[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                    PROTECTING LOWER-INCOME FAMILIES
                     WHILE FIGHTING GLOBAL WARMING

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                   INCOME SECURITY AND FAMILY SUPPORT

                                 of the

                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 12, 2009

                               __________

                            Serial No. 111-6

                               __________

         Printed for the use of the Committee on Ways and Means




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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       DAVE CAMP, Michigan
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            SAM JOHNSON, Texas
JOHN LEWIS, Georgia                  KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts       PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee            ERIC CANTOR, Virginia
XAVIER BECERRA, California           JOHN LINDER, Georgia
LLOYD DOGGETT, Texas                 DEVIN NUNES, California
EARL POMEROY, North Dakota           PAT TIBERI, Ohio
MIKE THOMPSON, California            GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut          GEOF DAVIS, Kentucky
EARL BLUMENAUER, Oregon              DAVE G. REICHERT, Washington
RON KIND, Wisconsin                  CHARLES W. BOUSTANY, JR., 
BILL PASCRELL, JR., New Jersey       Louisiana
SHELLEY BERKLEY, Nevada              DEAN HELLER, Nevada
JOSEPH CROWLEY, New York             PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

                                 ______

           SUBCOMMITTEE ON INCOME SECURITY AND FAMILY SUPPORT

                  JIM MCDERMOTT, Washington, Chairman

FORTNEY PETE STARK, California       JOHN LINDER, Georgia
ARTUR DAVIS, Alabama                 CHARLES W. BOUSTANY, JR., 
JOHN LEWIS, Georgia                  Louisiana
SHELLEY BERKLEY, Nevada              DEAN HELLER, Nevada
CHRIS VAN HOLLEN, Maryland           PETER J. ROSKAM, Illinois
KENDRICK MEEK, Florida               PAT TIBERI, Ohio
SANDER M. LEVIN, Michigan
DANNY K. DAVIS, Illinois

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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of March 5, 2009, announcing the hearing................     2

                               WITNESSES

Terry Dinan, Ph. D., Senior Advisor for Climate Issues, 
  Congressional Budget Office....................................     6
Dallas Burtraw, Ph. D., Senior Fellow, Resources for the Future..    20
Chad Stone, Ph. D., Chief Economist, Center on Budget and Policy 
  Priorities.....................................................    27
Lord Christopher Monckton, Chief Policy Advisor, Science and 
  Public Policy Institute........................................    39

                       SUBMISSIONS FOR THE RECORD

H. Sterling Burnett, Statement...................................    78
Stephen A. Smith, Statement......................................    81
The National Community Action Foundation, Statement..............    84


                    PROTECTING LOWER-INCOME FAMILIES
                     WHILE FIGHTING GLOBAL WARMING

                              ----------                              


                        THURSDAY, MARCH 12, 2009

             U.S. House of Representatives,
                       Committee on Ways and Means,
        Subcommittee on Income Security and Family Support,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at approximately 
10:10 a.m., in room B-318 Rayburn House Office Building, Hon. 
Jim McDermott [Chairman of the Subcommittee] presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                            SUBCOMMITTEE ON

                   INCOME SECURITY AND FAMILY SUPPORT

                                                CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
March 5, 2009 ISFS-1

                     McDermott Announces Hearing on

     Protecting Lower-Income Families While Fighting Global Warming

    Congressman Jim McDermott (D-WA), Chairman of the Subcommittee on 
Income Security and Family Support of the Committee on Ways and Means, 
today announced that the Subcommittee will hold a hearing on protecting 
low- and moderate-income families while curbing global warming. The 
hearing will take place on Thursday, March 12, 2009, in B-318 Rayburn 
House Office Building, immediately after a brief Subcommittee 
organizational meeting beginning at 10:00 am. In view of the limited 
time available to hear witnesses, oral testimony at this hearing will 
be from invited witnesses only. However, any individual or organization 
not scheduled to appear may submit a written statement for 
consideration by the Subcommittee and for inclusion in the record of 
the hearing.
      

BACKGROUND:

      
    A major international assessment released in 2007 highlighted the 
clear consensus in the scientific community that the Earth's climate 
has unequivocally warmed and that most of the observed changes since 
the 1970s are due to greenhouse gases emitted as a result of human 
activity. Various proposals have been advanced to curb these emissions 
and the associated risk of significant and potentially catastrophic 
environmental and economic damage. Such proposals will likely raise the 
price of fossil-fuel energy sources, which could present a particular 
hardship for low-and moderate-income families. The Congressional Budget 
Office estimates that households in the bottom fifth of income would 
have their energy costs, as a percentage of their income, rise nearly 
twice as much as households in the top fifth if greenhouse emissions 
were cut by 15 percent. This raises the question of how to best 
mitigate these costs for lower-income households to shield them from 
enduring increased hardship.
      
    In announcing the hearing, Chairman McDermott stated, ``We must 
address the dire risks of global warming while also ensuring this 
effort does not impose additional hardships on families already 
struggling to get by. We should establish specific mechanisms to help 
these families, and I look forward to hearing testimony related to that 
goal.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on ensuring effective and efficient 
protections for low- and moderate-income families while addressing the 
threat of climate change.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
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    Note: All Committee advisories and news releases are available on 
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    Chairman MCDERMOTT. I would now like to start the hearing 
itself. Would the panel of witnesses please take their seats. 
If you'll come up to the table and we'll get you started.
    We're here today to discuss helping low- and moderate-
income families as we attempt to reduce the harmful greenhouse 
gas emissions that threaten our planet.
    As a medical doctor, I took an oath that says, ``When it 
comes to treating patients, do no harm.'' There's no doubt in 
my mind that we can protect the planet from environmental harm 
and protect low- and moderate-income Americans from economic 
harm while we do it.
    Moving toward greener and cleaner energy will impose costs. 
There's no question about it, but the long-term cost of 
inaction is surely much, much higher, and we fail to respond to 
it at our own peril.
    Furthermore, we can mitigate the impact of the higher 
energy costs resulting from climate change legislation for most 
households.
    This Subcommittee's jurisdiction over many of the primary 
programs for low-income families and the Full Committee's 
responsibility for providing tax relief to middle-income 
Americans provide us the tools needed to achieve this goal.
    The world's scientific community has told us in unequivocal 
terms that our climate is warming and that most of this warming 
is the result of human activity, primarily the release of 
greenhouse gases into the Earth's atmosphere.
    There's a graph up on the monitor, which is from the 
National Oceanographic and Atmospheric Administration. It shows 
a significant change in the mean global temperature over the 
last 30 years, with eight of the ten warmest years on record 
occurring since 2001.
    Now climate change means more flooding and more droughts, 
longer and hotter heat waves, and rising sea levels. These 
trends translate into the growing loss of human life, the 
extinction of many animal species, and the imposition of 
extraordinary economic costs.
    I don't know how anyone can suggest we could sit on our 
hands and watch this happen, because such inaction would be the 
worst kind of generational malfeasance.
    Reducing the threat of climate change means reducing the 
emission of harmful greenhouse gases, such as carbon dioxide. 
There are various proposals for achieving this goal, but they 
all ultimately seek to impose some form of limit on those 
emissions by making the cost reflect their impact on our 
climate.
    Producers of energy will likely pass through much of the 
costs to their consumers. The good news, however, is that the 
limits on the greenhouse emissions will generate revenues that 
can be directly returned to consumers to offset higher energy 
costs.
    Climate control legislation also will generate new 
employment opportunities in green jobs that produce cleaner 
energy and promote greater efficiency.
    In helping the consumers, we must take particular care to 
reach out to lower income Americans, since they have less 
disposable income available to meet the higher energy costs. We 
saw that in the run-up in gas prices last year.
    Furthermore, our ability to offset higher energy costs will 
be maximized if we comprehensively focus on the consumers, 
without needlessly diverting resources to energy producers in 
the vain hope that they'll pass along the savings.
    We've seen in the last little while the folly of handing 
money to banks and expecting them to lend, and giving money to 
utilities runs the same risk, in my view.
    The Obama Administration has proposed that some of the 
revenues from climate control legislation be used to continue 
the Making Work Pay credit, which provides a refundable tax 
credit of $400 a year for individuals and $800 for couples.
    This may be a useful start, but there may need to be 
additional tax relief for low- and moderate-income households 
in the future to ensure that higher energy costs are fully 
offset.
    Additionally, we should consider providing further 
assistance to large families, given the fact that more children 
usually mean higher energy costs.
    Finally we need to recognize that some Americans don't have 
earnings--senior citizens, the disabled, the unemployed--but 
they still need help in addressing higher energy costs.
    If you're living on SSI, and your electric rates go up, you 
are participating in this whole process.
    Any proposed assistance that excludes needy households is 
incomplete and inadequate, in my view.
    In short, we can protect low- and middle-income families 
while also protecting our planet.
    I look forward to hearing from our witnesses on how best to 
pursue this goal.
    The leadership of the House has suggested that we are going 
to move on this issue rather quickly. So, we called this 
hearing because we wanted to deal with what is undoubtedly one 
of the impacts of this process. We need to get our thinking 
clear about how we're going to mitigate the impacts on the 
society.
    I now yield to my Ranking Member, Mr. Linder.
    Mr. LINDER. Thank you, Mr. Chairman.
    In your announcement for this hearing, you began with this 
statement. ``A major international assessment released in 2007 
highlighted the clear consensus in the scientific community 
that the Earth's climate has unequivocally warmed as a result 
of human activity.''
    Not so fast. Science is not a democracy. The head count 
fallacy has been recognized as irrational since Aristotle. Even 
if science were a democracy, for every scientist who supports 
the notion of human-caused global warming, there are more than 
ten who consider that notion pure vanity, and they have made 
their names public.
    Our Committee has been told that water vapor is the 
overwhelming heat-producing gas. CO2 is a bit part 
player. The UN's climate panel has exaggerated its effect on 
temperature tenfold as satellite data show.
    In the 1995 IPCC report, a UN bureaucrat removed five 
statements in the scientist's final draft that there was no 
basis to blame human activity, and replaced them with a 
contrary statement that humans were to blame.
    That is not science, but it has been the official line ever 
since. No science, just bureaucratic conclusions contrary to 
science, an excuse for a brand new tax.
    In the scientific world, only two conditions obtain. One is 
theory and the other is fact. Areas are studied for centuries, 
and then are proven by facts to be correct or incorrect. Both 
Galileo and Einstein were famous deniers of centuries-old 
theories. They were right. The consensus was wrong.
    In this rather recent discussion, the whole notion of 
proving or disproving the theory is not only ignored, it is 
considered heretical.
    Parenthetically, let me note that to question science is 
called ``scholarship''; to question religion is considered 
heresy.
    Since the mid 1970s when some of the same scientists were 
warning of a coming ice age, and then felt comfortable going 
after some of the research grant money on the global warming 
side, we have not yet heard a single fact adduced proving 
humans to be responsible.
    The entire case for panic is based on computer games. I 
want to remind you that the other multi-trillion-dollar debacle 
we are witnessing around the world today is because risk 
managers with gray hair were replaced by computers. The 
computers got it spectacularly wrong, yet the financial 
consensus relied upon them.
    Today predictions of future weather calamities are being 
made by computer games that do not take into consideration 
scientific observations of the Earth's natural temperature 
modulations.
    Every computer predicting calamity requires for its 
accuracy a growing hot spot high above the equator. We have had 
years to measure that hot spot with scientific instruments. It 
doesn't exist.
    How do the modelers respond? ``You must have misread your 
thermometers for 50 years, because the computer guesses that it 
should be there.''
    So, we prepare to attack this erroneous conclusion with the 
one thing our government does best: Raise taxes on the rich and 
give that money to the poor. There! That fixes that!
    Have we forgotten the testimony before this Committee that 
showed us that because of entitlements, our Nation's total 
revenue stream will be insufficient to pay just the interest on 
the debt in 31 years? So, we'll just add another entitlement.
    Let me show you a slide. Whether you select the minimum 
plan or the maximum plan put forth by the experts, this program 
will dwarf our current welfare program. Turning the vast 
majority of our citizens into supplicants is as futile as it is 
cruel.
    Assuming you satisfy yourselves that you have taken care of 
the poor and fixed the climate, a vanity at which I just 
cringe, who is going to be hurt? Well, just 2 billion of the 
world's most vulnerable people.
    We've enjoyed a living standard in the last 100 years, 
which is the envy of the world. India and China are now going 
through what we went through. One byproduct of that success is 
CO2. Why do we want to deny that same opportunity to 
the most vulnerable, whom we will consign to a lifetime of 
hunger and poverty.
    As Dr. John Christy told us just last week, having lived 
among the world's poor, their lives there are brutal and short. 
Those who kick the poor in the teeth while pretending to soak 
the rich do not merit the votes from either.
    Thank you, Mr. Chairman.
    Chairman MCDERMOTT. We will now turn to our first witness. 
Everyone has 5 days to put things in the record, if they wish 
to make statements.
    I will turn to Dr. Dinan.

  STATEMENT OF TERRY DINAN, PH.D., SENIOR ADVISOR FOR CLIMATE 
              ISSUES, CONGRESSIONAL BUDGET OFFICE

    Dr. DINAN. Chairman McDermott, Congressman Linder, and 
Members of the Subcomittee, thank you for the invitation to 
testify on the effects that a Cap and Trade Program for carbon 
dioxide emission might have on low-income households.
    Global climate change poses one of the nation's most 
significant long-term----
    Mr. LINDER. Excuse me, Doctor. Is your microphone on?
    Dr. DINAN. It is. Should I move it closer?
    Mr. LINDER. Thank you.
    Dr. DINAN. Can you hear me? Okay.
    Global climate change poses one of the nation's most 
significant long-term policy challenges. While the potential 
damage from climate change is large, the potential cost of 
avoiding it is large too.
    Policy makers could help minimize that cost by using a tax 
or well-designed cap and trade program to motivate reductions 
and emissions.
    Either a tax or a cap would inevitably cause prices of 
goods and services to increase, with larger increases for goods 
that entail greater emissions, such as home heating.
    Those price increases are essential to the success of the 
program, but they would impose a larger financial burden on 
low-income households than on higher income households.
    Lawmakers could choose to reduce the burden created by 
prices by selling the allowances and giving the money back to 
households. As depicted on the left-hand side of this figure, 
low-income households would actually be made better off under a 
cap-and-trade policy if the government sold all of the 
allowances and used the proceeds to provide the same lump-sum 
rebate to each household in the United States
    In that case, the size of the rebate is likely to be larger 
than the average increase in expenditures that low-income 
households would face as a result of the policy.
    In contrast, the same size rebate would not fully offset 
higher income households for the increased expenditures. 
Lawmakers could use the revenue gained by selling allowances in 
many ways. The middle section of the figure shows the 
distributional outcome of using that revenue to fund a decrease 
in corporate taxes. Higher-income households bare most of the 
burden of corporate taxes, they would actually be made better 
off under this policy.
    Their decreased taxes would more than compensate them for 
their higher expenditures. Lower income households, however, 
would gain little as a result of the corporate tax cut.
    Determining how to distribute the allowance value could 
entail tradeoffs. As depicted by the middle bar in the figure 
now showing, decrease in corporate taxes could lower the 
overall cost of the policy, even though it would provide little 
benefit for low-income households.
    That cost reduction stems from the increase in economic 
activity that a tax cut would encourage.
    In contrast, distributing the allowance value in the form 
of lump-sum rebates would have higher economy-wide cost. Giving 
the allowances away, which was depicted at the right hand side 
of both figures would score low on both measures. It would have 
relatively high economy-wide cost, and would do little to 
offset the cost for lower income households.
    If lawmakers wanted to use a more targeted approach for 
offsetting cost incurred by low-income households, they could 
choose from a variety of different strategies.
    Using existing transfer programs or providing rebates for 
the income tax system would avoid creating new institutional 
structures for administering payments.
    No single existing system would reach all households, 
however. For example, as shown in this figure, only 54 percent 
of households in the lowest fifth of the income distribution 
receive earnings, and thus would be likely to file an income 
tax return.
    Providing rebates through the income tax system would 
require the participation of households that would not 
otherwise have an incentive to file.
    The response to the recent stimulus rebate suggests that 
such an approach can work, but that 100 percent participation 
is unlikely.
    Delivering rebates through a combination of the income tax 
system and existing transfer programs would do a better job of 
reaching low-income households than would relying on either 
approach by itself.
    However, it is not easy to coordinate among existing 
programs to avoid compensating the same household twice. For 
example, 10 percent of households in the lowest income quintile 
both had earnings and received Social Security benefits. Those 
households would receive some automatic compensation for higher 
prices through the Social Security COLA.
    Finally, no program or set of programs could account for 
all of the regional and household-specific circumstances that 
would cause the cost burden created by a cap-and-trade program 
to vary among low-income households.
    That concludes my prepared statement. I'd be pleased to 
answer any questions that you might have.
    Thank you.
    [The prepared statement of Dr. Dinan follows:]

              Statement of Terry M. Dinan, Senior Advisor

The Distributional Consequences of a Cap-and-Trade Program for 
        CO2 Emissions
    This document is embargoed until it is delivered at 10:00 a.m. 
(EDT) on Thursday, March 12, 2009. The contents may not be published, 
transmitted, or otherwise communicated by any print, broadcast, or 
electronic media before that time.

    Chairman McDermott, Congressman Linder, and Members of the 
Subcommittee, thank you for the invitation to testify this morning on 
the implications for low-income families of cap-and-trade programs that 
are designed to reduce U.S. emissions of carbon dioxide 
(CO2).
    Global climate change poses one of the nation's most significant 
long-term policy challenges. Human activities are producing 
increasingly large quantities of greenhouse gases, particularly 
CO2. The accumulation of those gases in the atmosphere is 
expected to have potentially serious and costly effects on regional 
climates throughout the world. The magnitude of such damage remains 
highly uncertain, but there is growing concern about the risk that the 
damage may be extensive and perhaps even catastrophic.
    A risk of such magnitude can justify actions to reduce that 
possible harm in much the same way that the hazards we all face as 
individuals motivate us to buy insurance. Although the potential damage 
from climate change is large, the potential cost of avoiding it is 
large too, because it would entail making large reductions in global 
emissions over the coming decades. U.S. emissions currently account for 
roughly 20 percent of global emissions. As a result, substantially 
reducing global emissions would probably entail large reductions in 
U.S. emissions. Achieving such reductions would be likely to involve 
transforming the U.S. economy from one that runs on CO2-
emitting fossil fuels to one that relies on nuclear and renewable 
fuels, improvements in energy efficiency, and the large-scale capture 
and storage of CO2 emissions.
    One option for reducing emissions in a cost-effective manner is to 
establish a carefully designed cap-and-trade program. Under such a 
program, the government would set gradually tightening limits on 
emissions, issue rights (or allowances) consistent with those limits, 
and then allow firms to trade the allowances among themselves. The net 
financial impact of such a program on low- and moderate-income 
households would depend in large part on how the value of emission 
allowances was allocated. By itself, a cap-and-trade program would lead 
to higher prices for energy and energy-intensive goods. Those price 
increases would impose a larger burden on low- and moderate-income 
households than on higher-income households, relative to either their 
income or total spending. Lawmakers could choose to offset the price 
increases experienced by low- and moderate-income households by 
providing for the sale of some or all of the CO2 emission 
allowances and using the revenues to compensate such households.
    My testimony makes the following key points about those issues:

      A cap-and-trade program, like a tax on CO2 
emissions, could raise a significant amount of revenue because the 
value of the allowances created under such a program would probably be 
substantial. As the cap specified in legislation became more stringent 
over time, the value of the allowances would grow. A key decision for 
policymakers is whether to sell all of the emission allowances, thereby 
capturing their value in the form of Federal revenue that could be used 
in various ways, or to give some of them away (for example, to 
companies that produce or use fossil fuels).
      Under a cap-and-trade program, firms would not ultimately 
bear most of the costs of the allowances but instead would pass them 
along to their customers in the form of higher prices. Such price 
increases would stem from the restriction on emissions and would occur 
regardless of whether the government sold emission allowances or gave 
them away.
      Price increases would be essential to the success of a 
cap-and-trade program because they would be the most important 
mechanism through which businesses and households would be encouraged 
to make investments and behavioral changes that reduced CO2 
emissions. Those increases, however, would impose a larger burden, 
relative to their income, on low-income households than on high-income 
households.
      Policymakers would face tradeoffs in deciding how to use 
the value of the allowances. For example, they might sell the 
allowances and use the revenue to reduce existing taxes that discourage 
the productive use of capital and labor. That strategy could lessen the 
overall cost that a cap-and-trade program would impose on the economy 
but would do little to offset the burden that the price increases would 
impose on low-income households. Alternatively, policymakers might 
choose to use the revenue raised by selling allowances to provide 
support for low-income households--a strategy that would lessen the 
burden on low-income households but that could have somewhat higher 
economywide costs. Thus, policymakers will face tradeoffs in deciding 
how to best use the value of the allowances. A policy of giving the 
allowances away to companies would preclude either reducing the 
economywide costs or lessening the burden on low-income households.
      Designing programs that protect low-income households 
could be challenging: No program could address all the region- and 
household-specific circumstances that could affect families' costs. A 
variety of policy instruments might be necessary to effectively target 
most low-income households. Although a significant fraction of those 
households have earnings (and, thus, are likely to file tax returns), 
many do not. Some mechanisms already in place, such as cost-of-living 
adjustments for Social Security and other entitlement programs, would 
automatically compensate households for some or all of the increased 
energy costs.
The Risk of Damage from Climate Change
    Shifts in climate resulting from the accumulation of greenhouse 
gases in the atmosphere will have many different effects, including 
impacts on regional and seasonal weather patterns; the amount and type 
of precipitation; large storms and hurricanes; oscillations in 
temperature and precipitation; sea level; ocean acidity; ecosystems and 
biodiversity; agriculture, forestry, and fishing; water supply; and 
human health.
    Although linking particular effects to specific changes in global 
temperature is extremely difficult, those effects are expected to 
become increasingly severe as the climate warms. According to the most 
recent major report of the Intergovernmental Panel on Climate Change 
(IPCC), even 1 degree Celsius of additional warming could result in 
increasing drought and decreasing water availability in arid regions 
such as the Mediterranean and the American Southwest; increasing damage 
from storms, flooding, and rising sea level in several regions; 
substantial bleaching of corals and a significant fraction of the 
world's species being placed at increasing risk of extinction; shifts 
in agricultural productivity, with degradation in some regions and 
improvement in others; and changes in the geographic distribution of 
some diseases. Figure 1, which is drawn from the IPCC report, 
summarizes the research about the types of environmental and economic 
changes that might accompany varying changes in the climate.\1\ The 
potential for a rapid, abrupt change in climate to occur if global 
temperatures pass a critical, but uncertain, level is of most 
significant concern. Such rapid change would entail substantial damage 
because it would not allow time for species and ecosystems to adjust. 
For reasons similar to why individuals insure themselves against risks 
they face, policymakers might want to cut CO2 emissions in 
order to reduce the potential for substantial damage.
---------------------------------------------------------------------------
    \1\ Neil Adger and others, ``Summary for Policymakers,'' in M.L. 
Parry and others, eds., Climate Change 2007: Impacts, Adaptation and 
Vulnerability. Contribution of Working Group II to the Fourth 
Assessment Report of the Intergovernmental Panel on Climate Change 
(Cambridge, U.K.: Cambridge University Press, 2007).
---------------------------------------------------------------------------
Figure 1.
Key Effects of Climate Change as a Function of an Increase in Global 
        Average Temperature

        [GRAPHIC] [TIFF OMITTED] T9410A.018
        
    Source: Neil Adger and others, ``Summary for Policymakers,'' in 
M.L. Parry and others, eds., Climate Change 2007: Impacts, Adaptation 
and Vulnerability. Contribution of Working Group II to the Fourth 
Assessment Report of the Intergovernmental Panel on Climate Change 
(Cambridge, U.K.: Cambridge University Press, 2007), p. 16.
    Note: Effects will vary by extent of adaptation, rate of 
temperature change, and socioeconomic pathway.
    a. ``Significant'' is defined as more than 40 percent.
    b. Based on an average rise in sea level of 4.2 millimeters per 
year from 2000 to 2080.
How a Cap-and-Trade Program Would Work
    As part of a global effort to reduce CO2 emissions, the 
United States is considering a cap-and-trade program that would seek to 
mitigate those changes by setting a limit on total emissions during 
some period and requiring regulated firms to hold rights, or 
allowances, to the emissions permitted under that cap. (Each allowance 
would entitle companies to emit one ton of CO2 or to sell 
fuel that would release one ton of CO2 when it was burned.) 
After the allowances for a given period were distributed, firms would 
be free to buy and sell the allowances among themselves. Firms that 
were able to reduce emissions most cheaply would profit from selling 
allowances to firms that had relatively high abatement costs. The 
trading aspect of the program would lead to substantial cost savings 
relative to command-and-control approaches--which would mandate how 
much entities could emit or what technologies they should use--because 
it would provide more flexibility in where and how emission reductions 
necessary to meet any given target were achieved.
    A cap-and-trade program has been implemented at the Federal level 
in the United States to limit emissions of sulfur dioxide (which 
contribute to acid rain). That program has been in effect since 1995 
and is widely judged to have reduced emissions at a significantly lower 
cost than would have been the case if lawmakers had chosen to rely on a 
command-and-control approach. A cap-and-trade program for 
CO2 emissions is currently in effect in the Northeast region 
of the United States, and several states outside that region are 
considering following suit. The European Union has a cap-and-trade 
program for CO2 emissions as part of its effort to comply 
with emission limits under the initial phase of the Kyoto Protocol, 
which spans the period from 2008 to 2012.
Distributional Consequences of a Cap-and-Trade Program
    In establishing a cap-and-trade program, policymakers would create 
a new commodity: the right to emit CO2. The emission 
allowances would have substantial value. On the basis of a review of 
the existing literature and the range of CO2 policies now 
being debated, CBO estimates that by 2020, the value of those 
allowances could total between $50 billion and $300 billion annually 
(in 2006 dollars). The actual value would depend on various factors, 
including the stringency of the cap, the possibility of offsetting 
CO2 emissions through carbon sequestration or international 
allowance trading, and other features of the specific policy that was 
selected.\2\
---------------------------------------------------------------------------
    \2\ Carbon sequestration is the capture and long-term storage of 
CO2 emissions underground (geological sequestration) or in 
vegetation or soil (biological sequestration). For more information, 
see Congressional Budget Office, The Potential for Carbon Sequestration 
in the United States (September 2007).
---------------------------------------------------------------------------
    Policymakers would need to decide how to allocate the allowances 
that corresponded to each year's CO2 cap. One option would 
be to have the government capture the value of the allowances by 
selling them, as it does with licenses to use the electromagnetic 
spectrum. Another possibility would be to give the allowances to energy 
producers or some energy users at no charge. The European Union has 
used that second approach in its cap-and-trade program for 
CO2 emissions, and nearly all of the allowances issued under 
the 14-year-old U.S. cap-and-trade program for sulfur dioxide emissions 
are distributed in that way. Whether policymakers decided to sell all 
of the allowances or give some of them away would have significant 
implications for the distribution of gains and losses among U.S. 
households and for the overall cost of the policy.
Market Forces Would Determine Who Bore the Costs of a Cap
    Obtaining allowances--or taking steps to cut emissions to avoid the 
need for such allowances--would become a cost of doing business for 
firms that were subject to the CO2 cap. However, those firms 
would not ultimately bear most of the costs of the allowances. Instead, 
they would pass those costs along to their customers (and their 
customers' customers) in the form of higher prices. By attaching a cost 
to CO2 emissions, a cap-and-trade program would thus lead to 
price increases for energy and energy-intensive goods and services, the 
production or use of which contributes the most to those emissions. 
Such price increases would stem from the restriction on emissions and, 
except in limited circumstances (for electricity in states with price 
regulations, for instance), would occur regardless of whether the 
government sold emission allowances or gave them away. Indeed, the 
price increases would be essential to the success of a cap-and-trade 
program because they would be the most important mechanism through 
which businesses and households would be encouraged to make 
economically motivated changes in investment and consumption that 
reduced CO2 emissions.
    The rise in prices would impose a larger burden, relative to 
income, on low-income households than on high-income households for two 
reasons. First, low-income households spend a much larger fraction of 
their income than do high-income households. In addition, energy-
intensive items compose a greater share of low-income households' total 
expenditures. Data collected by the Bureau of Labor Statistics 
indicates that, measured as a share of income, spending on energy-
intensive items by households in the lowest income quintile averages 
more than five times that by households in the highest income quintile 
(see Table 1).
Table 1.

            Average Annual Household Expenditures on Energy-Intensive Items, by Income Quintile, 2007
                                                    (Dollars)
----------------------------------------------------------------------------------------------------------------
                                                                      Quintile                            All
                                              ------------------------------------------------------------------
                                                 Lowest     Second     Middle     Fourth    Highest   Households
----------------------------------------------------------------------------------------------------------------
Utility Expenditures                              1,203      1,596      1,840      2,181      2,847       1,934
Gasoline Expenditures                             1,046      1,768      2,418      2,988      3,696       2,384
    Total Spending on Energy-Intensive Items      2,249      3,364      4,258      5,169      6,543       4,318
    Total as a Percentage of Income                21.4       12.2        9.2        7.1        4.1         6.8
----------------------------------------------------------------------------------------------------------------
Note: Energy-intensive items include natural gas, electricity, fuel oil, other heating fuels, gasoline, and
  motor oil.
Source: Congressional Budget Office based on data from Bureau of Labor Statistics, Consumer Expenditure Survey,
  2007 (www.bls.gov/cex/2007/Standard/quintile.pdf).

