More on the Estimated Costs to Households of a Cap-and-Trade Program

June 25, 2009

Last Friday, CBO released an analysis of the average cost per household that would result from the greenhouse-gas (GHG) cap-and-trade program in the American Clean Energy Security Act of 2009 (H.R. 2454). In that analysis, CBO examined the effects of the bill as it would apply in 2020 but described those effects in the context of the current economy: that is, as if the 2020 policy were in effect in 2010. Describing the effects in 2010 allows a more direct comparison of the costs with current household incomes. The blog entry provides more detail on how CBO derived the estimate of the costs of emission allowances and offsets for 2010.

CBO estimates that the price of an allowance, which would permit one ton of GHG emissions measured in carbon dioxide equivalents, would be $28 in 2020 (measured in 2020 dollars). CBO also estimates that nearly 5 billion allowances would be issued in 2020 (after subtracting allowances set aside for a strategic reserve) and that the costs of international and domestic offsets purchased in 2020 would be $20 billion, yielding a total cost of allowances and offsets of about $160 billion.

CBO modeled the 2020 policy in 2010 by maintaining the same relationship between the total value of allowances and the size of the economy (as measured by gross domestic product) in 2010. On that basis, CBO estimates that the equivalent cost of allowances and offsets would be roughly $105 billion in 2010. CBO projects that GDP in 2010 will be about one-third below the level projected for 2020 and thus the 2020 allowance value is reduced by about one-third so that its value relative to the size of the economy remains the same. CBO made a similar adjustment to the 2020 estimate of the resource costs associated with the policy.

To measure the impact across households in 2010, CBO used an estimate of the distribution of spending on goods that have carbon dioxide emissions associated with their production or consumption across household income groups in that year. The database for the analysis was constructed by statistically matching income information from the Statistics of Income data from the Internal Revenue Service, households characteristics from the Current Population Survey reported by the Bureau of the Census, and data on households expenditures from the Consumer Expenditure Survey by the Bureau of Labor Statistics. The data are from 2006, the latest year for which the data from all three sources are available, and thus reflect the patterns of income and consumption in that year. CBO adjusted the data to 2010 levels by the estimated overall growth in population and income. CBO did not attempt to project how the distribution across household income groups or composition by source of income or expenditures would change between 2006 and 2010.