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Regulating carbon progressively
By Jerrold Oppenheim
Friday, January 18, 2008
Regulating carbon progressively
January 18, 2008

By Jerrold Oppenheim

It is important that any cap-and-trade system for carbon emissions be structured to have a progressive impact, i.e., have a lesser burden on (or even a net benefit to) low-income households than others. A basic assumption is that the proceeds of any such system are 100% returned to consumers. In summary, as the chart below illustrates, I would propose to structure the return to customers such that none is returned to the top quintile of earners, the middle 60% receive about what the system costs them so they break even, and the bottom 20% receive more than the system costs them.
This proposal would make the system net neutral for those in the middle because their incomes have been nearly stagnant for two decades and they are therefore neither economically nor politically ready for a sharp increase in taxation. Alternatively, the return could be structured to give this group a small net benefit. The relative economic difficulty of the bottom 80% is shown by these data compiled by the Center on Budget and Policy Priorities (CBPP) from US Census data:

[Please download full article for table]

Here is an illustrative example of how the distribution of costs and benefits might work:

[Please download full article for table and charts]

Thus, depending on the price of carbon (this illustration approximates CBO’s mid-point), there may be sufficient revenue to return 3.5 times the cost of carbon to the poorest 20% while returning the cost of carbon to others (provided there is no benefit to the top 20%). Alternatively, this revenue would cover twice the cost to the poorest 20% and provide revenue for other purposes, such as research and development of sustainable technologies and mediation of worker dislocation. Many other alternatives of progressive distribution are possible.
Distribution decisions are likely to be made on both Federal and State levels. This analysis of incomes is by quintile largely because much income data are reported that way. The analysis should be considered illustrative and could be refined to narrow the fraction of earners who pay the full costs of the system to, for example, 10% (with, say, the next 10% paying partial cost); and/or to narrow the fraction of earners who receive a net benefit to, say, a quarter, which would encompass those at or below 60% of median income (i.e., $28,814), a common definition of poverty. Note also that these national averages disguise wide differences in carbon use across regions and states. For example, emissions of CO2 for Massachusetts residential electricity generation are about half the national average.
The mechanics for achieving this or similar structures could include a combination of the income tax system (including Earned Income Tax Credit and payroll tax credits), fuel assistance, energy efficiency, and/or other benefit programs. Middle income rebates can be administered through the income tax system. However, reaching the lower 40% will not be that easy. A number of methods have been suggested, none of them wholly suitable:
• Earned Income Tax Credit (EITC)
• Other Income Tax credits
• Payroll tax credits
• Fuel assistance (LIHEAP) supplement
• Energy efficiency program funding (through Weatherization Assistance Program or through utility-funded programs)
• Food stamps or other relatively popular low-income benefits
None of these programs fully identify or serve all those it is desirable to reach.
• Income tax credits, including the EITC, and payroll taxes do not reach non-working elderly, unemployed, and disabled people.
• The EITC also does not reach many working poor.
• Fuel assistance directly responds to increased energy prices but often reaches fewer than 25% of those who are income-eligible; energy efficiency programs reach even fewer. Of course, the low penetration of these programs – which are fully subscribed – is largely a function of grossly inadequate funding.
• Food stamps may be the most popular low-income benefit, but nevertheless reach fewer than half of those eligible.
The most effective approach is likely to be a combination of these programs, although coordinating such a set of programs could be a complex undertaking. For example, fuel assistance could be funded to (or beyond) its full $5 billion authorization, energy efficiency programs could be greatly expanded, and food stamps and EITC or payroll tax credits could be used to reach those not reached by fuel assistance or energy efficiency programs.
Fuel assistance is a desirable approach because it is an existing program, requiring no new administration, that was designed to directly respond to fuel price increases. Energy efficiency is a particularly desirable approach because the benefits it provides are long-term and greater than the amount invested.

[Please download full article for charts, tables, and footnotes]

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