    Although the price of energy-intensive items such as electricity, 
natural gas, home heating fuels, and gasoline would increase the most, 
the price of most items would rise in response to the imposition of a 
cap-and-trade program (because energy is an input for almost all goods 
and services). The price increases (as a percentage of income) for 
items that were not energy-intensive would account for approximately 40 
percent of the total price increases for households.
    The price increases caused by a cap-and-trade program would impose 
additional costs on households. For example, without incorporating any 
benefits to households from lessening climate change, CBO estimates 
that the price increases resulting from a 15 percent cut in 
CO2 emissions could cost the average household roughly 
$1,600 (in 2006 dollars), ranging from nearly $700 in additional costs 
for the average household in the lowest one-fifth (quintile) of all 
households arrayed by income, to about $2,200 for the average household 
in the highest quintile.
    The higher prices that would result from a cap on CO2 
emissions would reduce demand for energy and energy-intensive goods and 
services and thus create losses for some current investors and workers 
in the sectors of the economy that supply such products. Investors 
might see the value of their stocks decline, and workers could face 
higher risk of unemployment as jobs in those sectors were cut. Stock 
losses would tend to be widely dispersed among investors because 
shareholders typically diversify their portfolios. In contrast, the 
costs of unemployment would probably be concentrated among relatively 
few households and, by extension, their communities. The magnitude of 
those transitional costs would depend on the pace of emission 
reductions, with more rapid reductions leading to larger transitional 
costs.
Policymakers Would Determine Who Received the Value of the Allowances
    Although the price increases triggered by a cap-and-trade program 
for CO2 emissions would have a greater impact, relative to 
income, on lower income households, the program's ultimate 
distributional effect would depend on policymakers' decisions about how 
to allocate the emission allowances. Those allowances would be worth 
tens or hundreds of billions of dollars per year. Who received that 
value would depend on how the allowances were distributed.
    Lawmakers could choose to offset the price increases experienced by 
low-income households or the costs imposed on workers in particular 
industrial sectors by providing for the sale of some or all of the 
allowances and using the revenue to pay compensation. For example, CBO 
previously examined the distributional effects of a cap-and-trade 
program that would reduce CO2 emissions in the United States 
by 15 percent. That 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.\3\ In that case, the size of the 
rebate would be larger than the average increase in spending by low-
income households resulting from the higher price of energy (see the 
top panel of Figure 2).\4\ High-income households would be worse off 
under that scenario (again, excluding any benefit from reducing the 
risks associated with climate change) because the average increase in 
their spending would be larger than the rebate.
---------------------------------------------------------------------------
    \3\ See Congressional Budget Office, Who Gains and Who Pays Under 
Carbon-Allowance Trading? The Distributional Effects of Alternative 
Policy Designs (June 2000).
    \4\ One researcher has suggested that an environmental tax credit 
based on earnings also could reduce the regressive effects of the price 
increases that would result from a tax or cap on CO2 
emissions. See Gilbert E. Metcalf, A Proposal for a U.S. Carbon Tax 
Swap, Discussion Paper 2007-12 (Washington, D.C.: Brookings 
Institution, Hamilton Project, October 2007).
---------------------------------------------------------------------------
Figure 2.
Effects of a 15 percent Cut in CO2 Emissions, with the 
        Allowances' Value Used in Various Ways
    (Percentage change)
    [GRAPHIC] [TIFF OMITTED] T9410A.019
    
    Sources: Congressional Budget Office (top panel); Terry M. Dinan 
and Diane Lim Rogers (bottom panel), ``Distributional Effects of Carbon 
Allowance Trading: How government Decisions Determine Winners and 
Losers,'' National Tax Journal, vol. 55, no. 2 (June 2002), 199-221.
    Notes: These figures do not reflect any of the benefits from 
reducing climate change.
    The policy examined here is a cap-and-trade program designed to 
reduce carbon dioxide (CO2) emissions by 15 percent from 
1998 levels. (CBO performed the analysis in 2000 and used 1998 emission 
levels so the distributional effects could be based on actual, rather 
than projected, data on consumer spending and taxes.) In the top panel, 
the costs of the cap-and-trade policy are shown as decreases in real 
household income, measured as a percentage of aftertax income before 
the policy change. Those numbers reflect data on each quintile's cash 
consumption and estimates of cash income. (A quintile contains one-
fifth of U.S. households arrayed by income.) Because of data 
limitations, those numbers should be viewed as illustrative and broadly 
supportive of the conclusions in this analysis rather than as precise 
estimates.
    a. Indicates the net effect of households' increased expenditures 
because of cap-induced price increases and the income that households 
would receive as a result of the allowance-allocation strategy.
    b. These estimates assume that the government would use any 
positive net revenue remaining after accounting for ways in which the 
policy affected the Federal budget to provide equal lump-sum rebates to 
households. The results would be more regressive if the government used 
any positive net revenue to decrease corporate taxes or payroll taxes.

    In contrast, using the revenues from selling allowances to reduce 
corporate income taxes would provide smaller offsets to the price 
increases experienced by low-income households than would an equal 
lump-sum rebate to every household. Although corporations write the 
checks to pay the corporate income tax, that money ultimately comes 
from households through some combination of lower returns to capital, 
lower wages, and higher prices. The issue of who pays the tax is 
uncertain, but most assumptions about the incidence of the tax suggest 
that higher-income households pay a greater portion of the corporate 
income tax than low-income households and that the benefits to low-
income households from reducing corporate income taxes would not offset 
the increased costs from higher energy prices. Using the revenues from 
selling allowances to decrease payroll taxes would also provide smaller 
offsets to low-income households than would an equal per-household 
rebate. That offset would be less than the increased costs borne by 
low-income households but larger than the offset provided by a 
reduction in corporate income taxes.
    Giving all or most of the allowances to energy producers--as was 
done in the cap-and-trade program for sulfur dioxide emissions--would 
also exacerbate the regressivity of the price increases. The reason is 
that the prices of those goods and services would go up, regardless of 
whether producers were required to purchase the allowances or received 
them for free (because the price increases stem from the restriction on 
emissions). Those price increases would reflect the value of the 
allowances. If companies benefited from the price increases but did not 
have to purchase the allowances, they would receive windfall profits, 
which could be very large. For example, in 2000, CBO estimated that if 
emissions were reduced by 15 percent and all of the allowances were 
distributed free of charge to producers in the oil, natural gas, and 
coal sectors, the value of the allowances would be 10 times the 
combined profits of those producers in 1998. Thus, the windfall gains 
that they would receive as a result of the free allocation would far 
outweigh the loss in sales that they might experience as consumers cut 
back on their use of fossil fuels.
    The profits resulting from a free allocation of allowances would 
accrue to shareholders, who are primarily from higher-income 
households. That additional income would more than offset those 
households' increased spending. Low-income households, by contrast, 
would benefit little if allowances were given to energy producers for 
free, and they would still bear a disproportionate burden from the 
price increases that would nonetheless occur. Thus, giving away 
allowances would be significantly regressive, making higher-income 
households better off as a result of the cap-and-trade policy and 
making lower income households worse off.
Reducing the Overall Economic Impact of a CO2 Cap
    How lawmakers allocated the revenue from selling emission 
allowances would affect not only the distributional consequences of a 
cap-and-trade policy but also its total economic cost. For instance, 
the government could use the revenue from auctioning allowances to 
reduce existing taxes that tend to dampen economic activity--primarily, 
taxes on labor, capital, or personal income. A CO2 cap would 
have economic effects like those of raising such taxes: The higher 
prices caused by the cap would reduce real (inflation-adjusted) wages 
and real returns on capital, which would be equivalent to raising 
marginal tax rates on those sources of income. Using the value of the 
allowances to reduce such taxes could help mitigate that adverse effect 
of the cap. Alternatively, policymakers could choose to use the revenue 
from auctioning allowances to reduce the Federal deficit. If that 
reduction lessened the need for future tax increases, the end result 
could be similar to dedicating the revenue to cuts in existing taxes.
    The decision about whether or not to sell the allowances and use 
the proceeds in ways that would benefit the economy could have a 
significant impact on the efficiency cost of an emissions cap. (The 
efficiency cost of a policy reflects the additional costs that 
producers would incur in order to produce goods in a way that led to 
lower emissions; it also reflects the loss in well-being that consumers 
would experience as a result of forgoing consumption of goods.) For 
example, the efficiency cost of a 15 percent cut in emissions could be 
reduced by more than half if the government sold allowances and used 
the revenue to lower corporate income taxes, rather than devoting the 
revenue to providing lump-sum rebates to households or giving the 
allowances away (see the bottom panel of Figure 2).
    In choosing among options for using revenues from the sale of 
allowances, policymakers could face a tradeoff between providing 
targeted assistance to low- and moderate-income households and 
offsetting some of the adverse effects on economic activity caused by 
the price increases. For example, using some of the auction proceeds 
for an equal lump-sum rebate paid to every household in the United 
States (set at an amount equal to the increase in energy costs for the 
average household) could actually more than offset the average increase 
in spending on energy-intensive goods by low-income households; 
however, a lump-sum rebate would not lower existing tax rates and thus 
would not offset any of the adverse effects that higher energy prices 
had on incentives to work. In contrast, using a portion of the auction 
proceeds to reduce corporate income tax rates could offset a 
substantial share of the additional adverse economic incentives, but it 
would relieve only a small portion of the increase in energy costs 
experienced by low-income households.
    Policies can be designed to achieve a mixture of outcomes. For 
example, lowering payroll tax rates on a portion of earnings or 
reducing the rate at which the earned income tax credit (EITC) phases 
out would target more relief toward lower income families than would a 
reduction in corporate tax rates, while potentially offsetting a small 
fraction of the adverse economic effects of the program.
Options for Offsetting the Economic Impact of a Cap-and-Trade Program 
        on Low-Income Households
    Lawmakers could choose a variety of policies for offsetting the 
costs to households of higher energy prices. An important consideration 
in using revenues to provide assistance to households would be to do so 
in a way that did not incur significant new administrative or 
compliance costs. Using existing transfer programs or providing rebates 
through the income tax system would avoid creating new institutional 
structures for administering payments. Existing systems that already 
collect information on household income also are well suited to 
targeting assistance on the basis of need. No single existing system 
would reach all households, however. For example, only 54 percent of 
households in the lowest fifth of the income distribution receive 
earnings and thus would be likely to file an income tax return (see 
Figure 3). Households that normally would not file a return would need 
to file to participate in a rebate program based on the income tax 
system. The response to the recent stimulus rebates suggests that such 
an approach can work but that 100 percent participation is unlikely.
Figure 3.
Low-Income Households with Income and Benefits from Selected Sources
    (Percent)

    [GRAPHIC] [TIFF OMITTED] T9410A.019
    

    Sources: Congressional Budget Office tabulations and tax 
calculations based on data from the March 2005 Current Population 
Survey.
    Notes: Quintiles are based on household income, unadjusted for 
household size. Quintiles have equal numbers of people.
    SNAP = Supplemental Nutrition Assistance Program; LIHEAP = Low 
Income Home Energy Assistance Program; EITC = earned income tax credit.

    Delivering rebates through a combination of the income tax system 
and existing transfer programs would, in theory, do a better job of 
reaching affected households than would relying on either approach by 
itself, and it would not require a new program. In practice, however, 
it is not easy to coordinate among existing programs to avoid overlap 
and ensure that economically equivalent households receive roughly the 
same benefit. For example, although 54 percent and 45 percent of 
households in the lowest quintile receive earnings and Social Security 
benefits, respectively, 10 percent of households receive both. As a 
result, 11 percent of households in the lowest quintile receive 
neither.
Reductions in Income Tax Rates
    Reductions in individual or corporate income tax rates would be 
straightforward to administer and would provide the largest benefits in 
terms of economic efficiency, but they would score low in terms of 
offsetting energy price increases for low- and moderate-income 
households. Reductions in individual income tax rates would enable 
taxpayers to reduce the amount of taxes withheld from their paychecks 
to cover the cost of additional expenditures on energy-intensive items 
as they occurred throughout the year.
    A proportional reduction in all individual income tax rates would 
provide the largest percentage increase in aftertax income and the 
largest dollar amount of tax reductions for taxpayers in the highest 
income tax brackets; taxpayers in the 10 percent or 15 percent tax 
brackets, who constitute roughly two-thirds of taxpayers with taxable 
income, would receive minimal benefits. Limiting the rate reductions to 
only the two lowest income tax brackets would provide a larger share of 
the tax benefits to taxpayers in those brackets, but taxpayers whose 
income put them near the top of the 15 percent bracket ($41,450 for a 
single taxpayer and $83,000 for a couple in 2008) would benefit the 
most. Reductions in income tax rates would not help low-income 
households that did not have sufficient income to owe income taxes.
    A reduction in corporate income tax rates would benefit owners of 
corporate stock in the short run, with most of the benefits going to 
higher-income households. As capital markets adjusted over the longer 
term, however, the economic gain from reducing the tax would spread 
across all types of capital. And over time, at least some of the 
economic gains could also be shifted to wage earners, although the 
degree of such shifting is uncertain. Nevertheless, any gains by low- 
and moderate-income households from a reduction in corporate taxes 
would be modest--even over the longer term--and insufficient to offset 
their increased energy costs.
Payroll Tax Rebates
    A payroll tax rebate would reach the approximately 165 million 
workers who are covered under the Social Security and Medicare 
Programs. Economist Gilbert Metcalf of Tufts University has proposed a 
payroll tax rebate for Social Security and Medicare taxes as an offset 
to a carbon dioxide tax.\5\ Under that proposal, the rebate would apply 
to the tax on the first $3,660 of earnings. With a combined employee 
and employer tax rate of 15.3 percent, the maximum energy credit per 
worker would be $560.\6\
---------------------------------------------------------------------------
    \5\ Gilbert E. Metcalf, A Green Employment Tax Swap: Using a Carbon 
Tax to Finance Payroll Tax Relief, Tax Reform, Energy, and the 
Environment Policy Brief (Washington, D.C.: Brookings Institution and 
World Resources Institute, June 2007).
    \6\ A payroll tax rebate would not have to affect the financial 
status of Social Security and Medicare or the future retirement 
benefits of workers. Workers would receive credit for their full 
covered earnings, and the Social Security and Medicare trust funds 
could be credited for the full amount of the payroll tax.
---------------------------------------------------------------------------
    Households without covered earnings would not benefit from a 
payroll tax rebate. Many of those households have low income or include 
retirees. Data from the 2008 Current Population Survey, produced by the 
U.S. Census Bureau, indicate that although about 80 percent of all 
households would be eligible for a payroll tax rebate, only slightly 
more than half (54 percent) of the households in the lowest fifth of 
the income distribution would qualify. Among those who qualified, some 
would receive less than a full $560 rebate if their earnings were less 
than $3,660. About three-quarters of the households in that quintile 
who would not qualify for a payroll tax rebate receive Social Security 
benefits and thus would be partially protected from higher energy costs 
by cost-of-living adjustments.
    Administering a payroll tax rebate would be complicated by a number 
of issues. Adjusting payroll tax withholding would impose some 
administrative burden on employers, who also would lack the necessary 
information to adjust withholding for workers with more than one job. 
An alternative to adjusting payroll tax withholding would be to pay the 
rebate through the income tax system when workers filed their returns. 
Although that approach would be easier to administer, the timing of the 
rebate would not coincide with the timing of individuals' increased 
expenditures. Furthermore, because some workers who pay payroll taxes 
do not currently file income tax returns, some additional 
administrative costs would be incurred to process more returns.
    A payroll tax rebate (like any fixed-dollar rebate) would be 
progressive over most of the income distribution, providing benefits 
that were a larger percentage of income for lower income households 
except for those with the very lowest income and little or no earnings. 
(The rebate would not necessarily be equal for households with the same 
income, because the rebate amount would depend upon the number of 
workers within each household.)
    A payroll tax rebate would provide modest incentives for greater 
participation in the labor force by increasing workers' take-home pay. 
It would not offer new work incentives for people already in the labor 
force with earnings high enough to qualify for the maximum rebate.
Income Tax Rebates
    The Internal Revenue Service (IRS) has experience, most recently 
with the 2008 stimulus payments, in delivering rebates based on 
information in income tax returns. When filing, households could claim 
a rebate as a credit against their income tax liability. That 
transaction would present the same timing issues described in the 
preceding section. Unless the rebates were refundable (that is, payable 
in excess of the amount of income tax owed), they would be of little or 
no value to taxpayers who filed income tax returns but owed no income 
tax--which was the case for approximately 45 million of the 138 million 
returns filed in 2006. Moreover, as seen in the experience with 
stimulus payments, the IRS would need to undertake substantial 
educational efforts, and many wage earners and others who otherwise 
would not file income tax returns (because their income falls below the 
statutory requirements for filing) would need to file one to obtain the 
rebate. In 2006, for example, an estimated 20 million households did 
not file a return. Households with very low income and those headed by 
elderly people account for most of the households that do not file a 
return.
    The economic stimulus rebates that were available in 2008 provide 
an indication of the number of eligible households that are likely to 
file an income tax return in order to claim a rebate. The IRS received 
approximately 156 million individual income tax returns during the 2008 
filing season, the first year in which filers could claim the recovery 
rebate included in the Economic Stimulus Act of 2008. That total 
represents an increase of 16 million returns (11.5 percent) over the 
number received in the previous year. Much of that increase probably 
represents those filing solely to claim the rebate--the annual 
increases in returns received during the 2006 and 2007 filing seasons 
were just 1.6 percent and 3.0 percent, respectively. Although many 
households appear to have filed a return just to claim the rebate, the 
number that did so was a bit below expectations. When the Economic 
Stimulus Act of 2008 was enacted, the Joint Committee on Taxation 
estimated that $106.7 billion in stimulus payments would be paid in 
fiscal year 2008. A total of $94.1 billion was actually distributed in 
that year, although it is difficult to know how much of the shortfall 
was attributable to eligible people failing to claim the rebate. The 
economic stimulus rebates were temporary, however. The percentage of 
eligible households that would file under a permanent program would 
probably be higher.
    A refundable tax rebate of a fixed dollar amount would be 
progressive, providing greater relief as a percentage of income to low-
income households. Rebates can be adjusted for differences in family 
size. They can also be targeted to low-income taxpayers by reducing 
(phasing out) the amount of the credit at higher incomes. For example, 
the individual income tax rebates that were part of the economic 
stimulus package enacted in 2008 were reduced by 5 percent of income in 
excess of $75,000 for individuals and $150,000 for couples. Phasing out 
a rebate reduces its budgetary cost but adds complexity to the 
calculation of tax liability and makes the true tax on additional 
income (the marginal tax rate) less transparent.
    One issue is whether the rebates would be paid to all households or 
only those that met certain income requirements. The recent economic 
stimulus rebates were payable to households without income tax 
liability if their combined income from earnings, Social Security, and 
veterans' disability payments was at least $3,000. Allowing all 
households to claim a refundable income tax rebate would increase 
administrative costs.
    A fixed rebate that did not depend on earnings would not provide 
households with any additional incentives to work or save and thus 
would not offset any of the overall economic costs associated with a 
cap-and-trade program.

Increased EITC Payments
    An option based on the current tax system, and targeted 
specifically toward low-income households, would be to expand the 
earned income tax credit. The EITC is a refundable credit (that is, 
households receive a payment if the credit exceeds their income tax 
liability), payable to low-income families with earnings. In 2008, 
single parents with one child and income up to $33,995 ($36,995 for a 
married couple) were eligible for the credit. Single parents with two 
or more children could qualify with income up to $38,646 ($41,646 for a 
married couple). Childless workers between the ages of 25 and 65 were 
eligible for a much smaller credit but must have had income of less 
than $16,000 to qualify.
    In 2006, taxpayers filed for the earned income tax credit on 23 
million tax returns. The total amount of the credit was $44.4 billion, 
of which $39.1 billion (88 percent) was refundable. About half of the 
total EITC payments went to families whose income was less than 
$15,000.\7\
---------------------------------------------------------------------------
    \7\ Internal Reveune Service, Statistics of Income--2006: 
Individual Income Tax Returns , Publication 1304 (Rev. 07-2008), 2008.
---------------------------------------------------------------------------
    Increasing the EITC payments would be straightforward for the IRS 
to administer. If the increase was proportional to the existing credit, 
most of the benefits would go to low-income families with children and 
very few to childless workers. Increasing the EITC would not provide 
any benefits to households without earnings, however.
    An expansion of the EITC could also yield economic benefits. For 
example, studies have found that increases in the EITC have had a 
positive effect on the participation of low-income single women in the 
labor force.\8\ Although increasing the EITC would raise marginal tax 
rates for some workers, there appears to be little adverse effect on 
the number of hours worked by people who are already working.
---------------------------------------------------------------------------
    \8\ See Bruce D. Meyer, ``The U.S. earned income tax credit, Its 
Effects, and Possible Reforms,'' Harris School of Public Policy Studies 
(University of Chicago) and National Bureau of Economic Research 
(August 2007); and Nada Eissa and Hilary W. Hoynes, ``Behavioral 
Responses to Taxes: Lessons from the EITC and Labor Supply,'' in James 
M. Poterba, ed., Tax Policy and the Economy, vol. 20 (Cambridge, Mass.: 
MIT Press, 2006), pp. 74-110.
---------------------------------------------------------------------------
Automatic Increases in Social Security and Supplemental Security Income 
        Benefits
    Households receiving benefits from the Social Security or 
Supplemental Security Income (SSI) programs would be partially 
protected from higher energy costs because those benefits are 
automatically increased each year to reflect increases in consumer 
prices. Therefore, considered in combination with automatic increases 
in Social Security benefits and SSI, options such as a payroll tax 
rebate that are limited to households with earnings can reach a large 
portion of the low- and moderate-income population. Data from the 
Current Population Survey indicate that about 95 percent of households 
would qualify for a payroll tax rebate or an automatic cost-of-living 
increase in Social Security benefits, including 85 percent to 90 
percent of households in the lowest income quintile. Cost-of-living 
increases for Social Security and SSI would only partially protect 
households receiving those benefits because income from those sources 
covers only part of their total expenditures. That effect would be 
exacerbated because expenditures on energy-intensive items are a higher 
share of total expenditures for the elderly (see Table 2).
Table 2.

                  Average Annual Household Expenditures on Energy-Intensive Items, by Age, 2007
                                                    (Dollars)

                                                                 Under Age 65   Age 65 and Over   All Households

Utility Expenditures.........................................           1,947            1,880            1,934
Gasoline Expenditures........................................           2,607            1,461            2,384
    Total Spending on Energy-Intensive Items.................           4,554            3,341            4,318
    Total as a Percentage of Income..........................             6.6              8.3              6.8

Note: Energy-intensive items include natural gas, electricity, fuel oil, other heating fuels, gasoline, and
  motor oil.
Source: Congressional Budget Office based on data from Bureau of Labor Statistics, Consumer Expenditure Survey,
  2007 (www.bls.gov/cex/2007/Standard/sage.pdf).

Supplement to SNAP Benefits
    An energy credit based on the same eligibility rules as those for 
the Supplemental Nutrition Assistance Program (SNAP, formerly known as 
the Food Stamp Program) would be a way to target benefits to low-income 
households. To be eligible for SNAP, an applicant's monthly income must 
be at or below 130 percent of the poverty guideline ($2,238 for a 
family four) and countable assets must be less than $2,000 ($3,000 for 
households with elderly or disabled members). Approximately 27 million 
people receive SNAP benefits each month. About 65 percent of eligible 
people participate in the program, and nearly 90 percent of eligible 
children do.\9\
---------------------------------------------------------------------------
    \9\ Kari Wolkwitz, Trends in Food Stamp Program Participation 
Rates: 1999–2005 (prepared by Mathematica Policy Research for the 
U.S. Department of Agriculture, Food and Nutrition Service, June 2007).
---------------------------------------------------------------------------
    An energy credit could be distributed to households through the 
same system as SNAP benefits, which are paid through an electronic 
benefit transfer system. Those SNAP benefits are deposited 
electronically in individual accounts each month, and recipients use a 
card to debit their account when paying for groceries.
    An energy supplement to SNAP benefits would not affect work or 
savings incentives at the margin and thus would not offset any of the 
economic efficiency costs of higher energy prices.
Increased Funding for the Low-Income Home Energy Assistance Program
    Increases in funding for the Low-Income Home Energy Assistance 
Program (LIHEAP) could supplement other options for offsetting higher 
energy costs but by themselves would not be an effective way to help 
the majority of low- and moderate-income households. Federal rules 
restrict LIHEAP assistance to households with income up to 150 percent 
of the Federal poverty guideline (or 60 percent of state median income 
if greater). States, however, can choose to set lower income limits, 
and as a result, eligibility requirements vary from state to state. In 
2006, an estimated 5.5 million households received assistance through 
LIHEAP--about 16 percent of federally eligible households.
    Providing assistance to all low- and moderate-income households 
would require a major expansion of the program, a substantial increase 
in administrative costs, and possibly a major overhaul of the program. 
The current program is funded as a block grant from the Federal 
Government to the states and other entities, leaving wide latitude in 
the types of assistance provided. Increasing LIHEAP subsidies could 
raise the overall cost of achieving a given cap because it would offset 
the price signals that are necessary to motivate households to 
undertake low-cost reductions.

Increased Incentives for Energy-Saving Investments by Households
    The increase in energy prices that would result from a cap-and-
trade program would encourage businesses and households to adjust their 
energy usage. Using revenues from auctioning allowances to subsidize 
household investments that reduced carbon dioxide emissions would lower 
the cost to households of adapting to higher energy prices. For 
example, subsidizing weatherization improvements would enable 
households to use less energy for heating and cooling.
    However, incentives for energy-saving investments in combination 
with a cap-and-trade program would not reduce CO2 emissions 
below the level set by the program. Although investment incentives 
could alter the timing of emission reductions by lowering the cost of 
meeting the targets, the cap set by the program would ultimately 
determine the total amount of the reductions.
    Furthermore, such incentives could increase the total costs (both 
public and private) of meeting the cap because they would encourage 
households to choose certain alternatives over others in adjusting to 
higher energy prices. For example, a tax credit for solar heating would 
encourage the use of that technology even if it was not the most cost-
efficient alternative in the absence of the credit. Creating a tax-
incentive system without distorting technology choices is difficult.
    A wide variety of deductions or credits related to energy savings 
already exist at both the Federal and state levels. A Federal credit 
(termed the section 45 production tax credit) is available for 
electricity produced using certain renewable energy sources, including 
wind, biomass, geothermal energy, solar energy, and others. Other 
credits are available for the manufacture of energy-saving appliances, 
the construction of new energy-efficient homes, energy-efficient 
improvements to existing homes, and purchases of alternative types of 
motor vehicles.

                                 

    Chairman MCDERMOTT. Thank you very much for your testimony.
    Dr. Burtraw.

 STATEMENT OF DALLAS BURTRAW, PH.D., SENIOR FELLOW, RESOURCES 
                         FOR THE FUTURE

    Dr. BURTRAW. Thank you for the opportunity to testify 
today.
    I am senior fellow at Resources for the Future. RFF takes 
no position on issues and neither lobbies on specific 
proposals. The views I express are my own.
    The main point I would like to convey is that the primary 
impact on households----
    Chairman MCDERMOTT. Did you hit your mic? There's a button 
down at the bottom that will--there you go.
    Dr. BURTRAW. Okay. The light's on.
    Chairman MCDERMOTT. Okay.
    Dr. BURTRAW. The main point I would like to convey is that 
the primary impact on households depends on the way emission 
allowances are distributed under the cap-and-trade or the way 
revenues would be distributed under an emissions tax.
    It is possible to fully compensate all low- and moderate-
income families and there are several ways this could be 
accomplished. To understand the impact on households, though, 
it is essential to characterize a complete policy. One part is 
the introduction of a price on CO2. This affects the 
costs of energy directly and it affects indirectly the costs of 
goods and services throughout the economy.
    The second part of the policy is how the CO2 
allowance value, or equivalently the revenue collected under 
the tax, is distributed in the economy. That is because the 
cost of CO2 allowances is the lion's share of the 
cost that's imposed on households.
    For example, under the Liebermann-Warner proposal, by 2015 
the CO2 price would be $21 per ton. Households would 
feel an average impact of $928 per year from changes in energy 
prices and the costs of goods and services.
    The value of allowances constitutes $843 of this sum, or 90 
percent of the total impact on households. The different is the 
real cost to the economy, just $86 per household, or less than 
10 percent of the total cost on households.
    So, allowances can be given away, or they can be auctioned, 
but the key is how their value is distributed.
    For this reason, you might say that the distribution of 
allowance value or tax revenue is more important for 
determining the cost on households than the actual stringency 
of the policy.
    One might be most concerned about the impact on lower 
income households, because they spend a large fraction of the 
their income on energy and are less able to make investments 
that might soften the blow from changing energy prices.
    Options such as either expansion of the earned income tax 
credit or dividends from auction revenues per capita to 
households would be strongly progressive and would protect low-
and moderate-income households.
    In fact, the entire bottom half of the income distribution 
could expect to come out ahead under these climate policies. 
That is, the revenue they receive back would be greater than 
their change in costs at the household level.
    Another option would be reducing the income tax. This is 
unfortunately very regressive. Households in the bottom eight 
deciles of the income distribution would remain worse off under 
the policy.
    We've also assessed the regional impacts of different 
policies. There are differences, especially for low-income 
households. The Mid-Atlantic and Ohio Valley regions could be 
most hard-hit. In comparison to the nation as a whole, where 
about 50 percent of households on average benefit from a cap 
and dividend policy, in these regions only roughly the bottom 
30 percent of households on the income ladder would benefit.
    Next, in the Northeast and plains States, the figure is 
about 35 percent.
    Finally, I will comment on some other approaches to 
allocation. Free allocation to incumbent emitters or 
grandfather, would be regressive because the value of free 
allowances accrues primarily to higher-income households that 
own a relatively higher portion of shareholder equity.
    In addition it directs about 10 percent of the allowance 
value overseas to foreign owners of shareholder equity.
    Other options would provide special treatment for some 
types of energy use, such as personal transportation or home 
heating. This leads to higher allowance prices, because greater 
emission reductions would have to be achieved in other sectors.
    In the case of free allocation to electricity consumers 
through allocation to the local distribution companies, our 
research indicates this could cause the allowance price to rise 
by 15 percent, raising the cost of using other fuels even 
further. It is not obvious whether this will diminish or 
amplify regional differences or make households better off.
    In closing, Federal climate policy could be designed to 
benefit most households or it could impose potentially 
significant costs on most households. Most certainly the 
distribution of allowance value can safeguard the majority of 
low- and moderate-income households. There are a variety of 
ways to accomplish this.
    Cap and dividend across the population may offer an 
advantage in that it suggests an equal franchise in the 
climate, something economists call a common pool resource 
potentially creating more durable political support, and a more 
stable long-run climate policy.
    More broadly, however, I think it is critical that the 
goals of transparency and simplicity be front and center in the 
design of climate policy.
    Thank you.
    [The prepared statement of Dr. Burtraw follows:]

 Statement of Dallas Burtraw, Ph. D., Senior Fellow, Resources for the 
                                 Future

    Mr. Chairman, thank you for the opportunity to testify before the 
House Committee on Ways and Means' Subcommittee on Income Security and 
Family Support. My name is Dallas Burtraw, and I am a senior fellow at 
Resources for the Future (RFF), a 57-year-old research institution 
based in Washington, D.C., that focuses on energy, environmental, and 
natural resource issues. RFF is independent and nonpartisan, and shares 
the results of its economic and policy analyses with environmental and 
business advocates, academics, government agencies and legislative 
staff, members of the press, and interested citizens. RFF neither 
lobbies nor takes positions on specific legislative or regulatory 
proposals. I emphasize that the views I present today are my own.
    I have studied the performance of emissions cap-and-trade programs 
from both scholarly and practical perspectives, including evaluation of 
the sulfur dioxide (SO2) emissions allowance trading program 
created by the 1990 Clean Air Act Amendments, the nitrogen oxide 
(NOX) trading program in the northeastern United States, and 
the European Union Emission Trading Scheme (EU ETS). I have conducted 
analysis and modeling to support the state and regional efforts to 
design trading programs, and I served on California's Market Advisory 
Board overseeing the state's greenhouse gas initiative. Recently, with 
colleagues at Resources for the Future, I have conducted economic 
analysis to understand the distributional impacts of climate policy on 
households, paying close attention to differences across regions and 
income groups.

