CBO report pans plans for carbon cap & trade as “Regressive” and hard on poor

An April 2007 Congressional Budget Office Brief has described plans to implement a carbon-based cap & trade system as “regressive.”

The briefing notes that such a system will the greatest impacts on the poor, by raising prices for electricity and costing jobs in the energy sector. It also describes the rent seeking problem often associated with these types of schemes, noting that the program would have the effect of “transer(ring) wealth from some people to others.” Essentially, those who were granted rights to emit CO2 early on in the program would hold a very valuable commodity and it is unlikely that the value of those early emissions credits would be passed on to consumers.

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. Such losses would probably be limited to current workers and investors. Job losses in those industries would be likely to impose a fairly large burden on a relatively small number of households; investors’ losses, by contrast, would tend to impose a smaller burden on a much larger number of households (because, typically, investors hold diversified portfolios). …

A cap on U.S. carbon dioxide emissions would impose costs on the economy by restricting the use of fossil fuels—particularly coal, which has the highest carbon content. Profits and employment would decline for some existing fossil-fuel suppliers. In addition, the restriction would raise fossil-fuel prices and increase production costs for firms that rely heavily on those fuels, creating an incentive for them to decrease their use of fossil fuels. Consumers, in turn, would face higher prices for energy and for goods and services that require substantial amounts of energy to produce, which would give them an incentive to reduce their consumption as well.

11. May 2007 by
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