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Cap-and-Trade Cost Inflation

Republicans puff up the impact of a cap-and-trade program on the average family's energy costs.


Summary

Leading Republicans are claiming that President Obama’s proposal to curb greenhouse gas emissions would cost households as much as $3,100 per year. The Republican National Committee calls it a “massive national energy tax.” But the $3,100 figure is a misrepresentation of both Obama’s proposal and the study from which the number is derived.

Republicans say they base their figure on a study from the Massachusetts Institute of Technology. But one of the authors says that the GOP’s use of the study is “simplistic and misleading” and that it ignores key provisions designed to cushion the impact on consumers. The author puts the true added cost of a cap-and-trade system at closer to $800 a year.

Obama himself once said energy costs would “skyrocket” under his plan, but the GOP’s partisan claim of a $3,100 per household cost increase is far higher than figures produced by other studies. The Environmental Protection Agency estimates the average cost per household to be between $98 and $140 per year, based on the Democratic cap-and-trade bill working its way through the House. Even the conservative, pro-Republican Heritage Foundation figures the average family would see its energy bill increase by $1,500 a year, less than half what the GOP claims. A Congressional Budget Office expert recently estimated the cost per household at an average of $1,600 a year, but that figure doesn’t account for energy rebates Obama has proposed giving to consumers. If the government did use revenue from cap and trade “to pay an equal lump-sum rebate to every household,” the CBO expert said, “lower-income households could be better off.”

Analysis

As a presidential candidate, Barack Obama said he would tackle climate change by implementing a cap-and-trade system to limit the release of greenhouse gases into the atmosphere. According to the budget President Obama proposed in February, the administration would aim to “reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050.” The proposed system would require companies emitting gases (principally carbon dioxide) above the cap to buy allowances. Companies that emit gases under the cap would then be able to sell, or trade, their allowances to other companies that need them. But the plan faces opposition from some Republicans who say it is a costly “energy tax.”

How Much Higher?

Image from RNC Fundraising E-MailExperts agree that the increased costs imposed by a cap-and-trade program would be passed down by companies to their consumers in the form of higher prices on energy products. But just how big of a hit would consumers take?

The Republican National Committee recently tried to scare up donations with a frightening e-mail. “President Obama and the Democrats are planning to jack up energy prices and pass the cost on to you and your family,” it said, asking: “[C]an you and your family afford an additional $3,100 in higher energy taxes a year?”

The message goes on to assert that “if Obama and his liberal Democrat cohorts get their way, you and your family will be paying an additional $260 a month in energy taxes thanks to the Democrats’ outrageous Cap & Trade legislation. That’s $260 a month that you and your family should be allowed to spend, save or invest anyway you see fit.” We’ve heard similar claims about the potential costs of a cap-and-trade program from other GOP members over the last few months as well.

“Simplistic and Misleading” 

How do Republicans figure American households will be out $3,100? The figure is based in part on a 2007 study by the MIT Joint Program on the Science and Policy of Global Change. The study estimated that a cap-and-trade market for 2015 would be worth $366 billion in revenue. Republicans, figuring that that amount would be passed from the energy companies to consumers, calculated the average cost per household by dividing $366 billion by 117 million households (a population of 300 million divided into households of 2.56 persons) to get $3,128, or roughly $3,100.

However, one of the authors of the MIT study disputes that figure.

In a letter sent to House Minority Leader John Boehner (R-Ohio) on April 1, John Reilly, associate director for research at the MIT Joint Program on the Science and Policy of Global Change, said that the study he coauthored had “been misrepresented in recent press releases distributed by the National Republican Congressional Committee.” He said the GOP’s calculation fails to account for Obama’s stated intent to provide rebates to consumers to cushion the effect of increased prices: “[M]any of the proposals currently being considered by Congress and as proposed by the Administration have been designed to offset the energy cost impacts on middle and lower income households and so it is simplistic and misleading to only look at the impact on energy prices of these proposals as a measure of their impact on the average household.”

Reilly at first estimated the average annual cost of implementing a cap-and-trade program to each household to be about $340, but he later wrote a follow-up letter to Boehner on April 14 correcting what he said was an error in his calculations and increasing his estimate to about $800. He said his corrected estimate “includes the direct effects of higher energy prices, the cost of measures to reduce energy use, the higher price of goods that are produced using energy, and impacts on wages and returns on capital.”

Despite Reilly’s objections, Republicans continue to use the $3,100 figure. An April 2 “Leader Alert” on the House Republican Leader’s Web site reads: “An MIT professor has questions about the $3,100 figure but his letter makes assumptions that are factually inaccurate.” Boehner disputes Reilly’s assumption that revenue from a cap-and-trade program would be returned to households: “[W]e all know that Democrats have no intention of using a cap-and-trade system to deliver rebates to consumers; they want the tax revenue to fund more government spending.”