                                 * * *

    The leading proposal to reduce emissions of greenhouse gases is a 
cap-and-trade policy whereby the economy is subject to an overall cap 
on total emissions. Emissions permits, or allowances, would be 
distributed into the economy. Polluters could buy, sell, or trade with 
one another while still maintaining the overall cap. There are many 
similarities between cap and trade and an emissions tax, in that both 
place a scarcity value on carbon dioxide (CO2) emissions and 
thereby provide a price signal that is expected to encourage innovation 
and investment in lower-emitting technologies and also to trigger 
changes in consumer behavior.
    In order to understand the effects of such a policy on households, 
it is essential to characterize the complete policy, which has two main 
components. One is the introduction of a price on CO2. The 
way that households are affected by this aspect of the policy will 
depend on the CO2 emissions embodied in their economic 
activities--both the emissions embodied in the direct energy use in the 
home and the emissions embodied in their indirect purchase of goods and 
services.
    The second component of the policy is the way this new value 
associated with placing a price on CO2 is distributed in the 
economy. It is a big error to evaluate this policy by focusing on the 
first component alone, because it implicitly assumes that the value 
disappears. In fact, the value is substantial, and its assignment is a 
central decision facing policymakers in the design of climate policy.
    For example, a cap-and-trade policy in which the allowances are 
auctioned and the auction revenues returned to households in a lump-sum 
manner leads to quite different impacts on households than a policy in 
which the auction revenues are used to reduce income taxes or a policy 
in which there is no auction but rather the allowances are distributed 
for free to existing emitters. To assess the full impacts of carbon 
policy, both the impacts of the price and the impacts of the 
distribution scheme are of critical importance.
    Before addressing several specific questions, I want to draw 
attention to the magnitude of the value that would be created by 
placing a price on CO2 in the United States. A 
CO2 cap-and-trade program would constitute the greatest 
creation of government-enforced property rights since the 19th century. 
Depending on the stringency of the cap and breadth of the program, the 
annual market value of these property rights will range from $100 
billion to $370 billion, depending on the coverage and stringency of 
the program. The means by which these rights are organized and 
initially distributed each year is of historic significance for the 
economy as well as the environment. Policymakers might frame the 
decision about allocating emissions allowances in the following way: 
Imagine we are implementing a new program that will create well over a 
trillion dollars in value in the next decade. Now, how do you want to 
allocate that value? The answer to this question will determine the 
answer to the main questions facing this committee, including the 
effect on low- and moderate-income families.
    I would like to make one additional point. The value of emissions 
allowances under a cap-and-trade program (or the tax revenue collected 
under an emissions tax) would be substantially greater than the cost of 
the resources actually used to achieve emissions reductions. For this 
reason, you might say the distribution of the value of emission 
allowances is more important to the cost on households than is the 
actual stringency of the program.
    For example, implementation of the Lieberman-Warner level goals can 
be expected to result in an economywide CO2 allowance price 
of $20.91 per metric ton by 2015 (2006 dollars), according to modeling 
from the Energy Information Administration.\1\ This price is expected 
to accomplish a 13 percent reduction in emissions from 2006 levels, and 
16.5 percent reduction from the forecast business as usual levels for 
2015. A first-order estimate of the costs of achieving this reduction 
is $11.3 billion, but the estimated value of the allowances is $114 
billion (2006 dollars). Thus, the real economic loss comprises just 10 
percent of the cost of the program on households, and the allowance 
value (or tax revenue) comprises about 90 percent of the cost on 
households. The allowance value would be available to achieve a range 
of potential goals, including achieving desirable distributional 
outcomes. This fact highlights the important role played by the 
allocation of emissions allowances, or the distribution of carbon tax 
revenues, in determining the distributional outcome of climate policy 
under cap-and-trade or a carbon tax.
---------------------------------------------------------------------------
    \1\ Energy Information Administration, Energy Market and Economic 
Impacts of S.2191, the Lieberman-Warner Climate Security Act of 2007, 
SR/OIAF/2008-01 (Washington, DC, April 2008), web site http://
www.eia.doe.gov/oiaf/servicerpt/s2191/pdf/sroiaf(2008)01.pdf. See 
supplementary spreadsheet National Energy Modeling System run 
S2191.D031708A.
---------------------------------------------------------------------------
    With this information as background, I will address questions that 
frame the agenda for this hearing.

1. In what ways might climate control legislation disproportionately 
        impact low- and moderate-income households?
    Climate control legislation implemented through the introduction of 
a price on CO2 emissions can be expected to affect household 
expenditures and disposable income in several ways. One is through the 
change in prices for direct energy expenditures. Second is through the 
change in prices of other goods and services in the economy. Third is 
through the change in government's own expenditures associated with an 
increase in the price of fuels, which has implications for the tax 
burden of households. Fourth, there is a possibility that a household 
could be affected by changes in employment and income possibilities as 
a result of changing forces in the economy. I focus only on the effect 
on household expenditures.
    Low-income households spend a larger share of their income on 
direct energy expenditures than do households at higher-income levels. 
This suggests that unmitigated changes in energy prices could most 
seriously impact low-income families. For example, my analysis shows 
that households in the bottom decile spend about 24 percent of their 
disposable income on direct energy purchases (electricity, personal 
transportation, home heating), while their counterparts in the top 
decile only spend 3.6 percent.
    There are a variety of reasons that one might be most concerned 
about the impact on lower-income households, in addition to the fact 
that they bear a relatively larger burden from climate policy. These 
households have less discretionary income that can be directed to 
investments that might soften the blow from changing energy prices. 
Hence, they may be less able to adapt to a changing economy. Moreover, 
lower-income households may be subject to greater effects from a 
changing climate because of the location and condition of the 
neighborhoods and housing in which they live.
    This does not mean that lower-income households necessarily will be 
made worse off from climate policy. In fact, lower-income households 
can easily benefit relative to richer households depending on how 
carbon revenue is allocated. That is because the absolute value of the 
change in costs is less for lower-income households than for others, so 
it takes relatively less to compensate them.

2. What factors should the Committee consider when attempting to 
        mitigate any costs for low-and moderate-income consumers that 
        may result from climate control legislation?
    First, the introduction of a price on CO2 would be 
fairly regressive, meaning that it would disproportionately affect 
lower-income households, which spend a larger portion of their income 
on energy expenditures. Second, the assignment of the value from the 
CO2 price--either the value of emissions allowances, if 
allocated for free or the government revenue collected under an 
allowance auction--has a major influence on how the burden is 
ultimately shared.
    Similarly, the economic costs will not be uniform across different 
regions. Different parts of the country have both different levels and 
patterns of energy expenditures. In the Northeast and the Mid-Atlantic 
area, home heating contributes importantly to expenditures, but not so 
in the South. In contrast, on average electricity and gasoline 
expenditures are substantially greater as a percentage of income in the 
South than for other regions. Moreover, the CO2 emissions 
associated with electricity use varies greatly in different parts of 
the country because the fuel used to generate electricity varies.
    Most existing research on the distributional ramifications of 
climate policy examines only the effects of putting a price on 
CO2. We have analyzed 10 climate policy scenarios that vary 
in the manner that they assign the allowance value that is created 
under the program. Five scenarios we have considered address the use of 
revenue directly, including returning the revenue directly to 
households as taxable income on a per capita (or per adult) basis, 
returning the revenue as nontaxable income, or using the revenue to 
reduce the income tax, the payroll tax, or to expand the Earned Income 
Tax Credit (EITC). Five other scenarios examine options for the 
electricity sector including free allocation to local distribution 
companies and expenditure of allowance value on energy efficiency, 
exemption of particular sectors--specifically home heating and personal 
transportation--and finally, free allocation to incumbent emitters.
``Cap-and-dividend'' options
      Per-capita (taxable) dividend of allowance revenues to 
households (e.g. income taxes would be paid on those dividends)
      Per-capita (nontaxable) dividend of allowance revenues to 
households
Adjustments to preexisting taxes
      Reduction in income taxes
      Reduction in payroll taxes
      Expansion of the Earned Income Tax Credit
Energy and fuel sector options
      Free allocation of allowances to consumers in the 
electricity sector (accomplished by allocation to local distribution 
companies, namely retail utilities)
      Exemption of the transportation sector from the cap-and-
trade program
      Exemption of the home heating sector from the cap-and-
trade program
      Investment in end-use energy efficiency
Free allocation to emitters
      Grandfathering to incumbent emitters.

    (Note that several of these policies would not use all of the 
allowance value. The ultimate distributional consequence of the policy 
will depend on how all the value is distributed. We consider the 
incremental effect of each type of allocation.)
    We find expansion of the EITC, and the cap-and-dividend programs 
that directly return revenue to households are strongly progressive. In 
contrast, three policies appear severely regressive, even more so than 
before accounting for the use of the revenue. These include free 
allocation to incumbent emitters (grandfathering), reducing income 
taxes, and reducing payroll taxes. Free allocation to emitters directs 
about 10 percent of the allowance value overseas to foreign owners of 
shareholder equity and therefore not available to any income group in 
the United States. Additionally, this option is decidedly regressive 
because the value of the free allowances accrues primarily to higher-
income households which own a relatively higher portion of shareholder 
equity.
    While the case for equity across income groups is straightforward, 
interregional equity is more complicated due to differences in 
preexisting policies and incurred costs, energy prices, resources, and 
lifestyle choices. Some regions have already enacted policies to reduce 
their carbon footprint, with California being the prime example.
    Nonetheless, important differences emerge and the biggest regional 
differences affect poor households. Low-income households in the bottom 
quintile of the income distribution in Texas, California, and the 
Northwest are the least vulnerable, while low-income households in the 
Northeast, Ohio Valley, followed by the Mid-Atlantic and Plains states 
are the most vulnerable.
    We examined five policies in detail that use revenue to return 
allowance value directly to households or to reduce the income tax, the 
payroll tax, or to expand the EITC. (We assume that 14 percent of 
allowance value accrues to government to pay for its own increase in 
expenditures.) We examined the effects on households in 2015, from a 
policy equivalent in stringency to the Lieberman-Warner proposal. This 
would yield a CO2 allowance price of $20.91 (2006 dollars) 
and emission reductions of 16.5 percent from a business-as-usual 
baseline for 2015, or 13 percent from 2006, according to the Energy 
Information Administration.
    Under this policy, we estimate that households would feel an 
average impact of $928 from changes in energy prices and indirect 
changes in the costs of other goods and services. We estimate the real 
economic cost on an average household basis would be $86. The 
difference is the value of emissions allowances, equal to about $843 
per household (2006 dollars). Consequently, the actual effect on 
household well being will depend crucially on the distribution of that 
allowance value.
    As noted already, three of these policies would be progressive in 
that the costs would not fall heavily on low-income households. These 
include cap-and-dividend policies (either taxable or nontaxable 
dividends) and an expansion of the EITC. In fact, in these three cases 
low- and moderate-income households could expect to benefit from the 
policy. One way to consider this is to ask what percentage of 
households, when measured along the income distribution would benefit. 
For all three policies we find that half of all households in the 
nation would benefit--that is, after returning revenues either as a 
lump-sum payment or as an expansion of the EITC, about half of 
households come out ahead under these climate policies. The crossover 
point where households would begin to be worse off is in the sixth 
income decile. Measured in this way, a slightly larger share of 
households benefit from cap and dividend than from expansion of the 
EITC because the credit removes some dividend from all households and 
concentrates it in households that qualify for it.
    In contrast, reducing income tax is regressive. Households in the 
bottom 8 deciles of the income distribution are made worse off, even 
after accounting for the revenue. Households in the top two income 
deciles are made better off. The reduction in the payroll tax is 
somewhat less dramatic. Households in the bottom deciles are made worse 
off. I hasten to add, however, that the policy we modeled is not the 
same as the sketch reflected in the Obama administration's budget 
proposal, because we assume all households benefit from the reduction 
in their payments to the payroll tax while the administration's 
proposal would provide a lump-sum payment to offset payroll taxes and 
would phase that payment out at higher-income levels.
    As noted already, there can be important differences across 
regions. One way to consider this is to ask: what is the break-even 
point in different regions of the country? We examined this for the 
cap-and-taxable dividend case. On a national basis, slightly more than 
half of households would benefit but that varies across regions. In the 
most vulnerable regions, the Mid-Atlantic and Ohio Valley, roughly 30 
percent of households would benefit from this climate policy. In the 
Northeast and Plains states, only about 35 percent of households would 
benefit.

3. What methods or policies might both mitigate costs for lower-income 
        populations and increase economic efficiency?
    An important consideration is how the use of allowance value could 
contribute to economic growth. Public finance economists have 
emphasized that using the value to reduce pre-existing taxes would spur 
economic growth and reduce the hidden costs associated with the policy. 
Those hidden costs stem from the introduction of a new regulatory 
burden in the economy that acts much like the introduction of a new 
tax. It may provide a disincentive to work to the extent it reduces the 
real wage. If revenue is used to reduce pre-existing taxes then it can 
mitigate most of this effect. Much of the economics literature suggests 
the efficiency gains from using emissions allowance value in this way 
can be very significant. As we have indicated with respect to policies 
to reduce the income tax, however, the effect can be very regressive 
because most of the benefits would accrue to those who earn the most 
income. We obtain similar, but less strong results for a reduction in 
the payroll tax. Each of these approaches can be adjusted to alter this 
affect, as the administration's budget proposal appears to attempt to 
do. Nonetheless, our results highlight the tensions that may exist 
between efficiency and equity in climate policy.
    Expansion of the EITC does not suffer from the same tradeoff. It 
may promote employment for lower-income households and may help 
insulate those households from changes in energy prices.
    One option that also might have the potential to be equitable and 
potentially also economically efficient is investment in energy 
efficiency. However, whether this actually is efficient or simply 
constitutes a subsidy to the consumption energy services hinges on the 
effectiveness of energy efficiency programs that reduce the cost of 
meeting the cap. Implementation of energy efficiency programs has 
proven uneven in the past.
    Finally, it is important to note that exclusion of personal 
transportation or home heating fuels leads to higher allowance prices 
because greater emissions reductions would have to be achieved in other 
sectors. The same is true if allowances are used to compensate 
electricity consumers, and the ramifications are even greater. The 
protection of any of these sectors from changing prices leads to less 
consumer response. Consequently, greater emissions reductions have to 
be achieved in other sectors. In the case of free distribution to 
electricity consumers (through distribution to local distribution 
companies), our research indicates this could cause the allowance price 
to rise by 15 percent.\2\ This raises the cost of using other fuels 
even further, and it is not obvious whether this will diminish or 
amplify differences in the impact of the program across regions.
---------------------------------------------------------------------------
    \2\ A. Paul, D. Burtraw and K. Palmer. 2008. ``Free Allocation to 
Electricity Consumers under a U.S. CO2 Emissions Cap,'' 
Resources for the Future Discussion Paper 08-25.
---------------------------------------------------------------------------
    The subsidy to offset allowance costs associated with consumption 
of any one fuel leads to a violation of the ``law of one price'' that 
is necessary to achieve economic efficiency. As with the allocation of 
any scarce resource, efficiency requires that one price consistently 
reflects the scarcity value of emission allowances. A lower electricity 
price means that electricity consumers would have less incentive to 
purchase energy-efficient air conditioners and refrigerators. In 
practical terms, if you drive a car, or use natural gas to heat your 
home or run your industrial facility, you might be concerned that a 
subsidy to electricity consumers comes at the cost of higher prices for 
other uses of energy.
    In sum, the idea of softening any sudden change in electricity 
prices is compelling but it has an efficiency cost. One may acknowledge 
that, in the short run, consumers have an existing capital stock of 
refrigerators and air conditioners and are constrained in their ability 
to reduce energy use. To achieve emissions reductions, it is important 
to establish the expectation that future prices will rise to reflect 
the scarcity value of CO2 emissions because this would 
provide an incentive for consumers to purchase new appliances, etc.
    The imposition of sudden price changes may be disruptive to the 
economy and perceived as unfair. However, if legislation goes down this 
road, from the standpoint of efficiency it is important to acknowledge 
that allocation to electricity consumers through their local 
distribution companies should be phased out as soon as possible. I 
would suggest a phase out of four years would be appropriate to ease 
the transition. Coupled with two or three years of preparation before 
the program takes effect, this represents close to half the useful life 
of many household appliances.

4. Is it reasonable to presume that a policy can be designed to 
        compensate the large majority of low- and middle-income 
        Americans for the increased costs related to climate control?
    There is one additional consideration I wish to mention. The 
introduction of a price on CO2 in the U.S. economy 
represents the introduction of a long-term institution. The way that 
compensation to low- and moderate-income households is delivered, or 
any group for that matter, may be subject to changes in political 
priorities and may not be any more permanent than the tax cuts of the 
last administration.\3\ My concern is that these changes and the 
political struggles that might ensue can undermine the transparency of 
climate policy and the sense that we pursue it for a common purpose. To 
the extent possible, policy should be transparent and simple. 
Economists would view the atmosphere as a common pooled resource. This 
philosophical perspective suggests equal franchise in the resource and 
equal sharing of its value. An equal dividend approach would be 
consistent with this perspective and may solidify the sense of common 
purpose, and the permanence of the way that value is assigned under 
climate policy. As I see it, this is an added strength of the cap and 
dividend approach. More broadly, however, I think it is critical that 
the goals of transparency and simplicity be front and center in the 
design of climate policy.
---------------------------------------------------------------------------
    \3\ The Jobs and Growth Tax Relief Reconciliation Act of 2003 and 
the Economic Growth and Tax Relief Reconciliation Act of 2001.
---------------------------------------------------------------------------
    The decision about allocating emissions allowances involves a 
familiar trade-off between efficiency and distributional outcomes. 
Federal climate policy would impose potentially significant costs on 
households that would vary depending on the policy enacted. Taken just 
by itself, the introduction of a price on CO2 would be 
regressive, meaning that it would disproportionately affect lower-
income households because they spend a larger portion of their income 
on energy expenditures. But this is just one-half of the equation. The 
ultimate impact of the policy would also depend on how the policy 
distributes the value from the CO2 price--both the value of 
emissions allowances, if allocated for free, and the government revenue 
collected under an allowance auction. If done carefully, the 
distribution of allowance value can safeguard the majority of low- and 
moderate-income households in this country.
    Thank you for the opportunity to testify today.
    Dr. Burtaw is a senior fellow at Resources for the Future. He holds 
a Ph.D. in economics and a master's in public policy from the 
University of Michigan. Dr. Burtraw has conducted research in the 
design of incentive-based environmental policies in the electricity 
industry and written extensively on the performance of emissions 
trading programs in the United States for sulfur dioxide and nitrogen 
oxides and the European Union's Emission Trading System for carbon 
dioxide. He also has advised on the design of climate policy for U.S. 
state governments. He currently serves on the EPA Advisory Council on 
Clean Air Compliance Analysis and on the National Academies of Science 
Board on Environmental Studies and Toxicology.

                                 

    Chairman MCDERMOTT. Thank you very much for your testimony.
    Dr. Stone is the chief economist for the Center for Budget 
and Policy Priorities.
    Dr. Stone.

  STATEMENT OF CHAD STONE, PH.D., CHIEF ECONOMIST, CENTER ON 
                  BUDGET AND POLICY PRIORITIES

    Dr. STONE. Thank you.
    Chairman McDermott, Ranking Member Linder, and other 
Members of the Subcomittee, thank you for the opportunity to 
testify on this important topic.
    The main message of my testimony you heard in the 
Chairman's opening statement and what my fellow witnesses have 
already said, that it is indeed possible for climate change 
legislation to fight global warming effectively, while also 
protecting consumers.
    That might seem like a contradiction, but you've heard how 
the same policies that raise prices to consumers raise revenue 
that can used to offset that impact.
    Just to reiterate the impact of higher prices on consumers 
and the opportunities for returning money to consumers are part 
and parcel of climate policy.
    What is important to remember is that the way to judge the 
impact of climate change legislation on consumers at different 
points in the income distribution is to look at the net impact 
of, first, the hit to budgets from the higher prices, but 
second, the offset to that hit from rebates or other methods of 
using the revenue.
    I'd like to spend the remainder of my remarks talking about 
a concrete proposal developed by the Center on Budget and 
Policy Priorities for using climate change revenues to shield 
low- and moderate-income households from increased poverty and 
hardship in a way that is effective in reaching those 
households, using proven delivery mechanisms with a broad 
reach, that is efficient, with low administrative costs, and 
that is consistent with the goals of fighting global warming 
effectively.
    I will also talk about the Center's recent development of 
options for modifying this proposal, to extend consumer relief 
farther up the income scale while still protecting those who 
are most vulnerable.
    With the goals I laid out in mind, the Center has designed 
a climate rebate that would efficiently offset the average 
impact of higher energy-related prices arising from 
restrictions on greenhouse gas emissions on low- and moderate-
income households.
    The rebate would be delivered each month to very low-income 
households through State electronic benefit transfer systems. 
These EBT systems are essentially debit card systems that 
States already use to provide food stamps, TANF, and other 
forms of assistance to low-income families, the elderly, and 
some others.
    That's the first component of our policy.
    The second component of our policy would be to deliver the 
rebate to low- and moderate-income working families in the form 
of a higher earned income tax credit.
    So, the EBT delivery mechanism for people outside the tax 
system and the EITC for working families.
    In proposals that would extent relief farther up the income 
scale, a new refundable tax credit would substitute for the 
EITC, while the EBT delivery mechanism would be preserved for 
very low-income households that do not file income taxes.
    The size of the climate rebate and how far up the income 
scale it extends can be made larger or smaller, depending on 
the portion of revenues that policy-makers wish to devote to 
this purpose.
    All proposals we have developed, however, have a common 
principle and feature. They all fully offset the average hit on 
low-income households. Climate change policies need not and 
should not push more Americans into poverty or make those who 
are already poor still poorer.
    How much would these proposals cost? The size of the impact 
of higher energy prices on consumer budgets and the amount of 
revenue that would be available to offset that impact rise 
roughly together with the carbon tax rate, or the price of 
emissions allowances in a cap-and-trade system, the cost can be 
expressed as the percentage of the total revenues.
    Our low-income proposal, which would fully offset the 
impact in the bottom fifth of the population and extend into 
the next fifth of the population, would cost about 14 to 15 
percent of the revenue or allowance value.
    Extending the relief farther up the income scale to fully 
offset the loss in the middle fifth of the population and have 
rebates phased out after that would cost about 55 percent of 
the revenues.
    These are illustrations. If you would like in questions or 
later, we can talk about how the President's ``Making Work 
Pay'' tax credit proposal would fit into this framework.
    My organization, the Center on Budget and Policy 
Priorities, strongly believes that this rebate approach to 
providing consumer relief is superior to the alternatives we 
have seen.
    My written testimony lays out our concerns with other 
approaches. Let me just flag two of them that we can explore 
further in questions, if you're interested.
    These are utilized-based approaches that give revenues to 
local electric companies with instructions to use them for 
consumer relief. Dallas talked about them. Cuts in tax rates, 
as opposed to refundable tax credits. Terry mentioned them.
    We believe that there are serious problems with those 
approaches, compared with a rebate approach.
    I would also note in closing that the alternative approach 
that is closest in spirit to ours is the cap and dividend 
approach, which would return all the revenues in the form of 
per-capita dividends to the entire population.
    One of our concerns there would be whether there are not 
better uses for some of the revenue than returning dividends to 
very high income individuals. So, we have a question about the 
allocation.
    With that, I would conclude my testimony. Thank you.
    [The prepared statement of Mr. Stone follows:]

 Statement of Chad Stone, Ph.D., Chief Economist, Center on Budget and 
                           Policy Priorities

    Chairman McDermott, Ranking Member Linder, and other members of the 
Subcommittee. Thank you for the opportunity to testify on this 
important topic. The main message of my testimony is that it is indeed 
possible for climate change legislation to fight global warming 
effectively while also protecting consumers. Here is the argument in a 
nutshell:
    Fighting global warming requires policies that significantly 
restrict greenhouse gas emissions. The most cost-effective ways to do 
that are to tax emissions directly or to put in place a ``cap-and-
trade'' system. Either one will significantly raise the price of 
fossil-fuel energy products--from home energy and gasoline to food and 
other goods and services with significant energy inputs. Those higher 
prices create incentives for energy efficiency and the development and 
increased use of clean energy sources. But they will also put a squeeze 
on consumers' budgets, and low- and moderate-income consumers will feel 
the squeeze most acutely.
    Fortunately, climate change policies can be designed in a way that 
preserves the incentives from higher prices to change the way we 
produce and consume energy while also offsetting the effect on consumer 
budgets of those higher prices. That is because well-designed climate 
policies will generate substantial revenue. That revenue will be 
sufficient to offset the impact of higher prices on the budgets of the 
most vulnerable households, to cushion the impact substantially for 
many other households, and to meet other legitimate public needs, such 
as expanded research on alternative energy sources.
    To capture this revenue in a cap-and-trade system, it is important 
that most or all of the allowances or permits used to limit emissions 
be auctioned for public purposes rather than given away free to 
emitters. Giving away, or ``grandfathering,'' allowances is sometimes 
portrayed as a way to keep down costs for consumers, but that argument 
does not stand up to scrutiny. Rather, if allowances are given away 
free to polluting firms, only the firms and their shareholders would 
benefit. These firms would, as CBO has explained, receive ``windfall 
profits'': they would be able to charge higher prices for their 
products, but they would not have to pay for their emissions 
allowances. Ordinary consumers would get no help in dealing with the 
strain that the higher prices put on their budgets. Greg Mankiw, former 
chair of the Council of Economic Advisers for President George W. Bush, 
has written in a similar vein that consumer prices will rise regardless 
of whether allowances are given free to emitters and that 
grandfathering the allowances would constitute ``corporate welfare.'' 
There is little disagreement among economists about this effect.
    Protecting low- and moderate-income consumers should be the top 
priority of the consumer relief provisions included in climate change 
legislation. Those people are the most vulnerable because they spend a 
larger share of their budgets on necessities like energy than do 
better-off consumers. They also are the people least able to afford 
purchases of new, more energy-efficient automobiles, heating systems, 
and appliances. But middle-income consumers, too, will feel the squeeze 
from higher energy-related prices, and policymakers likely will want to 
extend consumer relief to them as well.
    Much of the Center on Budget and Policy Priorities' work on climate 
change policy has focused on developing concrete proposals to shield 
low- and moderate-income households from increased poverty and hardship 
in a way that is effective in reaching these households, efficient 
(with low administrative costs), and consistent with energy 
conservation goals. With these goals in mind, the Center has designed a 
``climate rebate'' that would efficiently offset the average impact of 
higher energy-related prices on low- and moderate-income households. 
That rebate would be delivered each month to very low-income households 
through state Electronic Benefit Transfer (EBT) systems, which are 
essentially debit card systems that states already use to provide food 
stamps, TANF, and other forms of assistance to low-income families, the 
elderly, and others. A rebate also would be delivered to low- and 
moderate-income working families in the form of a higher Earned Income 
Tax Credit (EITC).
    More recently, the Center has developed options for modifying this 
proposal to extend consumer relief farther up the income scale while 
still protecting those who are the most vulnerable. In these proposals, 
a new refundable tax credit would substitute for the EITC, while the 
EBT delivery mechanism would be preserved for very low-income 
households that do not file income taxes. The size of the climate 
rebate, and how far up the income scale it extends, can be made larger 
or smaller depending on the portion of the auction revenues that 
policymakers wish to devote to this purpose. All proposals we have 
developed, however, have a common principle and feature--they all fully 
offset the average ``hit'' on low-income households. Climate-change 
policies need not--and should not--push more Americans into poverty or 
make those who are already poor still poorer.
     The approach that we have designed can be linked to the climate 
change measures outlined in the President's budget. The President 
proposes instituting a cap-and-trade system, auctioning all the 
allowances, and using the major share of the auction proceeds for 
consumer relief--including about $65 billion of relief that would be 
delivered every year through a permanent extension of the Making Work 
Pay tax credit. The President also proposes using $15 billion a year 
for clean technology investments to facilitate the transition away from 
fossil fuels.
    Additional measures to protect consumers--particularly individuals 
with very low incomes, some seniors, and others who do not pay taxes--
will be necessary. Over time, the relief that would be provided through 
the Making Work Pay tax credit also would need to be increased or 
supplemented to respond to the further increases in energy costs that 
would occur as the emissions cap tightened. We are currently developing 
proposals to incorporate the EBT component of our low-income proposal 
into an approach that makes these adjustments.
    The Center on Budget and Policy Priorities strongly believes that a 
rebate approach to providing consumer relief in climate change 
legislation is far superior to the alternatives we have seen, both for 
low-income consumers and for consumers farther up the income scale. Our 
specific concerns with approaches that rely on utility companies to 
provide consumer relief or on proposals that would cut tax rates (as 
opposed to providing a refundable tax credit) are outlined later in 
this testimony. The approach that is closest in spirit to our approach 
is the cap-and-dividend approach popularized by Peter Barnes, which 
would use all of the allowance value for per capita dividends. We 
believe, however, that careful attention would have to be devoted to 
the delivery mechanism in such an approach to make sure that the 
dividend would actually reach low-income households, and we think there 
are better uses for the allowance value that would be consumed by 
making payments to consumers with very high incomes under a cap-and-
dividend system in which all the allowances were used for dividends.
    The remainder of this testimony elaborates on these ideas. The next 
section discusses the economics of cap and trade in more detail. The 
section after that discusses our climate rebate proposal in more 
detail. And the last section discusses in more detail the reasons why 
we think our rebate approach is superior to other approaches we have 
seen.

