emit carbon dioxide (C02) under a cap-and-trade program. Specifically, CBO's analysis quantified the near- term changes in gross domestic product that might result under six allocation scenarios and examined how each scenario might affect income for households in different income categories. In your letter of June 29, you asked whether a cap-and-trade program would harm the economy by imposing costs that could not be justified by its benefits and whether such a program would necessarily be regressive, imposing disproportionately high costs on low-income households relative to their income. Those points are addressed below. Would a Cap-and-Trade Program Harm the Economy? An effort to limit CO2 emissions in any given year would have two principal effects: It would produce long-term economic benefits (by avoiding damages in the future) but would impose economic costs in each year in which the limit was in effect (by restricting the use of fossil fuels, which emit CO2 into the atmosphere when they are burned). Although CBO's issue brief acknowledged that reducing CO2 emissions would create both costs and benefits, it was not intended to quantify those benefits. Rather, the brief explicitly took the goal of reducing emissions as a given and focused on the near-term efficiency and distributional trade-offs associated with doing so under different methods of allocating emission allowances. More specifically, each allocation scenario considered in the brief would reduce CO2 emissions by the same amount and thus would produce the same long-term benefits, while imposing different near-term costs. Given the narrow objectives of the brief, the fact that it did not explicitly quantify the benefits of a cap-and-trade program should not be interpreted in any way as implying that CBO has concluded that the costs of such a program would outweigh the benefits. A variety of analyses suggest that a carefully designed program to begin reducing CO2 emissions would produce greater benefits than costs. In particular, a recent report by the Intergovernmental Panel on Climate Change has brought to light new information about the potential damages that could result from continued increases in those emissions. The magnitude of such damages remains www.cbo.gov

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