Putting a Cost on Cap-and-Trade Legislation

Determining the cost of cap-and-trade legislation on U.S. households is one of those inextricable tasks that promises to produce disputed and controversial results. So there was some reason to breathe a sigh of relief — albeit a small one — when the non-partisan Congressional Budget Office issued its report late Friday on the cost of cap-and-trade legislation included in the Waxman-Markey climate change bill.

That’s not to say there weren’t cost estimates already made or that critics of Waxman-Markey will simply roll over and allow the legislation to pass without a fight. But the CBO’s report lends the kind of non-partisan credibility that is difficult to discredit. It also strikes me as one of the most important details to know before voting on the legislation.

The CBO report estimates the net annual economy-wide cost of the cap-and-trade program in 2020 would be $22 billion or about $175 per household. The cost per household depends on annual income and ranged from a benefit of $40 for those in the lowest bracket to a cost of $340 for households in the fourth-highest income bracket, roughly between $62,001 and $100,000. The highest household income bracket  would incur costs of $245 a year.

The CBO’s report seems to quell concerns about the potential cost of the legislation on American families. So, I was interested in the oil and gas industry’s perspective and to find out if their opinion of the Waxman-Markey bill had changed.

Russell Jones, senior economic advisor at the American Petroleum Institute, wasn’t ready to give his complete assessment because is still wading through the report. But he did question how the CBO determined the net cost to households.

It’s assumed, in the CBO report, that firms would generally pass the cost of their emissions allowances onto households and governments. Households bearing the bulk of that burden. 

According to the CBO report, the $110 billion gross cost of those allowances would be reduced by direct relief from tax credits and rebates and indirectly through allocations to businesses and governments. The CBO determined $85 billion would ultimately flow back to U.S. households. Additional transfers and costs would add another $2.7 billion in benefits, bring the total net cost to $22 billion.

The allocations to businesses and government would eventually benefit households in people’s various roles as consumers, workers, shareholders and taxpayers, according to the report.

“I’m not sure this reflects the true cost to households,” Jones said in a phone interview Monday. “When will households see these benefits?”

Based on Jones’ comments, it’s safe to say the API’s stance on the Waxman-Markey bill has not changed despite the CBO’s report.

The concept of cap-and-trade isn’t as problematic, Jones said. But the API still disagrees with the Waxman-Markey legislation, because gives away too much to certain industries like coal and discriminates against natural gas, Jones said.

CBO report stats:

• Analysis focuses on 2020, when 17 percent of emissions allowances would be sold by the government and 83 percent would be given away;
• Report estimates the price of an allowance in 2020 would be $28 for one ton of greenhouse gas emissions measures in carbon dioxide equivalents;
• Under pending legislation, free allocations would be phased out and by 2035 about 70 percent of allowances would be sold by the federal government.