The Economics of Cap and Trade: Fighting Global Warming Effectively 
        While Also Protecting Consumers Cap and Trade Is an Efficient 
        and Effective Way to Reduce Emissions
    Economists agree that the most efficient way to reduce carbon 
emissions is either to tax them directly or to put in place a ``cap-
and-trade system.'' \1\ Several northeastern states have already 
implemented a cap-and-trade system on a regional basis as part of the 
Regional Greenhouse Gas Initiative. In addition, the 27 nations of the 
European Union have operated a cap-and-trade system since 2005.
---------------------------------------------------------------------------
    \1\ Like a cap-and-trade system, a carbon tax--a government-imposed 
charge on firms for every ton of greenhouse gas pollution they 
produce--uses market forces to achieve cost-effective emissions 
reductions. The two mechanisms operate in different ways, however. A 
cap-and-trade system specifies the amount by which emissions must be 
reduced and lets the market determine how high energy-related prices 
need to rise to achieve that reduction. A carbon tax does the reverse: 
it specifies the amount by which energy-related prices will rise, but 
it lets the market determine how much of an emissions reduction that 
price increase will cause.
    Both mechanisms lead to pollution abatement and generate revenues 
that can be used to offset the effects of the energy cost increases 
that result.
---------------------------------------------------------------------------
    A cap-and-trade system puts a limit (or ``cap'') on the overall 
amount of greenhouse gases--mainly carbon dioxide from the burning of 
fossil fuels--that businesses are allowed to emit each year. Electric 
power plants, oil refineries, and other firms responsible for emissions 
of carbon dioxide and other greenhouse gases are then required to 
purchase permits (called allowances) for each ton of greenhouse gas 
pollution they emit.
     Over time, the number of emissions allowances would shrink in 
order to achieve the substantial emissions reductions that scientists 
say are necessary to curb global warming. This would force the economy 
to gradually adapt by reducing emissions through energy conservation, 
improved energy efficiency, and greater use of alternative clean energy 
technologies.
     Firms are free to buy and sell (i.e., to ``trade'') emission 
allowances. The price for carbon depends on the level at which the cap 
is set and the technology available to produce goods and services that 
use less carbon. Companies that are able to reduce their emissions 
easily can sell allowances to companies that have more trouble reducing 
their emissions.
     Thus, cap and trade would give firms incentives to pursue cost-
effective ways of cutting emissions. The less carbon a firm produces as 
part of its normal operations, the less money it must spend on 
purchasing allowances, or the more money it can make by selling its 
allowances to firms that are not able to reduce their pollution 
production as easily.

Cap and Trade Generates Revenues to Protect Consumers from Higher 
        Energy Prices
    A cap-and-trade system would raise the prices of goods and services 
whose production and use involve the emission of greenhouse gases. But 
it would also generate revenues to offset the effects of these cost 
increases.
     Consumers would face higher prices both for home heating and 
cooling and for gasoline, food, and other items made with or 
transported by fossil fuels. These higher energy-related prices are 
necessary to encourage emissions reductions. But they do not have to 
reduce households' purchasing power. That depends on whether emissions 
allowances are given away free to polluters or auctioned and the 
proceeds then used to compensate consumers.
    Auctioning the emission allowances rather than giving them to firms 
free of charge will generate substantial revenue that can be used for a 
variety of purposes, including offsetting the impact of higher energy-
related prices on low- and middle-income consumers. The federal 
government would auction emissions allowances, and firms that emit 
carbon dioxide or other greenhouse gases would be required to purchase 
the permits. If instead, allowances were given away free to polluting 
firms, only the firms and their shareholders would benefit. These firms 
would, as CBO has explained, receive ``windfall profits'': they would 
be able to charge higher prices for their products, but they would not 
have to pay for their emissions allowances. Ordinary consumers would 
get no help in dealing with the strain that the higher prices put on 
their budgets.
    There is a misconception that giving allowances away for free to 
emitters would be a way to lower the costs to consumers. That is 
incorrect and flies in the face of the basic laws of supply and demand. 
A cap on emissions will limit the amount of energy produced from fossil 
fuels. Stated another way, it will lower the supply of energy that is 
produced from fossil fuels. Regardless of whether the government gives 
away or sells the allowances, market forces--i.e., the laws of supply 
and demand--will raise the price of fossil-fuel energy to the point 
where the amount demanded will fall to equal the amount supplied. 
Whether energy companies have to pay for allowances or receive them for 
free, they will be able to sell their products at the higher market 
price that results from the reduction in the available supply of 
fossil-fuel energy. This increase in prices is the source of the 
windfall profits that would go to companies that received allowances 
for free but were able to charge the higher price that the market would 
bear.
    The United States will incur some economic costs to change the way 
we produce and consume energy in order to reduce greenhouse gas 
emissions. But a broad consensus exists among scientists that reducing 
carbon emissions is essential to protecting the planet--and our long-
term prosperity. In other words, failure to act is the more costly 
policy economically.
    Higher energy prices under a cap-and-trade system will give all 
consumers the incentive to conserve energy and invest in energy 
efficiency, while rebates make sure the typical consumer has the 
necessary resources to respond appropriately to those higher prices 
without taking a substantial hit to his or her budget.

How a Climate Rebate Would Work
    To shield vulnerable households from higher energy costs in a 
manner that is both effective and efficient, we recommend that 
policymakers follow five basic principles.

    1.  Protect the most vulnerable households. Climate-change 
legislation should not make poor families poorer or push more people 
into poverty. To avoid that outcome, ``climate rebates'' should be 
designed to fully offset higher energy-related costs for low-income 
families. A good place to start is by fully protecting households in 
the bottom fifth of the income spectrum--a group whose average 
household income is only a little more than $15,000. Families at 
somewhat higher income levels that struggle to make ends meet also will 
need help in coping with the higher bills they will face.
    2.  Use mechanisms that reach all or nearly all low-income 
households. Members of some low-income households work for low wages 
and could receive a climate rebate through the tax code, such as 
through an increase in the Earned Income Tax Credit. But others are 
elderly, unemployed (especially during recessions), or have serious 
disabilities and are not in the tax system--and experience at state and 
federal levels shows that attempts to use the tax system to deliver 
relief to such households have generally been unsuccessful.\2\ Yet 
climate rebates need to reach these poor households as well.
---------------------------------------------------------------------------
    \2\ Over the years, a number of states have established refundable 
tax credits that are available to all low-income households, including 
those that have no or little earnings and do not file state income tax 
returns. These state tax credits are most commonly designed to provide 
relief from state sales taxes or property taxes. In most such states 
for which data are available, a large portion of the low-income 
households that are not required to file state income tax returns fail 
to file for these tax credits and thus do not receive them.
    States have found it difficult to get the word out to the diverse 
array of low-income people who are not otherwise connected to the 
income tax system. In addition, many people apparently are reluctant to 
have anything to do with state or federal revenue agencies and do not 
file income tax returns if they are not required to do so.
    Many of these state tax credits and the federal telephone tax 
rebate are smaller than a federal climate-change tax credit would be, 
and a larger tax credit would be expected to induce greater 
participation. Even so, a significant percentage of low-income 
households would likely be missed. For further discussion of these 
issues, see Robert Greenstein, Sharon Parrott, and Arloc Sherman,'' 
``Designing Climate-Change Legislation that Shields Low-Income 
Households From Increased Poverty and Hardship,'' Center on Budget and 
Policy Priorities, revised March 21, 2008.
---------------------------------------------------------------------------
         Fortunately, policymakers can tap existing mechanisms to reach 
the large number of low-income households that are not reached through 
a tax-rebate mechanism because their incomes are so low that they do 
not file a tax return. For example, ``climate rebates'' could be 
provided through the electronic benefit transfer (EBT) systems that 
state human service agencies use to provide various types of assistance 
to many poor people. (This is discussed further below.) Policymakers 
could fill any remaining gaps, and provide weatherization assistance, 
through some increases in the Low Income Home Energy Assistance 
Program.
    3.  Minimize red tape. Funds set aside for low-income consumers 
should go to intended beneficiaries, not to administrative costs or 
profits. Accordingly, policymakers should provide assistance as much as 
possible through existing, proven delivery mechanisms rather than new 
public or private bureaucracies.
    4.  Preserve Economic Incentives to Reduce Energy Use Efficiently. 
Policies that suppress price increases in an important sector such as 
electricity blunt incentives to reduce fossil fuel use in that sector. 
That keeps electricity demand somewhat elevated and puts a greater 
burden on other sectors to provide the emissions reductions required 
under the cap. The result is that emissions reductions are more costly 
to achieve and allowance prices are higher. Consumers may pay less for 
electricity but they will pay more for other things.
    5.  Do not focus solely on utility bills.
         For households in the bottom fifth of the population, higher 
home energy prices will account for less than half of the hit on their 
budgets from a cap-and-trade system. (See Figure 1.) Furthermore, about 
20 percent of the households in the bottom fifth have their utility 
costs reflected in their rent, so they pay for utilities indirectly, 
through the rents their landlords charge. Policymakers should structure 
climate rebates so they can help such low-income families with the rent 
increases they will face as a result of climate policies, as well as 
with the higher prices low-income households will incur for gasoline 
and other products and services that are sensitive to energy costs.
    6.  Adjust for family size. Larger households should receive more 
help than smaller households because they have higher expenses. 
Families with several children will generally consume more energy, and 
consequently face larger burdens from increased energy costs, than 
individuals living alone. Many other forms of assistance vary by 
household size; this one should as well.

A ``Climate Rebate'' That Meets These Principles
    A combination of an increase in the Earned Income Tax Credit and a 
rebate delivered through state electronic benefit transfer systems 
would reach the vast majority of low-income households, and would do so 
without creating the need for a new bureaucracy or large administrative 
costs.
    The Earned Income Tax Credit is a powerful tool for reaching 
millions of low-income working families; this committee (and Congress 
and the relevant administrations) relied on EITC expansions in both 
1990 and 1993 to offset the impacts on low-income working families of 
the increases enacted in those years in gasoline and (in 1990) other 
regressive excise taxes. Under cap-and-trade legislation, the EITC's 
parameters could be designed to adjust automatically over time to 
reflect the increasing consumer costs that result from the steady 
tightening of the emissions cap. (This could be done through a formula 
that ties the adjustments in the annual EITC parameters to annual data 
from the Energy Information Agency indicating the impact of the 
emissions cap on consumer purchasing power.)
    If such EITC increases were all that was done, however, the result 
would still be a substantial increase in poverty and hardship. About 
half of those in the bottom fifth of the population do not qualify for 
the EITC in any given year, in most cases because they are elderly, 
have a serious disability, were unemployed in the prior year due to a 
weak labor market, or are raising young children and are temporarily 
out of the labor force. The group left out includes some of the poorest 
children in the country. A tax-based strategy such as the EITC 
consequently needs to be coupled with a form of assistance that is 
available to other low-income households.
    The best such mechanism is the Electronic Benefit Transfer system 
that all state human service agencies use to provide food stamp 
assistance--and in most states, other benefits (such as child care or 
TANF assistance) as well--to a broad array of very low income 
households. A climate rebate administered through existing state EBT 
systems would be much less expensive to set up and administer than 
virtually any alternative, because states already have the EBT system 
in place. States could fairly easily issue a monthly rebate to the 
millions of low-income households that are already enrolled in either 
the Food Stamp Program or in the low-income subsidy for the Medicare 
prescription drug benefit (which reaches a large share of the low-
income elderly and disabled population). Poor households that do not 
receive either of those benefits but that meet the eligibility criteria 
for food stamps (income below 130 percent of the poverty line and 
limited assets) and wished to receive the climate-change rebate could 
apply for the rebate through their state human services agency.
    Some families that receive a rebate through the state human service 
agency also will have earnings over the course of the year and qualify 
for the EITC or climate-related tax credit. To ensure that families do 
not receive an excessive climate rebate, benefits received through the 
state human service mechanism would offset any climate-related tax 
credit for which the family otherwise would qualify. States would 
provide year-end information to families and the IRS on families' 
rebate receipt through the EBT system, and this information would be 
used to adjust the climate tax rebate a family would receive.
    These two delivery mechanisms--an EBT climate-change rebate and an 
expanded EITC--could be supplemented with a smaller increase in the 
Low-Income Home Energy Assistance Program (LIHEAP) to help low-income 
households that faced particular hardship because of extremely high 
energy costs even after the EBT rebate or EITC boost was provided, and 
to provide weatherization assistance and assistance with home energy 
efficiency to low-income households. LIHEAP also would be a backstop 
that could provide another way to help reach low-income elderly people 
not picked up through the other mechanisms, since it disproportionately 
serves the elderly.
    By building off existing, effective programs, this approach would 
succeed in reaching most low-income households. About three-fourths of 
all households in the bottom fifth of the income spectrum would be 
reached with little or no additional paperwork because they already 
participate in the Food Stamp program, the EITC, or the low-income 
subsidy under the Medicare prescription drug benefit. (An estimated 28 
million low- and moderate-income households would receive assistance 
automatically because they already have an EBT account through the Food 
Stamp Program or receive the EITC. Another 7 million households receive 
the Medicare low-income subsidy and do not receive food stamps; they 
could be enrolled in the rebate program either automatically or with 
little additional paperwork.)
    We estimate that approximately 14 or 15 percent of the value of 
emissions allowances in a cap-and-trade system would fund this 
proposal.

Extending the Rebate to Middle-Income Consumers
    This low-income rebate program could easily be modified so it also 
provides relief to consumers with somewhat higher incomes, an approach 
that we believe represents sound policy--and that also should enhance 
prospects for the legislation's passage. Here is how climate rebates 
for low- and middle-income households would work.
    Retain the EBT rebate for very low-income households. Very-low-
income households that do not file tax returns would receive their 
climate rebate in the same manner as they would under the Center's 
original low-income proposal: as a monthly benefit delivered through 
state EBT systems. Climate rebates could be provided directly to 
seniors, veterans, and people with disabilities--individuals who may 
not otherwise need to file an income tax return--by the Social Security 
Administration, the Veterans Administration, and the administrator of 
the Railroad Retirement program. Just as was done in the American 
Recovery and Reinvestment Act, these entities can effectively and 
efficiently deliver climate rebates to Social Security, SSI, VA, and 
Railroad Retirement beneficiaries. For those who do file an income tax 
return, these benefits would offset any climate related tax rebate for 
which they would otherwise qualify.
    Create a new ``climate tax credit'' for other households. For all 
but very-low-income households and people on Social Security, SSI, VA, 
and Railroad Retirement, a refundable income tax credit (i.e., one that 
provides a refund check to families whose tax credit amount exceeds 
their income tax liability) is the most efficient way to deliver a 
climate rebate. Our original low-income proposal used the Earned Income 
Tax Credit for this purpose. Doing so would provide for effective 
targeting; the EITC phases out at moderate income levels. To reach 
middle-income as well as low-income households, however, would require 
a different vehicle: a new, refundable ``climate tax credit,'' rather 
than an expansion of the EITC. The tax credit would go to anyone who 
files a federal tax return and whose income is below the eligibility 
limit set for the rebate; families would simply look up the size of 
their credit in a table similar to the one used now for the EITC.
    President Obama has proposed using the Making Work Pay tax credit 
for this purpose. As proposed by the administration, that credit would 
be a fixed dollar amount. It would need to be modified, or a 
supplemental credit would have to be added, to take into account the 
increased impact on consumers' budgets that would need to be offset as 
the emissions cap tightened over time.
    How big a rebate? As noted, under our original low-income proposal, 
the rebate would equal the lost purchasing power for the average 
household in the bottom quintile. The rebates would be scaled by family 
size; larger families would receive more sizeable rebates. The dollar 
amount of the rebate would go up over time as the emissions cap 
tightened and energy prices rose. Annual data from the Energy 
Information Administration on the impact of the emissions cap on 
consumers' purchasing power would be used to set the size of the rebate 
each year.
    For a rebate also aimed at middle-income households, it would be 
more appropriate to tie the rebate's size to the average loss in 
purchasing power that households farther up the income scale would 
face. While low-income households feel the squeeze of higher energy 
prices more--they live on limited budgets, spend a larger share of 
their budgets on energy, and are less able to afford investments that 
can reduce their energy demand--the absolute dollar size of the 
purchasing power loss is somewhat larger at higher levels of income. 
Hence, a rebate set to offset the losses of middle-income families 
would need to be larger than a rebate targeted solely on low-income 
families. The rebate could, for example, be set equal to the average 
impact of the emissions cap on the budgets of households in the middle 
of the income scale.
    How much would it cost? Because a rebate program aimed at middle-
income as well as low-income households would go to more people and 
provide somewhat larger rebates, it would require more funding. The 
Center's low-income rebate program can be funded with about 14 or 15 
percent of the total market value of the emissions allowances under a 
cap-and-trade program (or 14 or 15 percent of the revenues from a 
carbon tax). A rebate that would offset the average purchasing power 
loss of consumers in the next higher quintile would require about 35 
percent of the total value of the allowances, and one that offset the 
average loss of the middle 20 percent of the population would require 
about 55 percent of the total allowance value.\3\
---------------------------------------------------------------------------
    \3\ The total cost of rebates as a percentage of the emissions 
value is largely independent of how tight the cap is and what an 
emissions allowance costs. As the emissions cap under a cap-and-trade 
system tightens over time, this will increase the total value of the 
emissions allowances by raising the price of those allowances. It also 
will increase consumers' purchasing power losses by raising the price 
of energy. Since both of these increases will occur at approximately 
the same rate, the cost of climate rebates will stay approximately the 
same as a percentage of the total allowance value.
---------------------------------------------------------------------------
    With 55 percent of the total allowance value generated by a cap-
and-trade system used to fund rebates, 45 percent would remain 
available to meet other important needs. These include basic research 
and development on alternative energy, conservation efforts and energy 
efficiency investments, transition assistance for workers and 
communities harmed by the shift to a less carbon-intensive economy, 
adaptation to the impacts of climate change here and abroad, green job 
training, and offsetting impacts on federal, state, and local budgets. 
(Note: the Congressional Budget Office has indicated that the Treasury 
will need to retain approximately 25 percent of the auction proceeds to 
ensure that a cap-and-trade bill does not increase the federal deficit. 
This ``25-percent offset'' arises because CBO essentially assumes that 
the additional revenue collected from imposing a charge on emissions 
will result in a reduction of certain other federal revenues.\4\)
---------------------------------------------------------------------------
    \4\ Chad Stone, Jim Horney, and Robert Greenstein, ``How CBO 
Estimates the Cost of Climate Change Legislation: Explaining the 25% 
Offset Rule,'' Center on Budget and Policy Priorities, May 13, 2008, 
http://www.cbpp.org/5-13-08climate.pdf.
---------------------------------------------------------------------------
Why Rebates Are Superior to Other Forms of Consumer Relief
    Rebates are an effective way to deliver consumer relief. They can 
be provided easily through the federal tax system and state EBT 
systems, with no need for new agencies or bureaucracy at the state or 
federal level. Also, rebates protect households against the loss of 
purchasing power from higher energy-related prices without blunting 
consumers' incentives to respond to those higher prices by conserving 
energy and investing in energy efficiency improvements. Because energy-
related products will cost more, households with the flexibility to 
conserve energy or invest more in energy efficiency will get more value 
for their budget dollar by taking these steps than by using their 
rebate to maintain their old ways of consumption. At the same time, 
rebates help households that cannot easily reduce their energy 
consumption to avoid a reduction in their standard of living.
    Other proposals for consumer relief generally lack one or more of 
these advantages, pose other serious problems, or lack crucial details 
needed to know how they would work in practice.

Universal ``Cap and Dividend''
    The proposal closest in spirit to rebates is the universal ``cap-
and-dividend'' proposal advocated by Peter Barnes, an energy 
entrepreneur who has studied this issue for a number of years.\5\ Under 
this proposal, all emissions allowances in a cap-and-trade system would 
be auctioned and the proceeds divided evenly among all Americans on a 
per capita basis, mirroring the concept that all Americans have an 
equal stake in the planet's future.
---------------------------------------------------------------------------
    \5\ See Testimony of Peter Barnes, before the Committee on Ways and 
Means, U.S. House of Representatives, September 18, 2008, http://
waysandmeans.house.gov/media/pdf/110/barnes.pdf.
---------------------------------------------------------------------------
    The dividend would equal the average per capita loss of purchasing 
power that results from climate-change legislation. Therefore, the 
dividend would be smaller than the actual losses that high-income 
individuals would experience due to higher energy-related costs, 
because they have above-average per capita energy expenditures. It 
would be somewhat larger than the actual losses of low-income 
individuals.
    There are a number of similarities between cap and dividend and the 
Center's rebate proposal. Both focus on consumer relief. The cap-and-
dividend approach has the advantage of simplicity: everyone would 
secure a share of the revenues while still facing an incentive to 
reduce their carbon emissions. Nevertheless, cap and dividend raises 
several concerns.

      The primary issue is that distributing all revenues from 
the auction of emissions allowances as dividends would leave no money 
for other climate-related priorities, which would have to be funded 
from other sources. (Barnes treats the dividend as taxable income which 
means that the CBO ``25-percent offset'' discussed earlier in this 
paper would not be needed to keep the budget deficit from widening.)
      On a more technical front, cap and dividend would require 
an implementation mechanism. Barnes has suggested that households would 
receive monthly payments, preferably into their bank accounts (as is 
done with Social Security).\6\ This would entail a significant 
expansion of the Social Security infrastructure or the creation of a 
similar administrative system. It would also require ensuring that all 
Americans are signed up with appropriate banking services or that a 
more universal system of debit cards than currently exists is created. 
While these are not necessarily insurmountable barriers, developing 
such a system would be a considerable undertaking.
---------------------------------------------------------------------------
    \6\ ibid.
---------------------------------------------------------------------------
      Finally, under a per capita dividend, the size of a 
family's dividend would be tied strictly to the number of people in the 
family. The evidence suggests, however, that energy expenditures 
increase lessthan in proportion to family size. (In other words a 
family twice as large as another consumes less than twice as much 
energy.) Rebates are better suited to providing a more appropriate 
family-size adjustment.\7\
---------------------------------------------------------------------------
    \7\ The climate tax credit discussed in this paper would adjust for 
family size but would take into account ``economies of scale'' in 
meeting families' needs. In other words, a family of four would get a 
larger credit than a family of two, but not one that was twice as 
large, as would be the case under a per-capita cap-and-dividend 
approach.
---------------------------------------------------------------------------
Payroll or Income Tax Cuts
    Some have proposed using climate change revenues to cut payroll tax 
rates or individual or corporate income tax rates. Such options would 
be far less effective than a refundable tax credit in preserving the 
purchasing power of low- and middle-income consumers.
    For example, in its analysis of trade-offs in the design of cap-
and-trade legislation, CBO found that if all the revenue from 
auctioning emissions allowances were used to reduce payroll tax rates, 
households in the bottom 60 percent of the distribution would get a 
smaller benefit from the tax cut, on average, than they would lose from 
higher energy prices.\8\ Those in the next 20 percent would come out 
even and the top 20 percent of the population would get a tax cut that 
exceeded their increase in energy costs. Using all the auction revenues 
to cut corporate taxes would be even more regressive, since the 
benefits of corporate tax cuts are concentrated still higher up the 
income scale. Using auction revenues to provide households rebates that 
vary by family size but do not increase as income climbs would not have 
these regressive effects.
---------------------------------------------------------------------------
    \8\ Congressional Budget Office, ``Tradeoffs in Allocating 
Allowances for CO2 Emissions,'' April 25, 2007, http://
cbo.gov/ftpdocs/89xx/doc8946/04-25-Cap_Trade.pdf; and ``Options for 
Offsetting the Economic Impact on Low-and Moderate-Income Households of 
a Cap-and-Trade Program for Carbon Dioxide Emissions,'' letter to the 
Honorable Jeff Bingaman, Chairman, Committee on Energy and Natural 
Resources, United States Senate, June 17, 2008, http://www.cbo.gov/
ftpdocs/93xx/doc9319/06-17-ClimateChangeCosts.pdf.
---------------------------------------------------------------------------
    The main argument for using climate change revenues to cut tax 
rates rests on the concept of economic efficiency. Economic analysis 
suggests that charging firms for emitting pollutants (as under a cap-
and-trade system) could dampen economic activity. By cutting tax rates 
at the same time, policymakers could reduce these economic efficiency 
losses. But, as the CBO analysis emphasizes, policymakers face a trade-
off between achieving efficiency gains and achieving distributional 
goals. Moreover, the economic efficiency gains CBO identifies are 
relatively modest, and the effect of the tax rate cuts that produce 
those modest gains would almost surely be to leave low- and middle-
income consumers worse off and to cause inequality in the United States 
to widen further.\9\
---------------------------------------------------------------------------
    \9\ For low- and moderate-income consumers not to be worse off 
under a proposal that uses all of the auction proceeds to lower tax 
rates, the additional economic activity generated by the tax cut would 
have to be so great that it raised workers' incomes by enough to 
increase their after-tax income by more than what they lose due to 
higher energy prices. Credible estimates of the economic efficiency 
gains from using climate change revenues for tax-rate reductions show 
those gains to be very small, however, compared with what would be 
needed to produce such a result. For example, in the analysis that CBO 
has relied upon to estimate the efficiency gains under an approach that 
uses all of the auction proceeds to cut tax rates, the efficiency gains 
would be equal to only 0.3 percent of GDP. That is far too small to 
offset the net loss that low- and middle-income consumers would bear as 
a result of losing more from higher energy prices than they would gain 
from the reduction in tax rates.
---------------------------------------------------------------------------
    A recent study by Resources for the Future reinforces the CBO 
analysis.\10\ The study finds that the benefits of cutting marginal tax 
rates would mainly go to upper-income individuals. In contrast, 
providing rebates to low- and middle-income consumers would result in 
the best outcome for those consumers.
---------------------------------------------------------------------------
    \10\ Dallas Burtraw, Rich Sweeney, and Margaret Walls, ``The 
Incidence of U.S. Climate Change Policy: Where You Stand Depends on 
Where You Sit,'' Resources for the Future, September 2008, http://
www.rff.org/News/Features/Pages/ClimatePolicyOptions.aspx.
---------------------------------------------------------------------------
    A reduction in payroll tax rates does not fare as well as a flat 
rebate on distributional grounds: the size of the benefit from a 
payroll tax cut is higher for those with higher earnings, and seniors 
and others without earnings would receive no rebate. The first concern 
can be partially addressed by switching from a cut in payroll tax rates 
to a rebate of payroll taxes paid up to a fixed cap. Workers above a 
certain modest level of earnings would all receive the same size 
rebate. Workers with very low earnings, however, would receive only a 
partial rebate, and people with no earnings would still be left out.
    Those problems can partly addressed by switching to a refundable 
income tax credit based on the amount of payroll taxes paid (up to a 
maximum amount) and making seniors and people receiving federal 
disability benefits eligible for a similar size tax credit.\11\ At that 
point, the modified payroll tax proposal would look a lot like our 
proposed low- and-middle-income rebate, although it still would leave 
out people who lack earnings and are not elderly or have disabilities, 
such as people who are unemployed during a recession and single mothers 
with very young children who are temporarily out of the workforce. That 
could be addressed by including our low-income EBT proposal and by 
making direct payments to people receiving Social Security, SSI, VA, or 
Railroad Retirement.
---------------------------------------------------------------------------
    \11\ Gilbert E. Metcalf, ``A Proposal for a U.S. Carbon Tax Swap: 
An Equitable Tax Reform to Address Global Climate Change,'' The 
Brookings Institution (Hamilton Project), October 2007.
---------------------------------------------------------------------------
     A similar outcome could be built around President Obama's Making 
Work Pay tax credit. That credit would have to be paired with payments 
to people on Social Security, SSI, VA, and Railroad Retirement as was 
done in the economic recovery legislation and with our EBT proposal so 
as to include people who do not file tax returns. Finally, there would 
need to be a supplement to the Making Work Pay credit so there is an 
adjustment for family size and an increase in the tax credit as the 
emissions cap tightens and the consumer impacts consequently grow 
larger.

