Budgetary effects of an amended climate bill

June 2, 2008

Today CBO issued a cost estimate foranamended version of the Lieberman-Warner Climate Security Act of 2008. Thesubstitute amendment for S. 3036 (formerly S. 2191) would set an annual limit or cap on the volume of certain greenhouse gases (GHGs) emitted from electricity-generating facilities and from other activities involving industrial production and transportation. Under this legislation, the Environmental Protection Agency (EPA) would establish three separate regulatory initiatives known as cap-and-trade programs one covering most types of GHGs, one covering hydrofluorocarbons (HFCs), and a third program to cover the carbon emissions embodied in imported goods.

EPA would establish a quantity of allowances for each of calendar years 2012 through 2050 and would auction some of those allowances. The proceeds would be used to finance various initiatives, such as developing renewable technologies, assisting in the education and training of workers, and providing energy assistance for low-income households. EPA would distribute the remaining allowances at no charge, to states and other recipients, which could then sell, retire, or use them, or give them away. Over the 40 years that the proposed cap-and-trade programs would be in effect, the number of allowances and emissions of the relevant gases would be reduced each year.

CBO estimates that enacting thelegislation would increase revenues by about $902 billion over the 2009-2018 period, net of income and payroll tax offsets.Over the next 10 years, we estimate that direct spending would total about $836 billion.The additional revenues from enacting this legislation would exceed the new direct spending by an estimated $66 billion, thus decreasing future deficits (or increasing surpluses) by that amount over the next 10 years. Other spending could result from enactment of the bill, but it would be subject to future appropriation action. This estimate does not address such spending. In years after 2018, net revenues attributable to the legislation would exceed annual direct spending through 2050.

Adetailed discussion of the methodology that CBO uses for analyzing this type of legislation, including the budgetary treatment of the cap-and-trade programand a discussion of how tax offsets are applied to the revenues generated by allowances auctioned and given awayareincluded in CBO's April 10 cost estimatefor S. 2191, the America's Climate Security Act of 2007, as ordered reported by the Senate Committee on Environment and Public Works in December 2007.