Tough Sell 

There’s no question that curbing greenhouse gas emissions would bring about higher energy prices. Obama himself, speaking to the editorial board of the San Francisco Chronicle on Jan. 17, 2008, said electricity costs would “necessarily skyrocket” as a result of capping emissions levels, and that his job as president would be to convince the public and Congress that benefits outweigh costs. “If we can’t make that argument persuasively enough, you can be Lyndon Johnson, you can be the master of Washington, you’re not going to get that done.”

 When Obama unveiled his proposed budget for 2010, it said that revenue from the program would be used to fund energy investments and also to help consumers. “[T]his program will fund vital investments in a clean energy future totaling $150 billion over 10 years, starting in Fy 2012. The balance of the auction revenues will be returned to the people, especially vulnerable families, communities, and businesses to help the transition to a clean energy economy,” the proposed budget explained. The budget also said that the administration would use the “climate revenue” from auctioning the allowances to fund the administration’s “Making Work Pay” tax credit – $400 for individuals and $800 for couples.

The Republicans’ claim of $3,100 per household simply ignores these features of Obama’s proposal. Furthermore, the MIT study was not based on Obama’s proposal specifically. It was done two years ago, long before Obama described his intentions in the budget. “We could not anticipate what he would propose, and frankly the details of any current proposal are not completely specified and will change as things go through the Congress,” Reilly told FactCheck.org.

Waxman-Markey Bill

Indeed, a cap-and-trade plan that is different in key respects from Obama’s is already advancing in Congress. On May 15, U.S. Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.) introduced H.R. 2454, the American Clean Energy and Security Act of 2009, in the House of Representatives. The bill recently passed in the House Committee on Energy and Commerce by a vote of 33 to 25. And it has been referred to other committees for consideration.

It would cap emissions at 17 percent below 2005 levels by 2020, a steeper initial reduction than the 14 percent cut proposed by Obama. Another key difference is that while Obama would have had the government sell 100 percent of the available allowances, the House bill would give away 85 percent of them to start while auctioning off only 15 percent. (Those differences are in how the program is phased in. Eventually both proposals would auction 100 percent of allowances and cap emissions at 83 percent below 2005 levels in the year 2050.)

The initial 15 percent of auctionable allowances would be used for the specific purpose of protecting consumers from higher energy costs. According to an outline of the proposed allowance allocation, “15% of allowances will be auctioned each year and the proceeds of these allowances will be distributed to low- and moderate-income families to protect them from other energy cost increases.”

 Other Cost Estimates

In past years, others have analyzed the possible economic impact of a cap-and-trade system and found that consumers’ energy costs would increase, but that they could be lessened with the appropriate action.

Testifying before the House Subcommittee on Income Security and Family Support in March, Terry M. Dinan, a senior adviser for the nonpartisan Congressional Budget Office, conceded that price increases from a cap-and-trade system would increase energy costs for American households. According to Dinan’s testimony, a 15 percent cut in CO2 emissions could run the average household about $1,600 (in 2006 dollars). The range: $700 for the average household in the lowest one-fifth of all households, according to income, to nearly $2,200 for households in the highest quintile.

But the CBO’s estimate did not include “any benefits to households from lessening climate change.” And the CBO also concluded that cost increases for some families, at least, could be offset if revenues from the allowances were returned to consumers. In his testimony, Dinan said that a 2000 CBO study “concluded that lower-income households could be better off as a result of the policy (even without including any benefits from reducing climate change) if the government chose to sell the allowances and use the revenue to pay an equal lump-sum rebate to every household in the United States.”

And initial analyses of the impacts of the Waxman-Markey bill have varied as well.

The conservative Heritage Foundation, which analyzed the draft version of the bill, estimated that the “typical family of four will see its direct energy costs rise by over $1,500 per year” by 2035.

An EPA analysis of the draft version found that “[t]he cap & trade policy has a relatively modest impact on U.S. consumers assuming the bulk of revenues from the program are returned to household[s],” and it estimates the average cost per household to be between $98 and $140 per year.

—by  D’Angelo Gore

Sources

Office of Management and Budget. A New Era of Responsibility, 2009.

Zabarenko, Deborah and Ayesha Rascoe. “Obama budget realistic on climate revenue: analysts.” Reuters, 26 Feb. 2009.

Web site of House Republican Leader John Boehner. “Why the Dems’ “Cap-and-Trade” Energy Tax Will Cost Each American Family Up to $3,100 Per Year.” Republicanleader.house.gov, 2 April 2009.

Paltsev, Sergey, Reilly, John M., Jacoby, Henry D., et al. “Assessment of U.S. Cap-and-Trade Proposals: Report 146.” MIT Joint Program on the Science and Policy of Global Change, April 2007.

Testimony. “The Distributional Consequences of a Cap-and-Trade Program for CO2 Emissions.” Congressional Budget Office, 12 March 2009.

House Committee on Energy and Commerce. “Chairmen Waxman, Markey Release Discussion Draft of New Clean Energy Legislation,” 31 March 2009.

House Committee on Energy and Commerce. “Chairmen Waxman and Markey Introduce “The American Clean Energy and Security Act,” 15 May 2009.

Environmental Protection Agency. “EPA Preliminary Analysis of the Waxman-Markey Discussion Draft,” 20 April 2009.