Energy Efficiency Programs
    Measures to encourage or require investments in economic efficiency 
can reduce the overall demand for energy, thereby limiting the size of 
the hit to consumers' pocketbooks from increased energy-related prices 
under an emissions cap. But energy efficiency programs are not a 
credible substitute for rebates as a means of addressing the impact of 
climate change legislation on consumers' budgets.
    There are two main reasons why. First, existing weatherization and 
other energy efficiency programs now operate on a small scale and would 
likely take years to scale up to reach a substantial portion of the 
population. Until now, the Weatherization Assistance Program, which 
helps low-income households make their homes more energy efficient 
through measures such as better insulation and newer appliances, has 
served only a few hundred thousand homes a year.\12\ Even if the 
program is expanded to the point that it reaches 1 million households a 
year, which would require a huge buildup in effort, it would take 
decades just to reach the 37 million low-income households that are 
eligible for LIHEAP assistance. Rebates, in contrast, can reach tens of 
millions of low- and middle-income people immediately.
---------------------------------------------------------------------------
    \12\ See the LIHEAP Annual Report to Congress for Federal Fiscal 
Year 2005.
---------------------------------------------------------------------------
    Second, the commonly discussed energy efficiency programs generally 
focus on home energy efficiency. Yet higher home energy costs account 
for less than half of the loss in household purchasing power that would 
be caused by an emissions cap. To provide full relief to households, 
the energy efficiency measures would have to be so effective as to 
compensate not only for the increased costs in home energy but also for 
the increase in the cost of gasoline and other products. That is far 
beyond what is realistic.
Using Utility Companies to Provide Consumer Relief
    The Lieberman-Warner Climate Security Act of 2008 (S. 3036) would 
have assisted low- and middle-income households by routing funds 
through local utility distribution companies (LDCs). Some other 
proposals have taken this approach as well.\13\ While relying on LDCs 
may seem reasonable at first blush in light of concerns about increased 
electricity bills, this approach is fundamentally unsound for several 
reasons.\14\
---------------------------------------------------------------------------
    \13\ One of the options included in the Dingell-Boucher discussion 
draft legislation on climate change released in October 2008 also would 
have relied on LDCs to provide consumer relief, and LDC provision 
figures prominently in the blueprint for legislative action issued by 
the United States Climate Action Partnership in January 2009.
    \14\ See Chad Stone and Robert Greenstein, ``Why Utilities Are Not 
Well-Suited to Deliver Relief to Low- and Moderate-Income Consumers in 
a Climate Bill,'' Center on Budget and Policy Priorities, February 18, 
2008.
---------------------------------------------------------------------------
    First, utility companies do not routinely collect information on 
their customers' incomes. To target assistance at customers within a 
particular income range, utility companies would therefore have to set 
up new bureaucracies to collect and audit income information. Covering 
the large costs of building an infrastructure at each utility company 
to gather and verify income information for millions of customers would 
require substantial government subsidies. Such subsidies would pay for 
an infrastructure that essentially duplicates what public agencies 
already do. Making households of all income levels eligible for utility 
company assistance would avoid this particular difficulty. But that 
approach would spread the funds much more thinly across the population 
and make it far less likely that low- and moderate-income consumers 
would be adequately protected from higher prices.
    Second, past experience suggests that utility company programs will 
miss large numbers of consumers. The only existing federal program that 
delivers assistance to low-income households through utility companies 
is the ``Lifeline'' telephone discount program, administered through 
local phone companies. That program reaches just one-third of eligible 
low-income households.\15\ In addition, the sizeable share of Americans 
whose utilities are built into their rents could be left out if climate 
assistance were delivered primarily through utility companies.
---------------------------------------------------------------------------
    \15\ Matt Fiedler, ``Lessons from The Telephone Lifeline Program,'' 
Center on Budget and Policy Priorities, July 18, 2008. Available at 
http://www.cbpp.org/7-18-08climate.pdf.
---------------------------------------------------------------------------
    Third, a utility company approach is aimed at electricity and 
natural gas bills, and hence fails to address the full impact of 
climate legislation on consumer budgets. With over half of the impact 
of climate change legislation on consumer budgets coming as a result of 
higher prices for a range of other goods and services, including 
gasoline and food, relying on utilities to deliver consumer relief 
would leave many low- and middle-income consumers with a large 
uncompensated hole in their budgets.
    Fourth, routing consumer assistance through utility companies 
artificially lowers households' utility bills and blunts the ``sticker 
shock'' of higher bills. People who do not realize that energy costs 
are going up will be much less likely to take steps to conserve energy 
or seek out energy efficiency improvements. A rebate, in contrast, 
protects consumers' purchasing power without blunting the incentives 
created by higher energy prices.
    Fifth, establishing a formula for allocating emissions allowances 
equitably among utilities would be fraught with severe difficulties. 
There are roughly 3,300 LDCs in the electricity sector (plus additional 
natural gas retail distributors not affiliated with electric 
utilities). As discussed above, information does not exist on the 
relative incomes of their customer bases, making it impossible to 
distribute allowances among LDCs in proportion to each LDC's share of 
the population being targeted for consumer relief. Making matters 
worse, basing the allocations to LDCs on each utility's share of total 
electricity delivered or total emissions--an approach often taken by 
legislative proposals that rely on LDCs to provide consumer relief--
would shortchange utilities that serve a disproportionate number of 
low- and moderate--income consumers, because their consumers' per-
capita energy consumption is likely to be lower than the per-capita 
energy consumption of more affluent households.
    Sixth, a major obstacle to relying on utilities to deliver consumer 
relief, either through reductions in consumers' bills or through energy 
efficiency measures, is the uneven quality of regulation and 
enforcement of utilities across the states. Most utility customers are 
served by investor-owned utilities whose rates and practices are 
regulated by state public utilities commissions. Regulators have to 
work closely with the industry they oversee, and states vary 
considerably in the degree to which the regulators have successfully 
avoided being ``captured'' by the industry. In such a heterogeneous 
regulatory regime, it would be difficult to provide the federal 
oversight necessary to make sure that the federal revenues from 
auctioning emissions allowances are used appropriately to protect 
consumers and invest in cost-effective energy efficiency improvements.
    Finally, policies that suppress consumer price increases in the 
electricity sector--as the utility company approach would do--blunt 
incentives to reduce fossil fuel use in that sector. That keeps 
electricity demand elevated and puts a greater burden on other sectors 
to provide the emissions reductions required to meet the cap. The 
result is that emissions reductions would be more costly to achieve, 
and allowance prices consequently would be higher. Consumers would pay 
less for electricity, but they would pay more for other forms of energy 
and energy-related products. In the worst case, the overall hit to 
consumers' budgets would be mitigated little or not at all despite the 
federal government's having devoted a substantial amount of allowance 
value, totaling tens of billions of dollars, to this effort.

Conclusion
    Climate change legislation that limits greenhouse gas emissions 
need not squeeze the budgets of low- and middle-income families. Well-
designed consumer relief can restore to these families the purchasing 
power that they would lose as a result of higher prices for energy-
related products. In addition, consumer relief can be financed with a 
portion of the revenues from the auctioning of emissions allowances 
under a cap-and-trade system, leaving significant auction revenues 
available for other climate-related priorities.
    A new refundable climate tax credit (including a modified version 
of the President's Making Work Pay tax credit), coupled with Electronic 
Benefit Transfers for the lowest-income households, would be the most 
effective way to provide consumer relief to low- and middle-income 
households. Other proposed mechanisms suffer from significant flaws. 
Cutting income or payroll tax rates would not have large enough effects 
on economic activity to offset the fact that these approaches would be 
quite regressive, providing the largest benefits to higher income 
households and leaving low- and middle-income households worse off as a 
result of the emissions cap.
    Filtering consumer assistance through utility companies--or relying 
solely on weatherization and related efforts to make homes more energy 
efficient--also would have very serious weaknesses, as these approaches 
would either bypass many families affected by higher home energy costs 
or provide them with inadequate relief. Moreover, such approaches would 
not address the increases that would occur, as a result of climate 
change measures, in prices for energy-related products other than 
household utilities. Both approaches also would require substantial 
expansions in government regulation.

                                 

    Chairman MCDERMOTT. Thank you very much.
    Now, Sir Monckton from Great Britain?

 STATEMENT OF LORD CHRISTOPHER MONCKTON, CHIEF POLICY ADVISOR, 
              SCIENCE AND PUBLIC POLICY INSTITUTE

    Lord MONCKTON. Sir, I bring you warmest fraternal greetings 
from the Mother of Parliament to the Congress of your great 
athletic democracy, and I pray that God's blessing may rest 
upon your counsels.
    As a prime ministerial policy advisor to Margaret Thatcher, 
inter alia I modeled the economic interactions of taxes and 
benefits on low-income households with the aim of eradicating 
poverty and investigated scientific frauds.
    I have written and lectured about the mathematics and 
physics of climate sensitivity, and I advise institutions on 
climate change.
    I should like to warn this honorable House that any 
proposal to inflict billions of dollars of new taxation on all 
citizens by charging selectively disfavored industries who 
arbitrarily rationed permits to emit a harmless and beneficial 
trace gas that is necessary to all life on Earth and has little 
effect on its surface temperature, will fall cruelly and 
disproportionately upon the poor; will threaten their very 
lives; will gravely diminish the liberty that is the glory of 
your great nation; will render difficult, if not impossible, 
the pursuit of happiness;
    Will raise little net revenue if the poor are adequately 
compensated by the subsidies of which we have heard; will 
damagingly distort the labor market by widening and deepening 
the unemployment trap that already gives millions of your most 
helpless citizens a better income on welfare than in work; will 
imprison the poorest earners in a perpetual poverty trap by 
inflicting upon them a crippling marginal taxation and benefit 
withdrawal rate that powerfully deters them from increasing 
their earnings;
    Will be complex, extravagant, and costly; will savagely 
compound the adverse effects of recession of excessive public 
and private indebtedness, of fiscal incontinence, of monetary 
laxity on industries and employment; will create soi-disant 
``green'' jobs by the thousand, while destroying real jobs by 
the million; will establish an unstable and artificial 
derivatives market in hot air that will enrich a handful of 
portly middle-men, while impoverishing the people; will 
automatically and ineluctably defeat its own objective by so 
depressing economic activity that the market price of carbon 
dioxide will tend rapidly to fall as close to zero as it has 
now done in both of Europe's attempt at a cap-and-trade scheme;
    Will directly encourage fraud by incentivizing not only 
both parties to every transaction, but also the regulatory 
authorities, recklessly to overstate the magnitude of every 
transaction; will set your enterprises at a profound 
competitive disadvantage against nations that stare wisely 
clear of purposely restrictions on or taxation of the very air 
we breath out;
    Will accelerate the transfer of wealth from your citizens' 
pockets to other nations' governments by way of boondoggles, 
such as the UN's clean development mechanism, and will 
appreciably increase global carbon dioxide emissions by 
transferring U.S. jobs and manufacturers to less efficient 
nations, whose emissions per unit of production are many times 
greater than your own, and by increasing poverty and 
consequently birth rates, and consequently carbon dioxide 
emissions world-wide, thereby exerting a prodigious and tragic 
cost, a double influence on the global climate that will be 
precisely the opposite of that which was, however piously, 
intended.
    Any restriction on the emission of carbon dioxide is 
unnecessary. It is simple to establish theoretically, and has 
been so established, that the UN's climate panel has 
exaggerated the true effect of carbon dioxide's enrichment on 
global temperature sevenfold.
    To confirm that theoretical result, it is simple to verify 
empirically and has been so verified by direct and repeated 
satellite observation that the diminution over time and the 
outgoing long-wave radiation from the Earth is one-seventh of 
that which the UN's computer games to which we have heard 
referred by your Ranking Member, had been instructed to 
predict.
    As you will see, global temperatures have fallen for seven 
straight years. That fall in temperatures on all measures has 
gone largely unreported.
    Next slide, please.
    Carbon dioxide is accumulating in the air at less than half 
the rate the UN had imagined. You can see it there. Not one of 
the UN's games had predicted the rapid global cooling to which 
I've just referred. Sea surface temperatures have fallen for 5 
years.
    Could I have the next slide, please?
    Sea level has risen not at all for the last 3 years and is 
predicted to rise by little more than one foot this century, 
even on the forecasts of the UN's climate panel.
    Next slide, please.
    Worldwide hurricane intensity in October 2008 in the 
Northern Hemisphere was at its least for the 30 years of the 
entire satellite record.
    Next slide, please.
    Global sea ice--this is the Arctic sea ice you see here in 
purple--shows little trend in 30 years: 1980 on the left and 
2009 on the right.
    Next slide, please.
    You will also see that in the southern hemisphere, the sea 
ice extent reached a maximum as recently as October 2007, at 
the same time as a much more widely reported minimum occurred 
in the Northern Hemisphere.
    The ice sheets of Greenland and Antarctica are thickening. 
The Sahara is greening. There is no climate crisis.
    The correct policy response to the non-problem of global 
warming is not to cap or tax carbon dioxide emissions. It is to 
have the courage to do nothing.
    [The prepared statement of Lord Monckton follows:]

 Statement of Lord Christopher Monckton, Chief Policy Advisor, Science 
                      and Public Policy Institute

    As a Prime Ministerial policy advisor to Margaret Thatcher, inter 
alia I modeled the economic interactions of taxes and benefits on low-
income households with the aim of eradicating poverty, and investigated 
scientific frauds. I have written and lectured about the mathematics 
and physics of climate sensitivity. I advise institutions on climate 
change.
    I warn this honorable House that any proposal to inflict billions 
of dollars of new taxation on all citizens by charging selectively-
disfavored industries for arbitrarily-rationed permits to emit a 
harmless and beneficial trace gas that is necessary to all life on 
Earth and has little effect on its surface temperature will fall 
cruelly and disproportionately upon the poor, will threaten their very 
lives, will gravely diminish the liberty that is the glory of your 
great nation, will render difficult if not unlawful the pursuit of 
happiness, will raise little net revenue if the poor are adequately 
compensated by subsidy, will damagingly distort the labor market by 
widening and deepening the unemployment trap that already gives 
millions of your most helpless citizens a better income on welfare than 
in work, will imprison the poorest earners in a perpetual poverty trap 
by inflicting upon them a crippling marginal taxation and benefit-
withdrawal rate that powerfully deters them from increasing their 
earnings, will be complex, extravagant, and costly, will savagely 
compound the adverse effects of recession, of excessive public and 
private indebtedness, of fiscal incontinence, and of monetary laxity on 
industries and employment, will create soi-disant ``green'' jobs by the 
thousand while destroying real jobs by the million, will establish an 
unstable and artificial derivatives market in hot air that will enrich 
a handful of portly middle-men while impoverishing the people, will 
automatically and ineluctably defeat its own objective by so depressing 
economic activity that the ``market'' price of carbon dioxide will tend 
rapidly to fall as close to zero as it has done in both of Europe's 
attempts at a cap-and-trade scheme, will directly encourage fraud by 
incentivizing not only both parties to every transaction but also the 
regulatory authorities recklessly to overstate the magnitude of that 
transaction, will set your enterprises at a profound competitive 
disadvantage against nations that steer wisely clear of purposeless 
restrictions on or taxation of the very air we breathe out, will 
accelerate the transfer of wealth from your citizens' pockets to other 
nations' governments by way of boondoggles such as the UN's ``Clean 
Development Mechanism'', and will appreciably increase global carbon-
dioxide emissions by transferring U.S. jobs and manufactures to less 
efficient nations whose emissions per unit of production are many times 
greater than your own, and by increasing poverty and consequently 
birth-rates and consequently carbon-dioxide emissions worldwide, 
thereby exerting at prodigious and tragic cost a double influence on 
the global climate that will be precisely the opposite of that which 
was, however piously, intended.
    Any restriction on the emission of carbon dioxide is unnecessary. 
It is simple to establish theoretically, and has been so established, 
that the UN's climate panel has exaggerated the true effect of carbon 
dioxide enrichment on global temperature sevenfold. To confirm that 
theoretical result it is simple to verify empirically, and has been so 
verified by direct and repeated satellite observation, that the 
diminution over time in the outgoing long-wave radiation from the Earth 
is one-seventh of that which the UN's computer games had been 
instructed to predict. Carbon dioxide is accumulating in the air at 
less than half the rate the UN had imagined. Not one of its games had 
predicted the rapid global cooling of the past seven years. Sea surface 
temperatures have fallen for five years. Sea level has not risen for 
three years, and is predicted to rise by little more than a foot this 
century. Worldwide hurricane intensity in October 2008 was at its least 
for 30 years. Global sea ice shows little trend in 30 years. The ice 
sheets of Greenland and Antarctica are thickening. The Sahara is 
greening. There is no ``climate crisis''. The correct policy response 
to the non-problem of ``global warming'' is not to cap or tax carbon 
dioxide emissions. It is to have the courage to do nothing.

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    Chairman MCDERMOTT. Thank you for your testimony.
    We will now move to questions. I guess we could mark you 
down as doubtful.
    [Laughter.]
    Chairman MCDERMOTT. I'm going to talk to the other 
witnesses here, because I think something's going to happen 
here. I assume that all of you think it doesn't make any 
difference whether it's a carbon tax or cap-and-trade.
    Does anyone have any particular feeling about that 
particular issue, in terms of how it affects the poor, or the 
people on the bottom of the economic scale?
    Dr. DINAN. Either a tax or a cap-and-trade program if they 
were designed to have equivalent--that the price of the 
allowance under a cap-and-trade program was the same as a tax, 
would create the same price effects. As I said before, that's 
essential to the success of the policy.
    Chairman MCDERMOTT. Yes?
    Dr. BURTRAW. The one nuance to that is in the electricity 
sector where, depending on how emission allowances are 
distributed initially, there could be differential effects. We 
can come back to that.
    Chairman MCDERMOTT. Is there a preferable way to put out 
the money with the most social justice, to distribute the money 
to the people at the bottom? I'd like to hear your all three 
answers. What would you put your nickel down for?
    Dr. DINAN. Well, I think inevitably there's tradeoffs in 
the choices that policy-makers----
    Chairman MCDERMOTT. I know, but we're going to have to vote 
``Yes'' on one way to do it. So, what I want you to do is be a 
Member of Congress for just a moment. It's like how economists 
always talk--Henry Jackson one time said, ``I wish I could find 
a one-armed economist,'' because they say on the one hand this 
and on the other hand that.
    I want you to make a choice.
    Dr. DINAN. The CBO does not make policy recommendations.
    [Laughter.]
    Dr. DINAN. I can only tell you the tradeoffs that you face, 
but it's not our place to give recommendations----
    Chairman MCDERMOTT. Okay. So, I'll let you slide out. Yes?
    Dr. STONE. Here's my one arm.
    Chairman MCDERMOTT. Okay.
    Dr. STONE. My testimony laid out our bet. We're putting our 
whole stake into the pot on the rebate-oriented proposal with 
EBT system for low income----
    Chairman MCDERMOTT. The enemies who will come--give the 
other side of that argument. Somebody's going to come in and 
say, ``Oh, that doesn't work, it won't work. Let me hear what 
they're going to say about that.
    Dr. STONE. What the other side would say?
    Chairman MCDERMOTT. Yes.
    Dr. STONE. What--okay, that's an interesting position to 
put me in. Now, what the other side would say is that it's an 
expansion of the welfare system. We saw a chart that showed 
that, but it's not, because it's putting money back into 
people's pockets, that came out as a result of the tax. It 
gives people the ability to maintain their standard of living 
while still facing higher energy prices, and respond to them 
appropriately with conservation, but without being pushed 
farther into poverty.
    They might say that it can't possibly work, but we have 
worked hard to have effective delivery mechanisms that rely on 
programs that are already in place to do it.
    Dr. BURTRAW. RFF does not take positions. They don't pay me 
the big bucks they pay you to make the hard choices.
    I do have an opinion about this in the final analysis. Cap 
and dividend has the advantage that it establishes a common 
franchise in what economists call a common pool resource. I 
think it's a signal that we are all in this together, and we're 
building an institution that may have to last for a century, 
and that means it's going to need to have broad public support, 
and the needs are going to need to be simple and transparent, 
and I think cap and dividend is an approach that has the 
longest legs to help us get through this.
    Chairman MCDERMOTT. Are you talking about the President's 
plan that's in his budget?
    Dr. BURTRAW. Not exactly. The plan that's in the 
President's budget is just a sketch. It's I think the beginning 
of a conversation that accomplishes a lot of good things, but 
it's not very detailed.
    I think a broad-based and simple cap and dividend would be 
as a couple of us have described it, and similar to the 
legislation proposed by Representative Van Hollen, would just 
be a per-capita or per-adult redistribution of all or a vast 
majority of the allowance value or tax revenue raised under the 
program.
    Chairman MCDERMOTT. The Make Work Pay proposal only goes 
for 2 years. So, if you put this money through that mechanism, 
the public will never recognize that we have continued 
something. They will think it's something that was created and 
brought down by Moses and that's the way it's going to be.
    Is there a real reason for taking that proposal from the 
White House?
    Dr. STONE. One reason is that the budget situation is 
really, really difficult and the President made a commitment to 
Making Work Pay. If he were to make Making Work Pay permanent 
and also have to come up with a way to provide the kind of 
offset to consumer costs we're talking about, that would make 
the budget situation nearly impossible.
    Now Make Work Pay does not fully satisfy the needs of 
offsetting consumer relief to especially low-income consumers. 
It would need to be supplemented with something like our EBT 
proposal to deal with people that don't file income tax 
returns.
    It also doesn't go up over time and the cost of the energy 
price increases, that cost of allowances, or the price of a 
carbon tax might have to go up over time, to tighten up on the 
emissions cap.
    So, Make Work Pay would also have to be supplemented with 
an additional climate payment, and pretty soon it would be more 
than just Make Work Pay.
    Chairman MCDERMOTT. Mr. Linder will inquire.
    Mr. LINDER. Lord Monckton?
    Lord MONCKTON. Sir?
    Mr. LINDER. To provide this huge amount of money for the 
lower income or middle income, or 80 percent of the households, 
whatever we choose to do, to mitigate against their increasing 
energy costs, there's got to be some money coming from 
somewhere. Under cap-and-trade, my understanding is we auction 
off excess carbon credits or emissions, and that money 
generated goes to pay for the aid to the low-income people.
    Lord MONCKTON. That would certainly be one mechanism, yes.
    Mr. LINDER. Well, how has Europe's system been working so 
far?
    Lord MONCKTON. The European system has collapsed twice. 
It's actually in the middle of its second collapse now.
    I should explain that the European Union, which is not as 
you splendidly are, a democracy, but a bureaucratic centralist 
dictatorship, takes all its decisions without real reference to 
the needs of ordinary people.
    So, what happened was that each of the countries in the 
European Union decided that it would vote itself a larger 
amount of emissions under the scheme--free emissions under the 
scheme--than they were emitting in total before.
    So, they tried that, and of course immediately the price of 
carbon on the market on which it is traded, which is an 
artificial rigged market, fell to the market-clearing level, 
which of course in those circumstances was zero.
    So, within three or 4 months, the entire system had 
collapsed and had to be re-jigged. There was then another 
meeting of, again, bureaucrats--elected representatives have 
very little to do with any of this--and they decided that this 
time they had better try to allocate rather fewer emissions 
permits to each country, in the hope that that would 
artificially increase the price at which these permits would be 
traded.
    However, by that stage, fiscal and monetary incontinence 
had caused an economic collapse worldwide, and the downturn in 
economic activity, once again drove the price of carbon credits 
down, and now I think it's somewhere $5 and $8 per ton, which 
is not a disincentive to the emission of carbon.
    So, the system has now failed twice.
    There is a particular problem when you try to introduce any 
form of additional taxation, for that is what this essentially 
is, when you already have an outrageously growing money supply, 
a collapse in government revenues, and huge increases already 
in social costs.
    If you try to compound those three extremely serious 
difficulties by adding a fourth extremely serious difficulty, 
you will drive your Nation very rapidly into bankruptcy. You 
will do it alone, for we are not going to do this again.
    Mr. LINDER. Reference has been made to jobs and emissions 
moving into other nations. How do you envision the future for 
the United States of these jobs?
    Lord MONCKTON. I fear for the poor of the United States. We 
already have some evidence in from California, where they 
decided under Governor Schwarzenegger to get ahead of the pack, 
and introduce various restrictions. That has led to a mass 
exodus from California, and a collapse in the State's revenues, 
and it's becoming one of the least attractive places in the 
nation to do business.
    The more you pile taxes on at a time when actually what 
should be happening is a reduction in the Federal and State's 
spending so as to discipline things, and not take too much 
money as--if you go on this way, then the private sector of the 
economy will implode.
    If you listen to these three and you try to say that only 
the top 40 percent or 60 percent of the economy should pay for 
all this extra cost--which is understandable, because otherwise 
you will hurt the poor, I can understand exactly where they're 
coming from--then those top 40 or 60 percent will do what the 
Californians are already beginning to do. They will get out, 
and your economy will go down.
    This is a catastrophically dangerous proposal. I want you 
all to understand this. If you really want to help the poor, 
you will not go there.
    Mr. LINDER. Do you expect other nations to follow suit if 
we, acting in our best wisdom, decide that we have to do 
something about climate change?
    Lord MONCKTON. Well, you may wish to do something about 
climate change. It is, of course, now a demonstrated non-
problem.
    You only have to look at the temperature record for the 
last 7 years, the CO2 rising at half the rate they 
predicted it to rise. That alone requires all their temperature 
forecasts to 2100 to be halved.
    If you do this, I think you will be doing it alone. America 
will be damaging her own economy uniquely, and she will be 
transferring her jobs and her industries to countries such as 
China, Russia, Indonesia, India, and Brazil, where they do not 
control emissions and pollution in the way that you do, where 
their emissions per unit of production are considerably higher 
than yours, and the net effect of this scheme will be directly 
counter to its intention, because you will actually increase 
worldwide carbon emissions by shipping your economic carbon 
emissions in your manufacturers overseas, with the consequence 
that the emissions will actually increase worldwide.
    That is not what you intend. I hope therefore it is not 
what you will do.
    Mr. LINDER. Thank you.
    Thank you, Mr. Chairman.
    Chairman MCDERMOTT. Ms. Berkley will inquire.
    Ms. BERKLEY. Thank you, Mr. Chairman, for holding this 
hearing. Thank you all for being here. I appreciate the input 
and the divergence of opinions.
    I'm a former utility attorney for a gas company in Las 
Vegas in the last 1970s, and even though I thought I had a good 
handle on issues that affect energy, energy consumption, 
renewable energy, I can say that the issues that I dealt with 
as a utility attorney in the 1970s is quite dramatically 
different from the issues that we're grappling with as a Member 
of Congress.
    Nevada, which is the State that I represent, is in the 
forefront of the climate change debate. In 1997 the State of 
Nevada enacted a renewable energy portfolio standard, requiring 
that 20 percent of our electricity comes from renewable sources 
by the year 2015.
    Southern Nevada's solar potential coupled with our State's 
geothermal and wind resources, which are among the strongest in 
the United States, can make Nevada a leader in the use and 
production of clean energy.
    Our utility companies are rapidly moving in that direction, 
and they have been good partners with our government in moving 
us forward.
    Focusing on clean and renewable energy gets us closer to 
our goal of becoming energy independent while also being cost-
effective.
    It is incomprehensible to me, as a member of Congress of 
the strongest country on the planet, that we have to rely on 
countries like the Saudis, the Venezuelans, the Nigerians, to 
have our energy needs met.
    I think moving toward renewable energy and energy 
independence is not only an environmental issue, which I 
believe it is, not only an economic issue, which I believe it 
is, but it's a national security imperative.
    Now some might be tempted to jump on the nuclear power 
bandwagon as a potential solution to climate change dilemma. I 
would caution my colleagues against this. Nuclear power is not 
a clean source of energy, because it has a toxic, lethal, 
radioactive byproduct, which is nuclear waste, that this nation 
has not figured out what it's going to do with.
    Yucca Mountain is not an option, and I would submit to you 
that the State of Nevada will never be a repository for this 
nation's energy nuclear waste.
    Burying that waste in the middle of the desert, 90 miles 
from Las Vegas, where we have ground water problems, seismic 
activity, and volcanic activity, where we have no canisters 
that currently exist that will not corrode, and the radio-
active nuclear waste that has a shelf life of 300,000 years of 
radioactivity, there is no way to prevent it from leaching into 
our ground water.
    There is not enough water in the State of Nevada, and it 
takes lots and lots of water in order to produce a nuclear 
waste dump. This is unsafe, not an option, and not going to 
happen.
    Without a safe solution to the nuclear issue, our attention 
should be on how to produce more clean energy, like solar, 
wind, and geothermal.
    Now while we must address the issue of climate change, 
which I believe is real, with all due respect--although I must 
say I don't agree with what you're saying, but I love hearing 
you say it--it's just wonderful.
    Lord MONCKTON. Thank you, madame.
    [Laughter.]
    Ms. BERKLEY. We must find a way to mitigate the economic 
impact on low- and middle-income families, which will face a 
disproportionate burden, and I look forward to being a part of 
the process.
    I cannot thank you all enough for giving us information 
that I need in order to make these difficult decisions and 
choices.
    Thank you very much.
    Chairman MCDERMOTT. Mr. Boustany will inquire.
    Mr. BOUSTANY. Thank you, Mr. Chairman. The title of this is 
hearing is protecting low income families while addressing 
climate change, and I want to address my initial line of 
inquiry to the three of you on my left here. In your verbal 
testimony none of you have mentioned any other aspect of 
protecting low-income families other than a transfer back from 
this tax.
    I want to congratulate you in your written testimony, Dr. 
Burtraw, that at least you gave lip service to other aspects of 
what the impact would be on low income on page four of your 
testimony. I represent some very hardworking individuals and 
small businesses along the Gulf Coast of the United States. 
Many of these are directly involved in the energy industry and 
there are many, many thousands of jobs indirectly related to 
those energy producing jobs. So, I would like to ask the three 
of you how many jobs are we going to kill with this type of 
proposal.
    Dr. Dinan.
    Dr. DINAN. CBO has never provided an estimate of the number 
of jobs that are lost. It depends in part on the actual policy, 
how quickly caps are phased in. Job losses tend to be 
transitional costs.
    Mr. BOUSTANY. I understand that, but we are looking at some 
fairly specific proposals here without the phase-in time. We 
need information before we jump off on this. This is critical. 
We are seeing massive unemployment today with the remaining 
areas of employment in an area that is vital to our National 
security, the energy sector. Without an adequate transition 
strategy, we need to know how many jobs these types of 
proposals will kill. So, with all due respect I would ask CBO 
to get to work on this.
    Dr. Burtraw, would you like to discuss this?
    Dr. BURTRAW. Yes, very briefly I am familiar with some work 
in this area, and some work has been done at Resources for the 
Future. There are some facilities and industries that may be 
severely affected, and they are affected in two ways. One is 
sort of the natural outcome and what we would expect, and over 
a transition would want to have happen, which is a transition 
away from carbon intensive to less carbon intensive activities.
    The second is the kind we want to avoid, which is exposure 
to unfair import and export competition with other countries 
that are not part of the international climate regime.
    Mr. BOUSTANY. Well, you are right. I think in addition to 
the energy jobs that I mentioned on the Gulf Coast of 
Louisiana, Mississippi, Alabama, export jobs I think will be 
severely impacted by this.
    Dr. BURTRAW. The estimates that we have developed suggest 
that for those facilities that are subject to unfair 
competition that they could be held whole with about three to 4 
percent of the total allowance pie; that is, a rebate system, 
for example, to those facilities to ``alleve'' them of their 
allowance burden would maintain their competitiveness on the 
international market. Finally, as other speakers said today, 
there still will be leakage.
    We estimate that that leakage that is the movement of 
omissions offshore, even as we are doing what we want to do, we 
cannot close that down entirely; and, that may run up to as 
much as 10 percent of the overall omission reductions that we 
were able to achieve on-shore, but that could be held in-check 
with a well-designed program to 10 percent.
    Mr. BOUSTANY. Dr. Stone.
    Dr. STONE. Yes, thank you.
    There will be transition losses in specific industries, and 
as Dallas said, there is allowance value. It is not that 
expensive to try to address them in terms of the allowance.
    Mr. BOUSTANY. So, in other words, we're going to have a 
massive increase in unemployment and at the same time we will 
be transferring money from this tax to these folks who are 
unemployed. How does that protect families?
    Dr. STONE. Well, it is very unlikely that we will have a 
massive increase in unemployment. There will be changes in 
where the jobs are.
    Mr. BOUSTANY. Nobody has modeled that, and nobody has given 
us an estimate, so I think you are speculating. I think we need 
numbers.
    Lord Monckton, would you like to comment?
    Lord MONCKTON. Yes. You will increase employment about 200 
percent if you pursue this measure over and above what it will 
rise to anyway. That's our experience in the U.K. I have done 
some modeling on this and the consequences will be very severe 
indeed if you attempt to impose any measure of this kind on 
your economy.
    Mr. BOUSTANY. Lord Monckton, you said 200 percent?
    Lord MONCKTON. Yes.
    Mr. BOUSTANY. You said employment or unemployment?
    Lord MONCKTON. I said unemployment.
    Mr. BOUSTANY. Unemployment, just for clarification.
    Lord MONCKTON. So, if you take unemployment as 'x', it will 
be 3x by the time you will finish this process. That's if you 
want the carbon tax to be at a level which will have any sort 
of disincentive effect at all and thereby to try and reduce 
your own emissions. Though of course you will then increase the 
emissions of everybody else and you will merely get greater 
worldwide emissions. No cash benefit, massive unemployment 
here; I'm afraid that cap and trade is a remarkably stupid 
proposal. I just pray that everyone on this Committee will 
think very, very carefully and examine the consciences before 
they expose the fault of the catastrophe that this tax would 
entail.
    Mr. BOUSTANY. Thank you, sir.
    Dr. Dinan, did you want to make a final comment?
    Dr. DINAN. I want to add something to what Dr. Burtraw 
mentioned. The free allocation of allowances that would benefit 
workers would not be the same kind of lump sum rebate that we 
have been talking about in our testimony. It would be an 
allocation of allowances that would be linked to their actual 
level of production, and that way it would help prevent these 
trade-exposed industries from being less competitive. So, the 
idea was not to use the allowances to pay unemployed workers, 
but to reduce the actual loss in jobs.
    Mr. BOUSTANY. Thank you. My time is up.
    Chairman MCDERMOTT. Mr. Davis of Alabama.
    Mr. DAVIS of Alabama. Thank you, Mr. Chairman.
    I was wondering who got the extra allowances from Ms. 
Berkley being so concise, speaking of cap and trade here. Let 
me begin with you Dr. Burtraw. You talked about the impact on 
household burdens in particular regions based on utility rates 
going up. What are the numbers for the south for the Georgia, 
Alabama, Mississippi, Louisiana neck of the woods?
    Dr. BURTRAW. Try though I might, I can't come prepared to 
give you all the numbers for different parts of the country 
directly. Let me just characterize the problem for you in this 
way. The impacts that occur around the nation are more similar 
than they are different by region. What is really different by 
region is the component parts of the way that households use 
energy.
    In some regions, it is for home hearing. For other regions 
it is for air conditioning load under electricity. Some 
regions, there is more transportation expense, et cetera. It is 
interesting that it adds up to be fairly similar across the 
nation geographically. So, therefore, the design of the program 
could have differential effects, because of the attempt to 
treat certain energy uses in this special way.
    Now, in the Southeast, the fact that I think is a usual 
point of orientation is there are some regions that are going 
to see the larger change in electricity prices, and the 
Southeast is not in front of that, but it is on the top half of 
where electricity prices will increase. What is interesting 
about that, with the exception of the Pacific-Northwest.
    Mr. DAVIS of Alabama. Well, slow down for 1 second, because 
I am not from the Northwest or from the Southeast, so I want 1 
second.
    What would you expect, based on your model, what would you 
expect to happen to rates in the Southeast?
    Dr. BURTRAW. Well, on a national average, let's say 20 
years out from now on a national average, in order to do what 
most models suggests has to be done to achieve climate goals 
we'll see an increase of about 30 percent on a national average 
electricity rates.
    Mr. DAVIS of Alabama. Does anybody have a number to venture 
when it comes to the Southeast, and does anybody have a number 
more than the 5- to 6-year range, 5 to 6 years after 
implementation?
    Dr. BURTRAW. I can give that to you in 1 minute.
    Mr. DAVIS of Alabama. Okay. All right. Well, I've got about 
2 minutes 49, so you have got some time to look for that, 
because I would like an answer to that.
    Dr. Stone, let me turn to you, because you've been the most 
descriptive in terms of speaking about the rebate concept 
that's gotten a lot of play in some circles. Let me ask you, 
how do you define low income? You used the term ``low income'' 
several times. How do you define low income?
    Dr. STONE. The low income rebate that we are talking about 
is one that would off-set the average.
    Mr. DAVIS of Alabama. Give me a number in terms of the 
income level. What do you define as low income? What percentage 
of the median income?
    Dr. STONE. What percentage of the median income? Okay. The 
income we are talking about with our low-income proposal is 
going up to 130 percent of poverty. The earned income tax cut 
fully phases out at a little over $43,000 for a married couple 
with two children.
    Mr. DAVIS of Alabama. Okay. So, 130 percent of poverty 
would be, give me a number. The poverty line is $21,000 for a 
family of how many, three or four?
    Dr. STONE. I don't have that readily at hand. I'll get 
those numbers too.
    Mr. DAVIS of Alabama. So, 130 percent of that would be 
around $29-30,000?
    Dr. STONE. The top of the bottom fifth of the population. 
The income cut-off for a family of three is about $27,500; and 
so our rebate proposal will go a little farther up.
    Mr. DAVIS of Alabama. What do we say to someone who is 
making $45,000 who is not affluent by any stretch of the 
imagination, but is outside that zone you described and well 
outside it. What would we say to them if their utility rates 
went up substantially?
    Dr. STONE. Well, we would say to them if we as 
policymakers, if you as policymakers want to extend the rebate 
proposal further up the income scale you can do that. I talked 
about a proposal that would go all the way up into the middle 
that would still leave.
    Mr. DAVIS of Alabama. Of course, if you did that, you would 
eat away a lot of the whole rationale for doing this in terms 
of alternative energy investment.
    Do you have that number yet, Dr. Burtraw?
    Dr. BURTRAW. No. I'm going to have to send it to your 
staff. I'll do that.
    Mr. DAVIS of Alabama. Well, let me just make this 
observation. Let me pose one more question to Dr. Burtraw and 
Dr. Stone.
    What are the specific industries, other than the obvious? 
Obviously, the petroleum producing industry would be 
substantially affected. Beyond the petroleum producing 
industry, what are some other industries that would be most 
significantly affected by a cap and trade regime in terms of 
job loss?
    What are the next two or three big industry losers? Anybody 
can answer that.
    Dr. BURTRAW. I can't go very deep on that subject, because 
I don't really know what's at the front of the cue. Again, my 
colleagues have been working on this.
    Lord MONCKTON. May I assist, Congressman?
    Steel construction, heavy industries of every kind, any 
heavy user of energy, as well as of course all the producers, 
the coal industry, in particular, will be very badly affected. 
These will be the first to go, but then it will be spread out 
from there, because energy is a very big cost for most 
industries; and, therefore, all industries that use energy will 
be adversely affected at a time when more and more industries 
are marginal anyway. You will push quite a large percentage of 
your industries or all kinds over the edge.
    Mr. DAVIS of Alabama. Well, my time is up, but I'd like to 
add 15 seconds of observations. I think, there's a temptation 
to see this as a little bit of a partisan debate, because 
that's the way it often tends to play out in Committee and 
Subcommittee. I think it is a little bit more nuanced than 
that.
    The second big observation I would make is that I think we 
do have to be concerned about the impact on particular 
industries and the fact that those industries aren't 
proportionately located around the country. They are 
disproportionately located in the Midwest and the South.
    My final point, Dr. Stone, is that any kind of a rebate 
regime is going to have a basic problem that there are going to 
be major numbers of people who simply aren't covered by it but 
who still are paying higher utility rates; and, frankly, they 
are turning to Washington, D.C. at that point and blaming 
Washington, D.C., which is ratcheting up their animosity and 
their anti-government attitude toward a region they are not 
crazy about anyway. To some of us that is an acceptable 
political cost; but, I yield back my time.
    Chairman MCDERMOTT. Mr. Heller will inquire.
    Mr. HELLER. Thank you, Mr. Chairman.
    Sir Monckton, I have a couple questions.
    Lord MONCKTON. Sir?
    Mr. HELLER. Specifically, in your opening comments you 
mentioned scientific fraud. We saw two charts here in the 
opening presentations. One showing the global mean temperatures 
going up, one showing the global mean temperatures going down, 
these are your charts.
    Lord MONCKTON. Yes.
    Mr. HELLER. Could you explain to us what the end-point 
fallacy concept is?
    Lord MONCKTON. Yes, certainly. I didn't show those charts 
to the Committee, but I did show them to you beforehand.
    Mr. HELLER. Do you have copies of those?
    Lord MONCKTON. I don't know if we have got them on the 
slides here. No, but, yes, what I was pointing out is that the 
U.N. in one of its documents tries to show that there has been 
an accelerating increase in the rate of warming over the past 
150 years. So, that from every shorter time scale, as you come 
toward our own time, temperatures have been increasing.
    That, however, is merely a consequence of a statistical 
piece of prestidigitation. It is the end-point fallacy where 
when you are dealing with data which is doodling up and down 
and you choose your start and end points very carefully, as the 
U.N. I am afraid in a rather deliberate way did, you can 
artificially show a problem which in fact doesn't exist. As I 
showed in here, the temperatures for the past 7 years, 
globally, have been falling extremely fast; and indeed over the 
past 4 years, they have been falling at a rate equivalent to 
eleven degrees Fahrenheit per century, which would give us an 
ice age within about 50 years.
    I am not saying this is going to happen, but I am saying 
not to take account of the fact that there has been 7 years of 
very strong global cooling casting extremely strong doubt on 
the U.N.'s calculations, would be most unwise of this 
Committee.
    Mr. HELLER. Thank you.
    Mr. Chairman, could I request that those charts be put in 
the record that he has on this end-point fallacy?
    Chairman MCDERMOTT. Without objection, it is ordered.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T9410A.008
    

