July 9, 2009
Today CBO released a letter describing studies by two teams of expertsone affiliated with the National Bureau of Economic Research (NBER) and one affiliated with Resources for the Future (RFF)that estimated regional differences in the effects of policies that would increase the prices of fossil fuels in rough proportion to the carbon dioxide emitted when they are combusted, as would occur under a cap-and-trade program.
CBO recentlyanalyzed the effects that the cap-and-trade program for greenhouse-gas emissions specified by the American Clean Energy and Security Act of 2009 (as reported by the House Committee on Energy and Commerce) would have on households at various income levels. That analysis accounts for the effects on households in different income groups of both the increases in prices of goods and services that would result from the cap-and-trade program (the gross cost of the program) and the distribution of the value of emission allowances (which would partly offset the gross cost). However, CBO did not analyze regional differences in these costs and benefits.
Like CBOs analysis of the American Clean Energy and Security Act of 2009 (ACESA), the analyses by NBER and RFF both assume that prices imposed on emissions ultimately would be borne by households in the form of higher prices for the goods and services that they consume, even if suppliers or intermediate users of fossil fuels initially pay the amounts involved. NBERs and RFFs analyses focus on the costs incurred once emissions are priced, and (like CBOs analysis) they do not address the transition costs of imposing such a price. Although the analyses by CBO, NBER, and RFF consider different carbon dioxide emission prices and examine policies in different years, the qualitative effects on households with different levels of income are similar in the studies; each finds that, measured as a share of annual income, the price increases would impose a larger burden on low-income households than on high-income households.
In contrast to CBOs analysis, the NBERs and RFFs analyses are not specific to ACESA: Most important, they examine methods of returning the allowance value (or tax revenues) to households that differ from the provisions in the legislation. This letter, therefore, addresses only the results concerning the price increases for households at various income levels (that is, the regional analysis of the gross annual cost per household, which CBO estimated to be $890 in its analysis):
- The NBER study finds only small regional differences. In particular, the increase in households spending would range from 1.9 percent of annual income in the East South Central region to 1.5 percent in the West North Central region.
- The RFF study also finds only small regional differences, although the differences are somewhat larger for low-income households. Specifically, the increase in households spending would range from 1.6 percent of annual income in the Ohio Valley to 1.3 percent in California, New York, and the Northwest. Effects on households in the bottom decile of the income distribution would range from 5.5 percent in the Ohio Valley to 4.0 percent in California.