Thursday, November 01, 2007

Congressional Budget Office Cap & Trade Studies

The April 25, 2007 Congressional Budget Office (CBO) study entitled "Trade Offs in Allocating Allowances in CO2 Emissions," concluded that:

"Regardless of how the allowances were distributed, most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline. Those price increases would be regressive in that poorer households would bear a larger burden relative to their income than wealthier households would. In addition, workers and investors in parts of the energy sector—such as the coal industry—and in various energy-intensive industries would be likely to experience losses as the economy adjusted to the emission cap and production of those industries’ goods declined. Because most of the cost of the cap would ultimately be borne by consumers, giving away nearly all of the allowances to affected energy producers would mean that the value of the allowances they received would far exceed the costs they would bear. As a result, that allocation strategy would increase producers’ profits without lessening consumers’ costs. In essence, such a strategy would transfer income from energy consumers—among whom lower income households would bear disproportionately large burdens—to shareholders of energy companies, who are disproportionately higher-income households." (More)

A more recent Nov 1, 2007 study entitled, "CBO Testimony on Approaches To Reducing Carbon Dioxide Emissions," includes 6 key points:
  1. The risk of potentially catastrophic damage from climate change can justify
    taking action to reduce that risk in much the same way that the hazards we all
    face as individuals motivate us to buy insurance.

  2. Although both a tax on emissions and a cap-and-trade system use the power of
    markets to achieve their desired results, a tax is generally the more efficient

  3. Under a cap-and-trade program, a key decision for policymakers is whether to
    sell emission allowances or to give them away.

  4. Policymakers’ decisions about how to allocate the allowances could have significant
    effects on the overall economic cost of capping CO2 emissions, as well
    as on the distribution of gains and losses among U.S. households.

  5. If the government chose to sell emission allowances, it could use the revenue to
    offset the disproportionate economic burden that higher prices would impose on
    low-income households.

  6. The budgetary treatment of a federal cap-and-trade system for CO2 emissions is
    an important topic that has received relatively little attention.

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