                                 

    Mr. HELLER. Okay. Thank you.
    Lord MONCKTON. Thank you.
    Mr. HELLER. I'll yield back.
    Chairman MCDERMOTT. Mr. Levin?
    Mr. LEVIN. Well the title of this hearing is ``Protecting 
Low Income Families While Fighting Global Warming.'' I think 
the problem is if one doesn't think there is global warming 
then I guess nothing happens.
    Lord MONCKTON. Yes, sir.
    Mr. LEVIN. So, I want to spend a few minutes on this.
    Mr. Davis, Mr. Chairman indicated that there should be 
bipartisanship and I think that's very true, but this is the 
second hearing that Ways and Means has held on this issue; and 
at both hearings the witness called by you, the minority, has 
denied there is a problem. Most of you, if not all of you, have 
essentially credited that conclusion with your questions.
    I said at the first hearing that I find that worrisome, 
because if there is that basic split to start with, you 
essentially, on the minority side, are leaving yourself out of 
any useful dialog about how we would implement a program that 
relates to the issue of global warming; and, I think that would 
be unfortunate. When you adopt a position that there is no 
problem, you are not going to be able to be effectively 
participate in discussion of its solution. Lord Monckton?
    Mr. BOUSTANY. Would the gentleman yield?
    Mr. LEVIN. Yes, sure.
    Mr. BOUSTANY. I think my line of inquiry was about the 
impact on unemployment. It had nothing to do with whether or 
not there's global warming.
    Mr. LEVIN. Well, your's was, but that wasn't true of the 
others and that wasn't true at the hearing we had.
    Mr. BOUSTANY. Would the gentleman yield?
    Mr. LEVIN. I just want to say that, Lord Monckton, your 
position is essentially a very small tiny position among 
scientists and you're not a scientist.
    Lord MONCKTON. May I answer that, sir?
    Mr. LEVIN. So, I just want to say, with due respect, that 
when you say your description here in your paragraph about 
charging selectively disfavored industries for arbitrarily 
rationing permits to admit a harmless and beneficial trace gas 
that is necessary to all life on Earth and has little effect on 
its surface temperature will fall cruelly and 
disproportionately upon the poor.
    That isn't the purpose of our hearing to argue that, but 
once that position is taken, essentially it leaves the 
proponents out of a meaningful participation in how we put into 
place a program that addresses a problem that most say does 
exist. I'm telling you what has bothered me for years about 
this. I don't understand why there is that line-up. I don't 
understand it.
    Does it stem in part from those who feel that if you accept 
the fact--and there's a statement that came out that was in our 
testimony of the scientists in the United States. They've come 
together. I think it was 1700 scientists who just made it clear 
there is a problem in May 2008. More than 1700 scientists and 
economists, and they cross the spectrum, released a joint 
statement calling on this nation's leaders to swiftly establish 
and implement policies to bring about deep reductions in heat 
trapping emissions. I come from Michigan. I'm worried about the 
impact on the industrial sector.
    We have to face this. I am clearly worried about the impact 
on low-income people, but, if the position of the minority is 
to essentially embrace your position, which is a microscopic 
minority of people who look at this.
    Mr. LINDER. Would the gentleman yield for a moment?
    Mr. LEVIN. Yes.
    Mr. LINDER. Are you aware that 32,000 scientists, 10,000 of 
whom have PhDs in the sciences and the rest of whom have 
masters have signed a position that's opposite to the one that 
you hold, that your 1700 people hold? They hold a press 
conference in this town, and 12 people showed up and no one 
wrote about it?
    Lord MONCKTON. Mr. Chairman, I wonder if I might make a 
constructive suggestion?
    Mr. LEVIN. I am. I am aware of that, and I raise it, Mr. 
Chairman, because if this is the way the line was began, if 
that's where we are, it is going to make it difficult for us to 
have what is necessary, and that is an effort on a bipartisan 
basis to work out a program that will address global warming.
    So, maybe my time is up.
    Chairman MCDERMOTT. It is.
    Lord MONCKTON. May I briefly respond, sir?
    Chairman MCDERMOTT. I am going to move to Mr. Roskam. Maybe 
he will give you a moment to speak. Mr. Roskam.
    Lord MONCKTON. Thank you so much.
    Mr. ROSKAM. Thank you, Mr. Chairman.
    Two years ago my wife and I were on a holiday in Ireland 
and we were on one of these walking tours where you spend a lot 
of time outdoors, out in the countryside, and noticed how 
robust the economy was. You just looked around and could see it 
was very, very prosperous, very dynamic and very exciting. One 
morning at one of the bed and breakfasts we asked the young guy 
that's presenting us with our meal, ``Hey, what's going on in 
Ireland?'' He said, ``Well, the government did an interesting 
thing. They decided to cut taxes, lower regulation, and people 
decided to come.''
    It was a revelation to this young man that government 
policy was driving investment. So, the question that I have for 
the panel is what is the implication. Sir Monckton, let's start 
with you.
    What is the implication from an economic point of view for 
the United States if we go it alone. Let's accept Mr. Levin's 
premise that there is a catastrophic problem. There is not 
unanimity on that, but let's accept this premise today that 
there is a catastrophic problem that's got to be dealt with.
    Mr. LEVIN. Well, it is not catastrophic. It's a major 
problem, okay?
    Mr. ROSKAM. A major problem--I will let him unyield and 
amend my time--that there is a major problem that needs to be 
dealt with but that the United States goes it alone, that China 
doesn't participate, that India doesn't participate, that 
Europe for one reason or another doesn't participate. Could you 
comment in the brief time that you have on the geopolitical 
implications and also the economic implications for the United 
States in light of that.
    Lord MONCKTON. Yes, I would be delighted.
    You raise, very fairly sir the point about China and India. 
They have both made it explicitly clear; and, indeed, in 
India's case with the endorsement of railway engineer Pachourie 
who is the chairman of the U.N.'s climate science pattern. He 
too is not a climate scientist.
    They have made it very clear they will not be participating 
in emissions reductions, because they know very well that to 
reduce carbon emissions is the quickest way to keep their 
countries in poverty and prevent them from bringing themselves 
out of poverty, thereby stabilizing their emissions and thereby 
eventually getting things into balance.
    So, they will not be participating. If you disadvantage 
your own industries selectively when major competing countries 
in China and India are now major competing countries, are not 
going to reduce their emissions, because they cannot leave 
their poor people in poverty. Then, of course, you will get 
what I have called here the California effect. We already have 
an example in California of people moving out of California to 
other States in quite large numbers in the last couple of 
years. As the carbon dioxide-drive restrictions imposed by the 
Governor have begun to bite, we can already see this happening 
internally within your own country. If you go for a selective 
unilateral shooting of yourselves in the economic foot, 
economic self-immolation, then the consequences will of course 
been very bad.
    Who are the people who will be affected first? Not us, the 
rich; it will be the poor. It always is, and it is very 
important. Your story about Ireland is a very good one. 
Deregulation was something that I and others in Margaret 
Thatcher's Administration spend a lot of time on. We simplified 
the law. We reduced substantives. We reduced handouts, and yet 
we reduced poverty. We reduced homelessness. We reduced 
unemployment because we increased economic activity.
    Every time you tamper with the free market or try to set up 
a rigged market, or try to inflict economic cost upon 
yourselves, but others are not inflicting upon their selves. 
However pious your intention, not only will that intention 
fail, but you will do appalling damage particularly to the 
poor. If I may very briefly answer, Mr. Levin, I was moved by 
what he said. I think he raised a very fair point in saying 
should be a bipartisan approach on these. In that spirit, I 
should like to offer to him and to any of his colleagues. I 
will arrange that certain very senior scientists will visit Mr. 
Levin and his colleagues and give them a briefing to explain 
why it is that we have very severe doubts about the likelihood 
that there is any threat from global warming, I should say.
    We could give you the scientific evidence, which lies 
behind the graphs which I showed you and those are not my 
graphs. Those are official graphs which are available, very 
widely, from recognized sources, most of them in the United 
States. The global warming that is foretold has not happened, 
is not happening, and will not happen. We should be very happy 
sir, in a bipartisan spirit, to explain to you in some depth, 
perhaps at an hour or two-briefing, exactly why that is the 
case, if you would like it.
    Mr. ROSKAM. Thank you.
    Lord MONCKTON. Thank you very much, sir.
    Mr. ROSKAM. My time has expired.
    Chairman MCDERMOTT. Your time has expired.
    Mr. Davis of Illinois.
    Mr. DAVIS of Illinois. Thank you very much, Mr. Chairman. 
Let me thank you for calling this hearing.
    Dr. Dinan, some of the Members have criticized refundable 
tax credits by saying that these credits go to people who don't 
pay taxes. Could you tell us what taxes low-income people pay, 
even if they don't pay Federal income taxes?
    Dr. DINAN. Well, as the CBO analysis that I showed the 
figure indicated, over half of households in the lowest fifth 
of the income distribution have payroll taxes. They have 
earnings, so they're contributing to payroll taxes. I think the 
estimate was 54 percent of low-income households.
    In addition, low-income households would bear other types 
of household taxes as well, including sales taxes, some local 
property tax burdens.
    Mr. DAVIS of Illinois. So, when individuals make that 
statement for practical purposes, they are actually inaccurate. 
It is not true that these individuals do not pay taxes. They 
may not pay one kind of tax, but they pay other taxes, and 
that's my point.
    Lord Monckton, you talked about the fear that you had for 
low income, well, you said poor people?
    Lord MONCKTON. Yes.
    Mr. DAVIS of Illinois. Could you expound a bit more?
    Lord MONCKTON. Yes, certainly. The modeling that I did at 
10 Downing Street on this subject showed how very sensitive, in 
particular, low income families are even to very small, even to 
very temporary, increases in their costs. This is a very severe 
problem, and the difficulty that you face, if you are trying to 
introduce what I am afraid is effectively a reverse poor tax, 
which selectively hits the poor worst.
    As you have heard, even from the other witnesses, and we 
are all on agreement on this, it is the poor. I use the poor as 
a shorter term than low-income families. I mean no disrespect 
to anyone. They suffer worst because they use energy the most. 
By the time you've tried to work out a rebate scheme that is 
sufficiently simple to administer, unfortunately, there will be 
large numbers of families who don't quite fit into the pattern 
that was envisaged and they will go cold or go unheeded, or go 
unlighted, because they simply won't be able to afford basic 
energy.
    Mr. DAVIS of Illinois. Let me just ask.
    Lord MONCKTON. Yes, sir.
    Mr. DAVIS of Illinois. Dr. Stone, you wanted?
    Dr. STONE. Yes, our rebate scheme automatically brings in 
75 percent of the low-income population without any effort at 
outreach and expansion. Many more would come in as a result of 
the availability of the rebates. What we learned in the 
stimulus rebates a year ago that there weren't people outside 
who didn't file taxes, elderly, if you reach out to them you 
can get a lot of them to file for the rebate. So, I think this 
notion that large numbers of low-income people would be left 
out of a rebate scheme, because it is too hard to design. It is 
just not what we have found inside of our program.
    Mr. DAVIS of Illinois. Well, let me ask you, Dr. Burtraw.
    Congress and the President have just made a substantial 
commitment to decrease energy costs and increase energy 
efficiency through weatherization and other kinds of programs.
    What other steps could families take that would also help 
lower costs?
    Dr. BURTRAW. The main steps the family can take is the 
turnover of appliances and household capital. That takes money 
to be able to accomplish that, to achieve energy efficiency, 
weatherization programs, and turnover appliances. One idea that 
has been suggested under the notion of a cap and dividends 
approach would be to provide incentives, sort of like the 529 
plan for college savings, to encourage families to try to 
accrue, and then perhaps take advantage of matching funds, zero 
interest loans from the existing State efficiency programs, or 
to take advantage of other investment programs to encourage new 
clients, purchases.
    Mr. DAVIS of Illinois. So, then it is actually advantageous 
for individuals after a period of time to replenish equipment 
that they use. I mean that you are losing if you hang on to it 
because your energy costs are constantly either going up or 
certainly not diminishing.
    Dr. BURTRAW. Yes, sir. It is widely recognized that because 
of cash-flow constraints, low income households hold an 
inefficient stock of appliances, and it should be a concern 
that raising energy prices isn't going to help that situation 
directly. If some kind of rebate program were to provide 
capital available to homeowners, we could accelerate the 
turnover of household appliances.
    Mr. DAVIS of Illinois. Would this also be a way to perhaps 
create new jobs and work opportunity as we make greater use of 
new equipment?
    Dr. BURTRAW. Well, sir, the only thing I can speak to 
specifically is the employment effects of weatherization 
programs, and there it is widely understand they have a very 
positive, local beneficial effect that takes a lot of labor to 
run weatherization programs.
    Mr. DAVIS of Illinois. Thank you very much, Mr. Chairman.
    Chairman MCDERMOTT. Mr. Tiberi will inquire.
    Mr. TIBERI. Thank you. Thank you, Mr. Chairman. I submit 
for the record an EPA analysis that was done the last session 
of congress on the Warner-Lieberman bill and the decline in 
output per sector and job growth.
    Chairman MCDERMOTT. Without objection; so ordered.
    [The information follows:]

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    Mr. TIBERI. Thank you. Thank you very much. Thank you 
ladies and gentleman for being here. I am from Ohio. In Ohio we 
have lost hundreds of thousands of jobs, many in manufacturing 
over the last several years. In your written testimony, CBO 
acknowledges that almost all goods and services will rise in 
this proposed bill, not just energy. In fact, Mr. Burtraw, in 
your testimony you say roughly only 30 percent of households in 
the Ohio Valley region would benefit under a cap and trade 
system. In other words, 70 percent would not benefit in the 
Ohio Valley under a cap and trade system.
    I spoke to a manufacturer in Ohio, third generation 
manufacturer, yesterday; and his company, a family owned 
business, analyzed what this would do to them. He said simply, 
``We would move. We would move and we would move to South 
America or somewhere else in the world.'' While we are in a 
deep recession, the last thing we need to do is have 
manufacturers in Ohio who have not left leave because this 
piece of legislation. We would put more people in the poverty 
line, not less people in the poverty line.
    To answer, Mr. Levin--I wish he was still here--as someone 
whose dad lost his job in manufacturing, because of high energy 
prices in the 1970s--that company went to Alabama, I wish Mr. 
Davis were here, they stole our jobs--and who ended up on the 
free introduced lunch program with no healthcare, and a dad who 
worked who lost his pension. I will say that's where we are 
concerned. We are concerned about what harm will this do, not 
only to the poor, but to working families today that might end 
up in the poor line.
    With that I'd like to ask a question. In Kentucky, there is 
a new steel manufacturing plant that came from Europe and it 
was publicized as a plant that came there from Europe because 
of the impacts of cap and trade. There is another manufacturer 
from Europe that is looking at Ohio right now. Jobs will be 
coming from Europe to Ohio, which is kind of a reverse to be 
honest with you. I don't want to mention the name, because I 
don't want to jinx them and have them not come to Ohio, but 
they are also looking at South America.
    My question to you sir is under the law in the European 
Union today, are these anecdotes, or have you seen, 
particularly in the manufacturing area, because of cap and 
trade, job losses in manufacturing, jobs not coming to the 
United States, maybe, but leaving the European Union to go 
elsewhere?
    Lord MONCKTON. Yes, this has been a continuing trend, 
really, over the last 10 years, because the European Union has 
become increasingly heavily regulated in many ways. The trickle 
has now become a flood directly as a result of the cap and 
trade program.
    Fortunately, since the cap and trade program has now 
collapsed for a second time, that particular disincentive has 
at least been temporarily removed. However, we are expecting 
that by December the European Union will once again have tried 
to find a way of making this failed thing work for a third 
time, and we think that will drive several.
    Once again, it is particularly the heavy industries. It's 
heavy transportation. It's heavy construction, heavy 
engineering of every kind, steel-making, of course, is a 
classic, heavy consumer of electrical energy in particular. All 
of these industries are uniquely vulnerable, and now these 
days, uniquely ready to move.
    Since we know that Brazil is not going to participate in 
any meaningful way in cap and trade or any other such 
restrictions, we know that Russia, Indonesia, China, and India 
are not going to either. All of these countries have declared 
that they are not going to do it. If you do it, then your 
business is your people's jobs, your low-income families jobs 
will go away from here and end up there. Your people who are in 
low incomes, they won't necessarily be able to afford to travel 
to those other countries to keep their jobs. So, you will keep 
your low income families here with no work.
    Mr. TIBERI. Dr. Stone, you mentioned in your written 
testimony the EITC, which I am a supporter of, as being a model 
for this program. We have had hearings and oversight in the 
past showing, demonstrating that program is not a hundred 
percent effective; and, it has been around for thirty years and 
we still can't make it a hundred percent effective. I would 
like to make it a hundred percent effective before we throw 
more weight onto the program.
    Nevertheless, my question to you is as my mom and dad are 
low-income retirees with fixed income, not eligible for the 
EITC, the way I look at this budget proposal today, they are 
going to get higher taxes on electricity. They are going to get 
higher taxes on their natural gas. They are going to get higher 
taxes on their car for gasoline, and they are not going to get 
a dime back from the Make Work Pay, and they are not going to 
get a dime back from EITC. They can't be the only people in 
America that are going to be screwed by this program.
    Dr. STONE. No. We recognize your point that there are 
groups that would not be in the EITC. When we talk about 
extending the rebate fund, first of all, our low-income 
proposal we do deal with the low-income elderly who would not 
be on the EITC. If they were eligible for the low-income drug 
subsidy through Medicare, but for a broader program that would 
go farther up the income scale, we would look to what we did in 
the Recovery Act and look at Social Security recipients, SSI 
recipients, recipients of Veterans Benefits, and recipients of 
Railroad Retirement Benefits. That would have to be added on to 
the making work pay to cover just the issue you raised.
    Chairman MCDERMOTT. Mr. Van Hollen will inquire.
    Mr. VAN HOLLEN. Thank you, Mr. Chairman. Let me thank all 
the witnesses for their testimony.
    I don't want to dwell on the issue of the scientific basis 
of global warming. We have had other hearings. Other Committees 
have had hearings. I do think it is important too as we debate 
to figure out, as that is a threshold question, if you don't 
believe that's a problem. Then, obviously, the whole 
conversation here is how you structure global climate change 
program goes out the window.
    I would point out that President Bush, who was a skeptic in 
his last address to Congress, conceded that it was a problem, 
but I don't want to go there. Here is where I want to go in 
terms of questions. Number one, there are obviously very 
legitimate questions that are raised. You have raised them; 
other panelists have raised them in terms of the impact on 
industry, on the impact of consumers.
    It is important as we talk about the potential job loss, 
also to talk about the potential job creation. The fact of the 
matter is there are opportunities for new industries in the 
clean energy sector. We now export hundreds of billions of 
dollars overseas in terms of purchasing foreign oil and to the 
extent that we can get more homegrown, clean energy businesses 
here, we are all better off in terms of employment in terms of 
the impact as a result of the higher energy cost. It is 
something we only need to address.
    Dr. Burtraw referred to a proposal that we are going to 
introduce soon, which would essentially have a universal rebate 
program, because it recognizes that every user of energy out 
there, especially carbon intensive energy users, will face 
additional costs as we make the transition to cleaner energies. 
It's fair and simple, and we can have a mechanism to get the 
funds back on a realtime basis to draw a real connection in the 
consumer's mind to the fact they are being compensated for 
whatever additional costs.
    Of course, they have an incentive then to go out and use 
cleaner energy or conserve energy, but at the same time being 
compensated for any additional costs. So, I would ask all our 
colleagues to take a look at that essentially universal rebate 
proposal. It also provides for some additional funds that would 
go to the areas and regions and industries that were hardest 
hit, because there is obviously a regional impact here.
    What I want to ask relates to the trade issue--not the cap 
and trade issue--but the issue of trade, which is in the 
jurisdiction of the Ways and Means Committee. As everyone has 
said, it is to the extent that India and China continue to 
produce with carbon intensive energy sources, number one, it 
does of course put people who are here using carbon at a 
competitive disadvantage. It also doesn't address the issue to 
the extent that they keep omitting carbon.
    So, there are a number of ways to address that. One is to 
try and use the permit process to help subsidize industries 
here. Of course that doesn't stop India and China from 
continuing to emit carbon and continuing to contribute to the 
problem. So, from a trade basis and there are a number of 
proposals that are being looked at, the question is how would 
you design a system consistent with international trade rules. 
Then, again, I am going to ask everyone to answer that.
    Lord Monckton, for the purposes of this question, if you 
could just assume that there is a problem and that we are 
trying to figure out the best way to deal with it, but I am 
asking you if you were to design a trade regime, whether it's 
increased tariffs or whatever, on carbon-based products coming 
into the United States. So, number one, you provided 
disincentive to those industries overseas from using carbon; 
and, after all, we are trying to get a climate change. Number 
two, you don't put the domestic industries at a competitive 
disadvantage.
    If each of you could just take a crack at that, I'd 
appreciate it.
    Lord MONCKTON. Should I go first?
    Mr. VAN HOLLEN. Sure.
    Lord MONCKTON. Very well, sir. What I should also counsel 
very strongly against, and of course four-fifths of my 
testimony directly addressed the economic question and not the 
scientific one, but if you go for any form of protectionism, 
because that is what imposing tariffs is, you will immediately 
be in breach of your treaty obligations. Treaties in this 
country have the first of constitutional law under the World 
Trade Organization Treaty.
    So, tariffs, I think, are not a lawful option. Even if they 
were, they are certainly not an economically sensible one, 
because as has been established in various ways in the past.
    Mr. VAN HOLLEN. Lord, I don't have much time.
    Lord MONCKTON. Yes.
    Mr. VAN HOLLEN. This is the problem. Your argument has two 
components. One is you don't think it's a problem, global 
climate change. I am assuming for the purposes of my question 
global climate change is a question we have to tackle on a 
global basis.
    Lord MONCKTON. Absolutely, I am saying.
    Mr. VAN HOLLEN. Do you have a solution, assuming that 
there's a problem?
    Lord MONCKTON. Yes, sir, I do.
    Mr. VAN HOLLEN. Okay.
    Lord MONCKTON. The solution is not in any way to impose cap 
and trade; not in any way to tax carbon, but instead to 
dedicate yourselves to increasing the efficiency of energy use 
to reducing the cost of government, which is the largest 
emitter of carbon dioxide in this country and bringing down 
overall waste in the economy.
    Certainly, there have been mention from one or two 
congressmen here of insulating homes more efficiently, more 
economical energy use. All of those things are very sensible 
and focuses on those things would achieve perhaps as much as 
you can achieve, which is relatively little. Even if, and I am 
prepared to go along with you, ad argumentum, even if there 
were a problem, there isn't practice remarkably little that 
humanity can do about it.
    Lord MONCKTON. All right.
    Mr. VAN HOLLEN. If I could ask the others, Mr. Chairman, if 
they can't answer now, to submit something?
    Chairman MCDERMOTT. Perhaps you could submit something in 
writing that would be useful of the Committee if that would 
serve your purpose.
    Mr. VAN HOLLEN. Thank you, Mr. Chairman.
    Chairman MCDERMOTT. Mr. Meek will inquire.
    Mr. MEEK. Mr. Chairman, I will yield 2 minutes to Mr. Van 
Hollen so he can get a response from the other panel.
    Dr. STONE. Right. I am going to defer on the trade issue, 
but just let the free market do it issue, and do all that 
energy efficiency investment, it's sort of the fundamental 
principle of economics is that's not going to work.
    Mr. VAN HOLLEN. Yes, we obviously can't get to where we 
want if we believe there is a serious problem just by doing 
what we are doing.
    Dr. BURTRAW. Conceptually, there is two approaches that 
have been discussed. One is a border tax adjustment. The other 
is the use of an allowance value to relieve U.S. industries of 
the kind of unfair competition situation that they might be 
placed in. There's a lot of difference of opinion out there. I 
think tax adjustment is the most talked about.
    I think in all sorts of analysis I've read, it runs into 
all sorts of problems with respect to the WTO. I think a much 
more careful look should be given as the use of rebates as Dr. 
Dinan has also mentioned, because that can essentially level 
the playingfield for those severely exposed U.S. industries, 
level the playingfield on an international basis.
    That can be bench-marked to a best practice, so you still 
provide an incentive to achieve emission reductions and those 
industries also. As I mentioned earlier, an analysis suggest 
that would require about three to 4 percent of the total 
allowance pie in order to protect those exposed industries. Dr. 
DINAN. I don't have anything really to add substantive to Dr. 
Burtraw's comments. I agree with his observation that there's 
basically these two fundamentally different approaches--either 
trying to subject imports to some kind of a comparable 
allowance requirement--or to provide an allowance exemption 
basically for exports of trade-exposed goods that are produced 
here.
    Mr. VAN HOLLEN. Thank you.
    The second doesn't provide any incentive obviously for the 
foreign manufacturer to try to reduce their carbon emissions. 
It does help address the playingfield issue, so.
    Dr. DINAN. Yes.
    Mr. VAN HOLLEN. Thank you.
    Mr. MEEK. So, I want just the rest of my time.
    Chairman MCDERMOTT. Mr. Meek, you claim your time.
    Mr. MEEK. Thank you. I would like to answer the question 
along with food safety, food security, when we look at this 
issue in the report, because we haven't really talked about 
that today. We have a lot of the low income families in 
Florida--almost forty to sixty percent in some cases, 20 
percent of Florida. They actually have incomes under $12,000 a 
year, but as we look at climate change, I am going to go ahead 
and just jump on the side.
    If climate change does have an effect on our economy and 
our future; and, as you know, as we look at this cap and trade 
piece, we have to look at some of the extreme weather events 
that we have experienced in Florida and throughout the nation, 
and I want to see as we reach this issue as we talk about this, 
that we talk about crops being wiped out in the future, what 
kind of effect in a positive sense can we think about when we 
look at this whole issue of what it's costing or what it will 
cost U.S. farmers and the Federal Government and the taxpayers 
as it relates to crop loss.
    As you know, the President is looking at this whole farming 
issue in a different way and/or as it relates to world hunger. 
So, if anyone can take that up I would appreciate it.
    Lord MONCKTON. Certainly, sir.
    The IPCC, which is the U.N.'s climate panel, which is 
regarded by many as authoritative, says that individuals' 
extreme weather event cannot be ascribed to global warming.
    Mr. MEEK. Okay. Thank you.
    Lord MONCKTON. Certainly during the first two Celsius.
    Mr. MEEK. Will you suspend, please? Will you suspend?
    Lord MONCKTON. Sorry. Yes, sir.
    Mr. MEEK. Suspend. Thank you. Thank you for your input. Do 
we have anyone else?
    Dr. STONE. Your question goes to something that's important 
to bring up at this hearing which is we have been talking about 
the costs.
    Mr. MEEK. Hit your mic.
    Dr. STONE. Sorry. It's on.
    Mr. MEEK. Yes, okay.
    Dr. STONE. We have been talking about the costs that 
mitigation strategies have imposed, but there are benefits in 
return and you are pointing out there are avoided costs of the 
damage from climate change, and that's a really important part 
of the conversation that we should account for.
    Mr. MEEK. Well, we're looking.
    Dr. STONE. I don't have specifics on your food.
    Mr. MEEK. I understand what you are saying, and what I am 
looking at is the other side of it, because I come from 
Florida. A lot of folks are talking about moving, converting 
homes to our great witness here in the first seat.
    That costs money, but we know over the long term that it 
will have a good effect in the long term.
    Yes, sir?
    Dr. BURTRAW. Well, sir, the point that should be added, 
we've been talking about mitigation and the costs of that, but 
the disproportionate effects of climate change, if we will 
concede that there is a change in climate, fall 
disproportionately on the poor. Whether it is in the delta, the 
Sacramento valley or low income residents in Texas or in the 
Southeast who would have to rely increasingly on air 
conditioning and a change in climate, or disease vectors that 
affect those populations most specifically. The poor are the 
most exposed to the change in climate in the United States and 
internationally.
    Mr. MEEK. Okay. You're good? Okay. Thank you very much.
    Mr. Chairman, as we look at this, we know when we have 
events and we have food shortages that it hits those who are 
hit the most even in regular life, even as we call here in 
Congress regular order, but as their everyday lives are 
affected, and in Florida, Hurricane season, which are now 
hurricanes on steroids, we find ourselves in a very difficult 
situation.
    I want to deal with the arguments against doing something, 
versus not doing anything at all.
    Thank you, sir.
    Chairman MCDERMOTT. Mr. Crowley, although you are not a 
Member of the Subcommittee, I believe that Members that are on 
the Ways and Means Committee ought to have the opportunity to 
come in and sit, watch and listen. If you have a question, I 
yield some time to you.
    Mr. CROWLEY. I appreciate your follow-up with the last 
sentence, in particular, if you have a question that 
dissipates, so thank you. I do a lot of listening, so if I 
could, just a follow-up on my friend from Ohio's comments, and 
I have a great deal of respect for him. I too have concerns 
about the cost affiliated with climate change for our seniors 
and others who don't work and will not qualify for the Make 
Work Pay tax credit, or for the earned income tax credits.
    There are some discussions about providing for free 
allowances to energy companies and that they would follow by 
passing on those savings to their consumers. So, my question 
is, would 100 percent of the benefit of free allowances to 
utility companies be passed down to consumers; and, if not, are 
the Tax Code and rebate checks like those in the 2009 economic 
stimulus bill, the best way to cushion seniors and others who 
otherwise are not covered by those with tax benefits to be 
buffered as a result to climate change legislation. I'd ask Dr. 
Burtraw and Dr. Stone if you could answer that question.
    Dr. BURTRAW. I will take the first part of your question. 
so basically the U.S. electricity industry exists under two 
basic types of regulation and so free allocation to companies 
as you describe it, we have to be very careful about the type 
of free allocation we are talking about.
    Mr. CROWLEY. So, the State jurisdiction you are talking 
about?
    Dr. BURTRAW. That's right. So, the kind of grandfathering 
we saw in the SO2 program would not achieve on a 
nationwide basis the kind of outcome you suggest, but 
increasingly, for example, on the Dingell/Boucher discussion 
last year, there's a discussion of a different type of approach 
which would be free allocation to local distribution companies, 
who could then be charged to act as trustees on behalf of 
customers and to roll that allowance value into reducing retail 
electricity prices. So, you would see an increase in the 
wholesale electricity price by a commensurate reduction in the 
retail electricity price.
    It would really offset the vast majority of changes on 
electricity price. This is virtuous from the standpoint of how 
it protects electricity to consumers, but as I mentioned in my 
opening remarks it has the disadvantage that it raises 
allowance prices economy-wide by about 15 percent. That means 
if you happen to drive a car or happen to use a natural gas to 
heat your home, et cetera, you are going to see even greater 
increases in those other fuels.
    Mr. CROWLEY. Dr. Stone.
    Dr. STONE. Yes. To follow-up on that first, we are very 
critical of the proposal to give it to the local distribution 
companies as a sole means of delivering consumer relief because 
for low income consumers, less than half of the total impact of 
higher costs from climate change and legislation would be in 
their home energy bills.
    There is a bunch of it, about a quarter of it, that's from 
gasoline; and then there's a part of it, the rest of it, 
another near quarter, that comes indirectly from the fact that 
it costs money to produce goods and services with energy. Your 
food: energy goes into the production of food and the 
transportation of food; and that fees also into cost. So, if 
you focus just on utility bills, you're not getting at those. 
As Dr. Burtraw just said, if you keep the price of electricity 
down in a cap and trade system, that's going to force more 
other sectors to bear more of the burden of meeting the cap; 
and, prices are going to go up there in that other half of the 
consumer pod.
    Dr. STONE. So, that would be a concern. On the positive 
side of the rebates, as I mentioned to representative Tiberi, 
it's easy to bring seniors, veterans, people on railroad 
retirement benefits, into a rebate-type system.
    Mr. CROWLEY. Which we did in the last bill as well, so 
you're advocating, if I'm reading correctly, through the 
broader way in terms of Tax Code as opposed to the benefit 
through the company.
    Dr. STONE. Right, plus our proposal for getting people not 
in the tax system for the electronic benefit transfer delivery 
mechanism.
    Mr. CROWLEY. Dr. Dinan, would you comment on that as well?
    Dr. DINAN. I just wanted to point out that seniors that 
receive Social Security benefits would receive some type of 
compensation automatically through the COLA. So, to the extent 
that their income is coming from Social Security and those 
higher prices are reflected in the COLA, they would 
automatically receive some compensation for those higher 
prices.
    Mr. CROWLEY. Thank you. Thank you for your comment.
    I appreciate it and I yield back the balance of my time.
    Chairman MCDERMOTT. Mr. Linder.
    Mr. LINDER. Mr. Chairman, I ask unanimous consent to have 
this gallop poll and its results inserted in the record. That 
portion of the record I have exchanged with Mr. Levin.
    Chairman MCDERMOTT. Without objection, so ordered.
    [The information follows:]

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    Chairman MCDERMOTT. Well, before we close, I said at the 
beginning, half in jest to you, Lord Monckton, that I could 
mark you down as doubtful. I want to just ask one question of 
you, because it seems to me that we are dealing with a huge 
problem about which there may be some controversy, which can 
have long-term, perhaps catastrophic effects, on society. In 
1987 you wrote in ``The American Spectator.''
    Lord MONCKTON. Sir.
    Chairman MCDERMOTT. I am sure you know this quote, but I 
know you said there is only one way to stop AIDS, that is to 
screen the entire population regularly and to quarantine all 
carriers of the disease for life. Every member of the 
population should be blood-tested every month. All those found 
to be infected with the virus, even if only carriers, should be 
compulsorily, immediately, and permanently confined.
    Now, I understand in 1987 I was in Zaire, right in the 
middle of the explosion of the AIDS epidemic, so I know the 
time when this statement was made. Do you have any doubt 
whatsoever that there is climate change going on that global 
warming is caused by human beings, or are you as rock hard as 
you seem in your testimony?
    Lord MONCKTON. Right. Thank you for that question and I am 
happy to answer it as follows.
    First of all, since I wrote the standard public health 
policy should have been applied to the AIDS virus just like any 
other fatal infection, at least 25 million people have died 
over the last 20 years who might not have died, had the usual 
public health policies been followed.
    So, there are consequences, if for whatever reason, however 
emotional, one does not take the tough decisions that however 
nasty they seem may be necessary to prevent a catastrophe. I 
may also add on AIDS that in this country the current 
prevalence is 0.7 percent and rising. When it reaches 1 
percent, that's the epidemic threshold. It will then pass very 
rapidly through the population and very large numbers even here 
could die.
    However, I am also trying to work on a cure, and we are 
getting some very promising results, and I hope to come back to 
you on that in due course. As to the climate, the climate is 
defined by the United Nations panel on the subject. As a 
nonlinear, complex, chaotic system about which no longer term 
predictions can be reliably made, now, they're there citing a 
paper 1963 by the late Edward Lorenz, one of your most 
formidable numerical weather forecasters in the paper in which 
he founded chaos theory in which he said that because we cannot 
know the initial state of the climate to a sufficient degree of 
precision, no long-run prediction on what will happen in the 
climate can be made. I am therefore not going to try to attempt 
to do what the U.N. then attempted to do and make long-term 
climactic predictions.
    What I can say is that there is a very considerable body of 
evidence in the peer review scientific literature, which 
establishes that what is called climate sensitivity, in other 
words the effect of increased CO2 concentrations on 
temperature is around one-seventh of what the U.N.'s climate 
panel has said it is. If that is correct, and there's a growing 
number of papers in the literature saying that it is of that 
order, then on any view there is no climate problem. So, I will 
give you that rather long scientific answer, because it is not 
a yes or no answer.
    Chairman MCDERMOTT. Your basic answer is you haven't 
changed your mind on AIDS and you don't see any possibility 
that global climate change can be affected by human beings 
changing their behavior?
    Lord MONCKTON. I am saying that one of the greatest 
failures of my career was the failure to persuade governments 
at the request of your U.S. Army Infectious Diseases Research 
Institute because they begged me. I went to see them, and you 
are one of the few people that will dare to say what needs to 
be said on this. They said, ``Millions will die, unless we 
treat this just like any other fatal infection and isolate the 
carriers.''
    That's the normal public health procedure. It wasn't done. 
25 million people are on my conscience, because 25 million 
people died. 40 million are infected and suffering, and I am 
very unhappy about that. That is one reason why on this 
particular question of climate change, where again millions are 
dying, not because of warmer weather, but because it is colder 
weather, not warmer weather, that tends to kill people more.
    They are dying because the biofuel scam that arose out of 
this scare has taken one-third of the agricultural land of the 
United States out of production. It has taken a lot of 
agricultural land elsewhere out of production; and, therefore, 
instead of providing food for people who need it, we are 
providing fuel for automobiles that don't. The consequence of 
that has been major food riots in 12 different regions of the 
world in the last 18 months alone as the price of food doubled, 
because of the taking out of use of agriculture land.
    There are very severe consequences in merely believing, 
because it may be expedient or attractive, that global warming 
is a problem, but there has now been 7 years of rapid global 
cooling that is causing even the U.N. to rethink its figures. I 
hope, therefore, that this Committee will also rethink whether 
or not it is quite as certain as some of its Members seem to be 
that we have a problem, when on the evidence, on the data, and 
on the outturn, we do not.
    Chairman MCDERMOTT. Thank you all for your testimony.
    The hearing is adjourned.
    [Whereupon, at 12:01 p.m., the Subcommittee was adjourned.]
    [Submissions for the Record follow:]

   Statement of H. Sterling Burnett, PhD, National Center for Policy 
                                Analysis

    Mr. Chairman and members of the Subcommittee, please accept my 
comments for the record regarding the March 12 hearing on the effects 
of climate change legislation on low- and moderate-income families. I 
am Dr. Sterling Burnett, a senior fellow of the National Center for 
Policy Analysis, a nonprofit, nonpartisan public policy research 
organization dedicated to developing and promoting private alternatives 
to government regulation and control, solving problems by relying on 
the strength of the competitive, entrepreneurial private sector.
    Current proposals to regulate greenhouse gas emissions will raise 
energy prices, reduce economic growth, and disproportionately affect 
low- and moderate-income families. As the Subcommittee considers the 
potential harm to families, I urge you to carefully scrutinize the 
regressive effects of the various climate change proposals.
Higher Energy Costs
    Though current climate change bills with cap and trade provisions 
have yet to be finalized, in previous sessions of Congress several 
bills have been considered that would cap CO2 emissions and 
allow the trading of excess allowances. The United States Environmental 
Protection Agency (EPA) analyzed three bills that would cap and trade 
greenhouse gas emissions \1\ The least restrictive, sponsored by 
Senators Jeff Bingaman (D-NM) and Arlen Specter (R-PA), would have 
required trimming U.S. emissions by less than 4 percent by the year 
2050. A more stringent bill, by Senators Joe Lieberman (I-CT) and John 
McCain (R-AZ), would have required reductions in U.S. emissions of 
nearly 16 percent by 2050. One of the most restrictive bills, 
introduced by Lieberman and John Warner (R-VA), would have forced 
businesses and consumers to cut their emissions by 44 percent by 2050.
---------------------------------------------------------------------------
    \1\ Environmental Protection Agency, Analysis of the Lieberman-
Warner Climate Security Act of 2008, March, 14, 2008.
---------------------------------------------------------------------------
    According to EPA and the Congressional Budget Office (CBO), each of 
these bills would substantially raise energy prices and reduce economic 
growth. A June 2003 analysis by the U.S. Energy Information Agency of 
the probable economic effects of McCain-Lieberman bill found that by 
2025 \2\:
---------------------------------------------------------------------------
    \2\ U.S. Energy Information Agency, Analysis of S. 139, the Climate 
Stewardship Act of 2003, June 2003

     Gasoline would cost 40 cents more per gallon than it would 
otherwise.
     The average household would spend $444.00 more per year on energy 
including a 46% increase in electricity prices.
     Gross domestic product would be $675 billion to $1.63 trillion 
lower, in present dollars.

    A study by an economic research institute, the American Council for 
Capital Formation, underscored these findings, estimating that under 
the McCain-Lieberman bill \3\:
---------------------------------------------------------------------------
    \3\ American Council for Capital Formation, Estimated Costs of the 
McCain-Lieberman Bill, July 2004

     By 2020, gasoline prices would increase 30 to 50 cents per gallon.
     Electricity prices would increase 43 percent and average household 
income would fall by as much as $2,255 per year by 2020
     By 2025, U.S. GDP would be reduced by $164 billion to $525 billion 
per year.
     More than 600,000 jobs could be lost in the U.S.

    The EPA also documented severe economic consequences beyond 
consumer energy prices. The agency found by 2050 the Bingaman-Specter 
bill could cost the United States as much as $1.2 trillion annually (in 
2005 dollars) from lost economic production. Lieberman-McCain could 
cost as much as $1.3 trillion annually, and Lieberman-Warner could cost 
nearly $3 trillion per year \4\
---------------------------------------------------------------------------
    \4\ Environmental Protection Agency, Analysis of the Lieberman-
Warner Climate Security Act of 2008, March, 14, 2008
---------------------------------------------------------------------------
    It should be noted that previously considered bills would have 
given out all or most of the initial carbon emission credits to 
affected industries. This stands in contrast to the bills currently, 
according to press reports, being debated before Congress and what 
President Obama assumes in his recently introduced budget proposal, in 
which the initial credits would be auctioned off to industry. Charging 
for the initial credits ensures that industry will face substantially 
higher costs at the outset of the program, and much of these costs will 
undoubtedly be passed onto consumers. Indeed, the Obama administration 
assumes that the carbon credit auction could bring in more than $650 
billion in revenue. That's a $650 billion dollar energy tax on top of 
the costs estimated for previous bills. In addition, much of the 
present discussion centers setting a goal of cutting carbon emissions 
80 percent lower than 2006, a much more stringent goal than any bill 
previously analyzed. Deeper cuts equal higher costs. Government gets 
the gold (carbon credit income) and consumers get the shaft.
Disproportionately Hurts the Poor
    Energy taxes are extremely regressive, disproportionately affecting 
seniors and low income households. Analyses of previous bills confirm 
that any cap and trade bill, acting as nothing less than an indirect 
energy tax, will harm the poor the most. This is because the poor and 
those on fixed incomes spend a greater portion of their disposable 
income on food and fuel than the average household and are least able 
to afford newer, more fuel-efficient technologies. Energy costs already 
consume 15 percent of the poorest households' income, compared to only 
3 percent for average households. CBO found that cutting carbon dioxide 
emissions by merely 15 percent would reduce the disposable income of 
the poor by an additional 3.3 percent, compared to a 1.7 drop for the 
richest Americans \5\ Deeper carbon dioxide cuts would inflict still 
more severe economic harm on low-income citizens.
---------------------------------------------------------------------------
    \5\ Congressional Budget Office, Trade-Offs in Allocating 
Allowances for CO2 Emissions, April 25, 2007
---------------------------------------------------------------------------
    Recognizing that energy taxes disproportionately impact the poor, 
the Obama administration has proposed giving some of the carbon auction 
revenue back to middle income Americans to pay for the continuation of 
the Administration's ``Making Work Pay'' refundable tax credit that has 
already been enacted. However, this refund will only cover a portion of 
the increased energy costs, for a portion of the citizenry--and does 
nothing to mitigate the impact on the nation's energy providers. In 
addition, since taxpayers are already receiving the tax credit, they 
are unlikely to perceive the rebate starting in 2011 as recompense for 
the new indirect tax imposed by a cap-and-trade regime as it comes 
online.
    Energy is the lifeblood of the economy, yet it is unclear whether 
the Administration has considered the impact that increasing the costs 
to energy providers will have on the overall economy. While we all 
share the Administration's hope that the economy will have recovered 
from its current downturn by the year 2011 when energy companies and 
other industries will be required to purchase the initial round of 
carbon credits at auction, it may well still be in recession. Raising 
taxes on energy production and consumption during a recession is 
virtually guaranteed to prolong it. On the other hand, if the economy 
is just beginning to recover, or the recovery, underway for a while, is 
tentative or fragile, low energy costs would be a critical factor in 
continuing economic progress. As such imposing a substantial tax at 
such a critical time could stall the recovery or at least slow it. 
There is a third, rose colored glasses scenario (which few economists 
are predicting), under which the economy has fully recovered and growth 
is on the horizon for the foreseeable future. If this comes to pass, 
energy prices will already likely be higher than at present and rising 
as a result of increased demand from industry, the commercial and 
retail sectors and consumers. At a time of rising energy prices, it is 
doubtful that consumers will think kindly of a legislature that ladles 
additional costs onto already higher energy prices. Just recently, 
voters were calling on legislators to do something--almost anything--to 
reduce high fuel and electricity prices. Voter's wrath will only 
multiply if high energy prices driven by demand are exacerbated by new 
costs, or worse, fuel scarcity, stemming from a new carbon cap-and-
trade scheme coming online.

Ineffective for Climate Change
    Advocates of climate change legislation argue that avoiding the 
cumulative environmental impacts of climate change--including higher 
sea levels, more powerful hurricanes and the spread of tropical 
diseases--far outweigh almost any economic costs. However, there is 
little reason to believe the emission reductions called for in the 
legislation would stop or even substantially slow global warming. Thus, 
they will not prevent the harms warming is predicted to exacerbate.
    For instance, research from the National Center for Atmospheric 
Research reveals that even if all the signatories of the Kyoto treaty 
met emissions targets by 2012, global temperatures would still be only 
0.07 to 0.19 degrees Celsius cooler in 2100 than without Kyoto \6\ This 
would not be enough to avoid the two to six degree increase in average 
global temperatures some scientists claim will irreparably harm the 
environment.
---------------------------------------------------------------------------
    \6\ Wigley, T. M. L., 1998: The Kyoto Protocol: CO2, CH4 
and Climate Implications. Geophysical Research Letters, 25, 2285-2288.
---------------------------------------------------------------------------
    Of the three bills discussed above, only Lieberman-Warner would 
provide more emission reductions than those required of the United 
States under Kyoto--the others would fall far short. Yet, even 
Lieberman-Warner would be ineffective because it is unilateral. 
Developing countries--such as China, India, South Korea, Brazil and 
Indonesia--are exempt from current international climate change 
agreements and would not be covered by domestic legislation. Even if 
all developed countries stopped using energy entirely, there would be 
little impact on overall greenhouse gas emissions or atmospheric 
concentrations. Why? Because fast-growing developing countries are 
expected to account for 85 percent of emissions growth in the next two 
decades and beyond. Indeed, China has already passed the United States 
as the world's largest CO 2 emitter and its economic growth rate is 
more than three times greater than ours.
    The EPA's own analysis indicates that just to significantly slow 
emissions growth (not even stabilize emissions), the United States 
would have to meet its emission reduction targets under Lieberman-
Warner, other developed countries bound by Kyoto would have to slash 
their emissions by more than 50 percent below their 1990 levels, and 
developing countries would have to cut their emissions to 2000 levels 
by 2035 \7\.
---------------------------------------------------------------------------
    \7\ Environmental Protection Agency, Analysis of the Lieberman-
Warner Climate Security Act of 2008, March, 14, 2008
---------------------------------------------------------------------------
Conclusion
    The benefit promised by recently proposed climate change 
legislation--lower global temperature---is unlikely to materialize 
because they don't include developing nations. Moreover, every economic 
analysis to date indicates domestic legislation proposed to regulate 
greenhouse gas emissions will harm the U.S. economy and specifically, 
the most vulnerable in our society--the poor. Lawmakers should not 
adopt laws that sacrifice the economic well-being0 of those living in 
the United States for nonexistent environmental gains.
    Thank you.

                                 

   Statement of Stephen A. Smith, Southern Alliance for Clean Energy

    My name is Stephen Smith. I am the Executive Director of the 
Southern Alliance for Clean Energy (SACE). Since 1985, SACE has been 
working on behalf of citizens in the Southeast to promote responsible 
energy choices that create global warming solutions and ensure clean, 
safe and healthy communities throughout the Southeast.
    SACE applauds the work you have done to promote effective climate 
change legislation and pledges to work with you and your staff to 
ensure the bill ultimately adopted by Congress embraces the most 
effective and responsible approach to reducing greenhouse gas 
emissions.
    In this statement, I would like to focus on one particular and 
critical aspect of a well-designed cap-and-trade program for carbon 
emissions--the need to auction 100 percent of the credits immediately 
to offset the costs associated with mitigating carbon emissions. As 
this statement will demonstrate, auctioning all the credits is a 
critical predicate to ensuring the environmental, economic and 
political success of a carbon cap-and-trade program.
Unprecedented Resources at Stake
    The science of pollution mitigation has advanced significantly 
since Congress enacted the first cap-and-trade program to address the 
problem of acid rain back in 1990.
    In the 18 years that followed, study after economic study have lent 
critical support to the idea that a properly constructed cap-and-trade 
program must auction 100 percent of the carbon credits. Anything less 
than 100 percent auctions needlessly increases the cost of the program 
to the economy and consumers, while potentially resulting in windfall 
profits for shareholders and executives of electric utility companies 
and other industries.
    Recently, SACE, in conjunction with our regional partners, released 
an economists statement detailing the need to auction credits in a cap-
and-trade program. The statement says, among other things, that any 
free allocation of carbon credits to utilities is tantamount to 
corporate welfare. To date, the statement has been signed by over 600 
economists from across the country.
    Under a cap-and-trade program, a carbon credit authorizes the 
holder to emit one metric ton of carbon dioxide, or its equivalent, per 
year. These credits will be extremely valuable--worth hundreds of 
billions of dollars in revenue each year--and they represent an 
important resource in our nation's efforts to address global warming.
    In fact, President Obama and OMB Director Peter Orszag echo this 
sentiment. According to OMB Director Orszag:
    If you didn't auction permits, it would represent the largest 
corporate welfare program that has ever been enacted in the history of 
the United States--Whatever the value is would go in a sense almost 
directly into corporate profits rather than being available to fund 
energy efficiency investments and to provide a cushion or some 
compensation to American households.
    The cumulative value of these credits over the life of the program 
is simply unprecedented, and any decision on the allocation these 
resources should be made only after extensive examination of their 
potential utility. Properly structured, these revenues could be used to 
offset the cost of higher prices and to speed the development of 
important renewable energy and energy efficiency technologies.
    We have seen great progress over the past twelve months with regard 
to climate legislation. Just last year, the Senate considered 
legislation that would have freely allocated over 75 percent of carbon 
permits to utilities. Now, we are pleased to see the approach taken by 
Representative Chris Van Hollen who has introduced legislation calling 
for a cap-and-trade program with 100 percent auctioning of the carbon 
credits. This is the only economically viable approach to ensure that 
Congress is able to protect low-income and vulnerable communities from 
potentially higher energy costs associated with a cap-and-trade 
program.

No Windfalls for Polluting Industries
    Utilities and other greenhouse gas emitting industries argue that 
Congress should allocate some or all of the credits to them for free to 
minimize the energy costs they pass on to their ratepayers. Just last 
month, the U.S. CAP proposal called for large amount of allocations at 
the outset of a cap-and-trade program as a means to protect ratepayers 
from higher energy prices. The proposal said:
    Consequently, USCAP recommends allocating a significant portion of 
emission allowance value (e.g. 40 percent directly to these entities 
[LDCs] specifically to dampen the price impact of climate policy on 
electricity and small natural gas consumers, particularly in the early 
years of the carbon constraint.
    USCAP's claim is misleading. Gifting billions of dollars in 
pollution credits to utilities will not lower energy bills for 
ratepayers because the marginal cost of abating a unit of greenhouse 
gas is the same regardless of whether a firm buys the permits or is 
allocated the permit for free. As the Congressional Budget Office 
observed in their testimony before the Senate Energy and Natural 

Resources Committee in May:
    By attaching a cost to CO2 emissions, a cap-and-trade 
program would thus lead to price increases for energy and energy-
intensive goods and services. Such price increases would stem from the 
restriction on emissions and would occur regardless of whether the 
government sold emission allowances or gave them away. Indeed, the 
price increases would be essential to the success of a cap-and-trade 
program because they would by the most important mechanism through 
which businesses and households were encouraged to make investments and 
change their behavior to reduce CO2 emissions.
    Further, the CBO notes:
    Giving all or most of the allowances to energy producers to offset 
the potential losses of investors in those industries--as was done in 
the cap-and-trade program for sulfur dioxide emissions--would also 
exacerbate the regressivity of the price increases. On average, the 
value of the CO2 allowances that producers received would 
more than compensate them for any decline in profits caused by a drop 
in demand for energy and energy-intensive goods and services. As a 
result, the companies that received allowances could experience 
windfall profits.
    Harvard Economist Greg Mankiw accurately points out that freely 
allocating carbon credits to polluting industries is nothing more than 
corporate welfare.
    To understand why this is the case, consider a utility that is 
given credits equal to its historic level of carbon emissions, as many 
utilities have suggested should happen. How will that allocation affect 
the utility's behavior? Very little, as it turns out.
    If the utility has a history of emitting 100 tons of carbon dioxide 
or equivalent per year and is given 100 credits that can be used to 
emit one ton of carbon each. The utility considers options for reducing 
its carbon emissions and determines that the cost of reducing its 
emissions from 100 to 99 tons is $10. If each credit is worth $15 
dollars, then the utility will spend the $10 to reduce its carbon 
emissions by one ton, sell the credit, making its shareholders $5 in 
the transaction. The utility will continue to reduce its emissions and 
sell its credits until the cost of reducing another ton of carbon 
emissions is equal to the market value of the credit. If the cost of 
reducing emissions from 60 to 59 tons is equal to $15, then the utility 
will stop there. In the end, it uses 60 credits and sells 40.
    Now consider the case where the utility is given zero credits, and 
it has to buy them in order to continue operations. Once again, the 
utility will have to balance the cost of credits verses the cost of 
reducing its carbon emissions. In this case, the utility will buy 
credits until the $15 cost of buying a credit is equal to the cost of 
reducing the next ton of carbon emissions. Here, the utility buys 60 
credits, and invests in mitigation technologies to reduce the other 40 
tons of carbon.
    The important point here is that the firm's behavior is the same 
regardless of whether it is given the credits or it has to buy them 
like everybody else. In both cases, the utility produces the same 
amount of electricity as well as carbon. And ratepayers will face 
similar costs.

What about Costs to Industry?
    There is very little doubt that gifting permits to industry will do 
little other than create windfall profits for utility executives. From 
the Administration, to Wall Street, academia and the European Union's 
experience with a cap-and-trade program, the general consensus is that 
any economically-viable cap-and-trade program must start with 100 
percent auctions of carbon credits. According to President Obama in his 
FY2010 budget proposal:
    This program will be implemented through a cap-and-trade system, a 
policy approach that dramatically reduced acid rain at much lower costs 
than the traditional government regulations and mandates of the past--
Through a 100 percent auction to ensure that the biggest polluters do 
not enjoy windfall profits, this 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.
    In recent years, considerable research has gone into assessing what 
level of credit allocation is necessary to ``compensate'' the owners of 
utilities and other industries for losses associated with a carbon cap 
and trade program. One study found that allocating between 9 and 21 
percent of the credits under the Kyoto Protocol would be sufficient to 
offset the agreement's costs to energy and electricity producers.
    Other studies, however, found the regulatory regime of a cap-and-
trade program without auctions could increase the opportunity for 
profits by affected industries. As Resources for the Future noted in a 
2002 study:
    By compelling fossil fuel suppliers to restrict their outputs, the 
government effectively causes firms to behave like a cartel, leading to 
higher prices and the potential for excess profit. To the extent that 
the environmental policy enables firms to retain these rents--such is 
the case under CO2 policy involving freely offered tradable 
permits--the firms can make considerably higher profit under regulation 
than in its absence.
    Wall Street apparently agrees. The Wall Street Investment firm of 
Bernstein Research reported its analysis of the potential impact of a 
cap-and-trade program on utility industry financials. The title of the 
report--``U.S. Utilities: Unregulated Generators' Profits Could Surge 
Under Senate Bills to Cap CO2 Emissions''--reflects its 
findings that implementing a cap-and-trade program could increase 
profits for some utilities. As the report notes:
    If the U.S., in implementing its own cap-and-trade regime for GHG 
emissions, also allocates allowances for free, we can expect 
unregulated power generators in this country to behave similarly, 
passing through the value of allowances consumed to wholesale power 
prices. And as these generators will bear no offsetting cost, their 
earnings can be expected to increase materially.
    Whatever the costs or benefits to industry, the more pertinent 
question to ask is simply this: If a cap-and-trade program affects 
everyone--energy consumers and producers alike--why should polluting 
industries alone get compensated?
    Global warming affects everyone. No industry should be given 
special status and protected from the responsibilities that the rest of 
us will face.
Economic Efficiency and Low-Income Families
    Effectively addressing climate change will impose a certain level 
of costs on the economy. The question before Congress is how to best 
structure a cap-and-trade program to minimize the impact to the economy 
while helping low-income families and other energy consumers most 
vulnerable to changes in energy prices. The answer to this question, 
again, is to auction the credits and use the revenues raised to reduce 
the program's overall cost to the economy.
    The CBO estimated that giving away credits under a cap-and-trade 
program would cost nearly twice as much than if the credits were 
auctioned and the revenues used to cut taxes. Who would bear the 
additional costs of giving away credits to polluting industries?
    Of the four allowance-allocation and revenue recycling scenarios 
that CBO analyzed, the share of policy costs borne by households in the 
lowest income quintile would be largest if the government gave 
allowances away and used the revenue received--to reduce corporate 
taxes.
    Further, the CBO noted in their June 17, 2008 letter to Senate 
Energy and Natural Resources Committee Chairman Bingaman that lawmakers 
have several options for assisting those most effected by increased 
energy costs, including collecting the resources from the auction of 
carbon credits and issuing rebate checks to households across the 
United States. The CBO noted that:
    Lawmakers could choose to offset the price increases experienced by 
low- and moderate-income households by providing for the sale of some 
of all of the CO2 emission allowances and using a portion of 
the revenues to compensate such households. For example, the 
Congressional Budget Office (CBO) found that lower-income households 
could be financially better off as a result of a cap-and-trade program 
(compared with no program--and without consideration of any benefit in 
terms of reduced risk of damage from climate change) if the government 
chose to sell the allowances and used the revenues to pay an equal 
lump-sum rebate to each household in the United States. In that case, 
the size of the rebate would be larger than the average increase in 
low-income households' spending on energy-intensive goods.
    Different studies may suggest different optimal options, but they 
are universal in finding that the free allocation of credits to 
industry produces the worst outcome, both for the economy as a whole 
and for at-risk populations. Freely allocating credits needlessly 
surrenders resources that could be used to ensure the best outcome for 
the economy and low-income families.

Auction, Not Allocation
    Congress should auction all credits under a cap-and-trade program 
and use those resources to assist consumers with their energy costs 
while investing in the development of critical technologies necessary 
to speed the future reduction of greenhouse gas emissions and using 
remaining revenues to assist those most affected by increased energy 
costs.
    Such an approach represents the surest means of meeting emission 
targets in the most equitable and economically efficient manner. 
Anything less is simply corporate welfare to those industries that have 
contributed the most to climate change.
    I thank the Subcommittee for holding this hearing and for 
advocating solutions for reducing our nation's global warming 
pollution. SACE looks forward to working with the Subcommittee to 
produce the most effective climate change legislation possible.
    Southern Alliance for Clean Energy (SACE) is a nonprofit, 
nonpartisan organization that promotes responsible energy choices that 
create global warming solutions and ensure clean, safe and healthy 
communities throughout the Southeast.
    Since 1985 SACE has been working on behalf of citizens in the 
Southeast to provide independent analysis of the energy supply system 
in the region, help state utility commissions evaluate proposed energy 
projects, work with state and local governments to develop new programs 
to improve the energy efficiency of government facilities and vehicles, 
and support the siting and development of clean, renewable energy 
sources in our region.
    SACE has been a leading voice for energy reform protecting our 
communities and our region's natural resources for more than 20 years 
with offices and staff throughout the Southeast.

                                 

         Statement of the National Community Action Foundation

    A fair Climate Change policy ensures reduction of greenhouse gas 
emissions at the same time it protects small consumers, especially 
vulnerable working families and retirees, from losing their purchasing 
power or access to affordable home energy and transportation.
    Many of the current proposals aim for such fairness, and, as 
originators of the Fair Climate Change Principles endorsed by a wide 
variety of consumer advocacy groups, we applaud the President's 
proposal and others that auction all allowances. We are pleased with 
the intent to seek mechanisms to ensure most households and small 
businesses are held harmless from the substantial price increases 
expected in fuels and most goods and services. We also support using a 
share of revenues for the Weatherization Assistance Program and LIHEAP 
and for developing more sustainable low-income communities.
    However, we are concerned that neither the analyses available to 
Congress so far nor the mechanisms proposed for implementing the 
``hold-harmless'' or ``mitigation'' policy are adequate to the 
challenge.
    Consumers' expenditures on fuel vary today based on the kinds of 
fuel they use at home and the distances they drive. Under a climate 
change policy, the cheapest fuel--coal and the electricity it 
generates--will cost far more relative to cleaner fuels; so will fuel 
oil and liquid propane gas. That means some households will see their 
bills change far more than others.
    The only study of cost impacts that uses household energy usage 
data, the 2007 review by Oak Ridge National Laboratory \1\ found low-
income residents of the South and Midwest would experience far larger 
increases in household fuel bills than consumers in the Northeast and 
West.
---------------------------------------------------------------------------
    \1\ Eisenberg, J., 2008, ``The Impact of Carbon Control on 
Electricity and Gasoline Expenditures of Low-Income Households,'' Oak 
Ridge National Laboratory, Oak Ridge, TN. www.weatherization/ornl.gov
---------------------------------------------------------------------------
    Further, while gasoline bills would rise in the same proportion 
everywhere, rural households, would lose a far greater share of their 
income than most because they drive 60% further yearly than others. 
Clearly, rural residents of the South and Midwest will be particularly 
hard-hit.
    Unfortunately, the proposals for delivering rebates through today's 
tax credit and income maintenance programs will provide essentially 
uniform awards to households at the same income level, no matter where 
they live. This can mean a majority of low- and moderate-income 
households in one highly impacted region or a majority of rural 
households everywhere will get rebates worth far less than the 
increased costs they are paying. Others who live in urban areas, 
especially those on the two coasts, would get significantly more back 
in rebates than the increases in their expenditures. We urge the 
Committee to devote more analysis and more complete consideration to 
the ``how'' as well as the ``what'' of the question of revenue 
recycling.
    First, better impact analysis using energy bill and energy use data 
is essential. The Department of Energy and EPA should be required to 
support analysis that includes modeling of household impacts and 
identifies variations in the patterns under different scenarios, 
especially those affecting low-and moderate-income working families and 
retirees.
    Next, it is time to consider a fresh program design to ensure that 
the climate change policy for the next generation does not rely on the 
mechanisms for general family income support suitable for the early 
21st century. Among the options we believe should be 
considered are:

      Provide a base, flat rebate that does not exceed the 
costs that consumers in the least-affected geographic regions will 
bear.
      Use state grant mechanisms to direct incremental income 
support resources through direct income transfers in highly impacted 
states.
      Design geographically targeted tax credits for rural 
consumers.
      Add funding to the state LIHEAP programs to assist 
highly-impacted households in every state.

    Of paramount importance is to have a policy ensuring that the 
design of an auction revenue distribution regime remains responsive to 
the sure-to-come, but unpredictable, changes in energy markets and 
consumer conditions over the generation-long span of the legislation. 
We have proposed that a governing body be responsible for evaluating 
the impact and effectiveness of policies to protect consumers and for 
making proposals to Congress regarding their implementation.
    Attached are the Fair Climate Principles on which these comments 
are based and a brief review of the technical analyses that indicate 
cost impacts on consumers in one place may be very different from the 
costs borne by those in a different place.
    Thank you for considering these concerns.
Contact information for these organizations:
    National Community Action Foundation, Washington, DC; David 
Bradley, Exec. Director, [email protected]
    National Consumer Law Center, Boston, MA and Washington, DC; Olivia 
Wein, Staff Atty., [email protected]
    Public Citizen, Washington, DC Tyson Slocum Energy Program 
Director, [email protected]
    Friends of the Earth, Washington, DC, Erich Pica, [email protected]
                               __________
Attachment 1
National Community Action Foundation
National Consumer Law Center for its low-income clients Public Citizen
Friends of the Earth
FAIR CLIMATE CHANGE POLICY:
Principles for Protecting Low- and Moderate-Income Consumers from the 
        Costs of Climate Change Policy and for Re-building Their 
        Communities
    The United States must meet its obligation to promote the common 
good of all peoples and reduce its greenhouse gas emissions; the policy 
framework for this change must fairly share the immediate economic 
costs and future benefits of change. It must ensure that vulnerable 
populations do not suffer greater hardship as a consequence of the 
policy.
    Policies to address climate change through mechanisms that raise 
the price of carbon will directly raise the price consumers pay for the 
use of energy and transportation and indirectly raise costs for other 
products and services, such as food and medical care. Legislation must 
ensure that low-income individuals and families do not find the cost of 
basic necessities to be even further beyond their reach than before.
    New climate change policies should be designed, implemented and 
governed based on the following principles:
THE DESIGN of any climate change mitigation policy that raises the cost 
        of energy and other essential consumer goods must be fair to 
        all Americans. Climate change policies must:
      Ensure that all consumers can afford the quantities of 
residential and transportation energy that meet their basic needs;
      Ensure that no households experience economic insecurity 
as a consequence of climate change policies;
      Ensure that vulnerable consumers who lack the capital or 
credit to reduce or eliminate their use of carbon-based energy in their 
homes and vehicles have access to cost mitigation programs such as 
weatherization, energy efficiency programs and clean energy 
technologies;
      Ensure that disadvantaged communities have access to a 
fair share of any funds designated for investments in infrastructure 
such as green homes and buildings, renewable energy technologies and 
easy access to low-emissions transit.
      Ensure that emissions of greenhouse gases are subject to 
regulation by government acting for the public and that any value 
created by the regulation belongs entirely to the public.
THE IMPLEMENTATION of programs, policies and investments that achieve 
        these goals will include resources that are sufficient in size, 
        distributed in proportion to the anticipated impact of cost 
        increases, and available to affected low-income families and 
        communities in a timely and efficient manner, as follows:

      Adequate resources: Funding must be adequate to hold low-
income consumers harmless against costs resulting directly or 
indirectly from the climate change policy. Policies should reduce the 
burden of fuel prices to affordable levels, and support complementary 
policies, including significant reinvestments that adapt low-income 
homes, community facilities and equipment to a low-carbon economy.
      Proportional Distribution: The resources for mitigating 
costs and adaptation must be distributed in direct proportion to the 
economic burdens of climate change policies on vulnerable consumers and 
communities and in inverse proportion to their ability to afford energy 
and to make investments in sustainable buildings, equipment and 
community improvements.
      Timely Distribution

        1.  Investments to prevent harm due to rising energy costs and 
        changing climate conditions such as the low-income 
        weatherization program must begin in advance of the time that 
        added costs will be incurred;
        2.  Funds that mitigate harm from loss of purchasing power and 
        unaffordable bills for energy and transportation fuel must be 
        delivered in the period when the damage is sustained; and

      Efficient Distribution: Assistance to vulnerable 
consumers must be managed through proven, efficient program mechanisms 
such as LIHEAP, the Weatherization Assistance program, EITC, and Social 
Security, provided that such programs are administered so as to 
distribute these resources proportionately and timely.
THE GOVERNANCE of climate change regulation and investment policy must 
        be fair and responsive to emerging conditions. Governance 
        mechanisms authorized must have sufficient flexibility to allow 
        for adjustments and policy changes to be considered over the 
        lifetime of any Greenhouse Gas regulatory framework.

      An entity governed by Directors who represent the 
interests of rural and urban low income consumers must be established 
to direct, oversee and report to the President and Congress on the 
operations and impact of programs for low- and moderate income 
consumers and for redeveloping communities that are authorized by 
climate change legislation. It should:
      Develop standards for the distribution of funds and other 
resources intended to mitigate cost impacts on low-and moderate-income 
consumers and for reports on the uses of those resources, and
      Develop strategies for integrating resources for 
sustainable re-development of low- and moderate-income communities, and
      Evaluate and make recommendations regarding the 
effectiveness of the programs to mitigate adverse impacts of climate 
change policy on vulnerable consumers;
      All entities established to administer resources to 
implement climate change policies should follow clearly defined 
procedures for thorough and transparent public reporting of all 
transactions and uses of funds, and for full compliance with federal 
regulations for fiscal accountability.

    Supporting Organizations 11/01/08:
State and Regional:
    Community Action New Mexico, Connecticut Legal Services, Inc., 
Greater Hartford Legal Aid (CT), Iowa Community Action Association, 
Illinois Association of Community Action Agencies, Missouri Association 
of Community Action Agencies, Maine Community Action Association, 
Massachusetts Association for Community Action, Ohio Partners for 
Affordable Energy, Oklahoma Association of Community Action Agencies, 
Tennessee Association of Community Action Agencies, Wisconsin 
Association of Community Action Agencies, The Utility Reform Network 
(CA),
Local and Other Organizations:
    Tri-CAP, Malden, MA; CAA of Somerville (MA), Inc., Democracy and 
Regulation (MA), A.W.I.S.H., Inc (WA)
                               __________

    Attachment 2

ECONOMIC OPPORTUNITY STUDIES
400 NORTH CAPITOL STREET, SUITE G-80, WASHINGTON, D.C. 20001
E-mail [email protected]
Carbon Emission Auction Rebates for Working Families and Retirees:
    Research Shows Uniform Payments Would Be Unfair
    Lynn Schneider and Meg Power, PhD.
    March 2009
    Proposed cap-and-trade policies could harm America's working 
families and retirees because their purchasing power drops as the cost 
of energy rises. The lower a household's income, the more its capacity 
to afford basic necessities will be impacted. Most major climate change 
bills filed in the 110th Congress in some way acknowledges 
the regressive impact of emission caps or taxes and proposed mechanisms 
to alleviate the impact, as does the Obama Administration's policy 
outline.
    New proposals for ``recycling'' revenues or ``rebates'' from the 
Treasury's auction revenues to consumers generally involve remitting 
cash transfers or tax reductions that vary by income. In other words, 
all households with a given income would receive the same rebate, 
perhaps varied for household size. Very little research has been 
conducted on the incidence of the consumer costs that will result from 
an auction system, but all of that analysis suggests a ``flat'' rebate 
is simple, but unfair. If the goal of a rebate or ``dividend'' 
mechanism is to mitigate the loss of purchasing power of the most 
vulnerable households, one size does not fit all.
    A rebate, even varied by family size, will significantly 
overcompensate some and under-compensate others because of their 
location and the fuels their utilities use. The key factors which were 
found to cause significant variation in the costs of climate policy to 
low-income households are: rural vs. non-rural residency and geographic 
region. Further research is needed in this area in order to ensure 
proposed revenue ``recycling'' is fair and progressive.
Study #1: Oak Ridge National Laboratory \1\
    The Oak Ridge National Laboratory (ORNL) conducted a study on the 
impact that the Climate Change Stewardship and Innovation Act of 2007 
(S.280) \2\ would have on LIHEAP-eligible households' direct 
expenditures on gasoline and residential energy across rural and non-
rural residencies, and across geographic regions.\3\ This remains the 
only published analysis based on data that includes the fuels used in 
homes. Of course, limits on CO2 emissions will raise the 
price of fuel oil, propane, and coal-based electricity more than the 
cost of other fuels. The bill analyzed, S.280, exempted natural gas 
from caps and had longer-range horizons on reductions than subsequent 
proposals; therefore, the costs to households seem low by contrast to 
the later proposals.
---------------------------------------------------------------------------
    \2\ S.280 was designed to reduce greenhouse gas emissions over time 
through a cap-and-trade system that would begin in 2012. The cap would 
be lowered drastically in 2020, 2030, and 2050. Some emission 
allowances would be allocated freely to emitters, and an unspecified 
number of allowances would be auctioned. The bill establishes that some 
of the proceeds of the auctions would go toward cash rebates, 
discounts, and subsidies for consumers to offset increasing costs of 
energy, climate change adaptation and mitigation programs targeting 
low-income populations, support of technology innovation and 
deployment, assistance to dislocated workers and communities, among 
other things.
    \3\ ORNL developed projections of impacts on the expenditures of 
low-income households on gasoline and residential energy by integrating 
the Energy Information Administration (EIA) National Energy Modeling 
System's price projections for electricity and gasoline under S.280 
with the EIA Residential Energy Consumption Survey and the EIA National 
Household Transportation Survey, both from 2001.
---------------------------------------------------------------------------
    The important figures are the differences between groups of 
households rather than the level of allocation values. Rural residence 
may entail substantial price increases for delivered consumer goods and 
food as well, but these prices are probably reflected in the base 
period prices, which are higher in many rural areas. ORNL looked only 
at the two types of direct household energy purchases: household fuels 
and gasoline because variability was the subject under study and 
inflation as an indirect result of energy price increases is not 
thought to vary greatly.
Variation between Rural and Urban Area Households
    Rural areas' residents in all regions drive far longer distances 
than do others. Table 1 displays ORNL's findings that there will be 
significant variation between rural and non-rural consumers' increased 
gasoline expenditures and therefore in the percent of income they must 
spend on transportation. Rural low-income households spend 45% more on 
average per year on gasoline than other low-income households.
Table 1. Incease in Annual Gasoline Expenditures above Baseline by 2030

------------------------------------------------------------------------

------------------------------------------------------------------------
National Average                                                   $323
------------------------------------------------------------------------
Rural                                                              $424
------------------------------------------------------------------------
Non-rural                                                          $291
------------------------------------------------------------------------
Source: ORNL. p. 6-8.

Variation Among Regions
    The carbon intensity of heating fuel and electricity generation 
will lead to very different cost increases in different residential 
fuels. As seen in Table 2, ORNL's findings reveal dramatic variation in 
impacts across regions by 2030, with vulnerable consumers in the South 
and Midwest incurring price increases more than double those of lower-
income consumers in the Northeast and West. This disparity appears to 
be mainly due to the reliance of the South and Midwest on coal for 
electricity, as well as the high use of coal-fired electric heating in 
the South.
Table 2. Percent Increase in Annual Electricity Expenditures above 
        Baseline by 2030

------------------------------------------------------------------------

------------------------------------------------------------------------
National Average                                                    20%
------------------------------------------------------------------------
West                                                                14%
------------------------------------------------------------------------
Midwest                                                             28%
------------------------------------------------------------------------
South                                                               21%
------------------------------------------------------------------------
Northeast                                                           12%
------------------------------------------------------------------------

    Source: ORNL. P.4-6.
Study #2: Resources for the Future \4\
---------------------------------------------------------------------------
    \4\ Burtraw, D., et al., 2008, ``The Incidence of U.S. Climate 
Policy: Where You Stand Depends on Where You Sit,'' Resources for the 
Future, Washington, D.C.
---------------------------------------------------------------------------
    Resources for the Future (RFF) evaluated a variety of climate 
policy mechanisms and their impacts on the 20% of households with the 
lowest incomes. The analysis shows what happens first when a flat 
rebate is provided (the ``dividend'' approach, which provides a uniform 
rebate to all individuals) and then when other uses of auction revenues 
are added to a flat rebate. The results are stated in terms of 
percentage of annual income lost or added. No data on the type of fuel 
used by the households was included.
Variation among Regions under Different Policy Scenarios
    Table 3 shows the impact of five policies on households in the 
lowest 20% of income and the range of impacts in percent of annual 
income lost/gained for those households by state or grouping of 
states.\5\ The percentages shown here are not comparable to the ORNL 
results. However, these results compare the fairness of various rebate 
proposals.
---------------------------------------------------------------------------
    \5\ For these projections of impacts, RFF used data on household 
expenditures from the U.S. Bureau of the Census Survey of Consumer 
Expenditure 2004-2006. To develop their sample, RFF used a national 
population sample from the Bureau of Labor Statistics, grouped 
households by income decile, and aggregated those households into 11 
regions. Those samples exclude Alaska and Hawaii, and due to a small 
number of observations, five other states were excluded from the study 
(Iowa, New Mexico, North Dakota, Vermont, Wyoming). The 11 regions into 
which the remaining 43 states and District of Columbia were aggregated 
are: Ohio Valley (IL, IN, KY, MI, MS, OH, WV, WI), Northeast (CT, ME, 
MA, NH, RI), Mid-Atlantic (DE, MD, NJ, PA), Plains (KS, MN, NE, OK, 
SD), Southeast(AL, AR, DC, GA, LA, MS, NC, SC, TN, VA), Northwest (ID, 
MT, OR, UT, WA), Mountains (CO, AZ), California and Nevada, Florida, 
Texas, and New York.


                          Table 3. Impact of Selected Policies on Annual Income in 2015
                   Loss or Gain on Percent of Annual Income for Bottom One-fifth of Households
----------------------------------------------------------------------------------------------------------------
                                                                                                          Plus
                                        Cap-and-Dividend     Plus Free        Plus      Plus Exclude    Exclude
                                           (taxable)       Allocation to    Invest in  Transportation     Home
                                                              Emitters     Efficiency       Fuel        Heating
----------------------------------------------------------------------------------------------------------------
National Average                                  1.97%           -6.15%       7.81%         0.03%        1.59%
----------------------------------------------------------------------------------------------------------------
Range of Impact on Regions               -1.23% (NE) to   -9.04% (NE) TO      -1.17%   -2.74% (NE) TO    -1.52%
                                             3.80% (TX)      05.12% (NW)     (NE) TO    1.72% (TX)      (FL) TO
                                                                           3.50 (TX)                      2.81%
                                                                                                           (TX)
----------------------------------------------------------------------------------------------------------------
Note: NE=New England
Source: RFF. 2008. The Incidence of U.S. Climate Policy: Where You Stand Depends on Where You Sit.

    RFF found that Texas, the Northwest, California, and Nevada are the 
only areas whose lower-income households incur net income gains under 
all policies except free allocations to polluters. Under that scenario 
all low-income consumers incur dramatic losses.
    Low-income households in New England incur higher losses than those 
in any other region under most policies, except the exclusion of home 
heating fuels. If heating fuels are excluded, Floridians incur the 
greatest real income losses. However, the losses in New England (not 
shown) are only a little lower.
    While ORNL found that low-income households in the entire Northeast 
Census region, including New York and Pennsylvania, would be harmed 
less by the direct cost of cap-and-trade relative to other regions, RFF 
found that New Englanders would be most harmed under any variation of 
cap-and-trade policy that returns a flat dividend. Texas' low-income 
consumers are net winners under four of five RFF scenarios; their 
collective real incomes would be 2-4% higher after the flat dividend is 
distributed. This finding reflects that the Texas share of U.S. 
families in the bottom 20% of income is much higher than New England's. 
These variations do not change the fact that a flat rebate creates 
unintended income transfers among low-income households in different 
locations.
Consumer Mitigation Proposals and the Distribution of ``Mitigation'' 
        Resources
    The best-developed blueprint for a rebate to lower-income 
households delivered through existing tax and income support systems 
was proposed by the Center on Budget and Policy Priorities.\6\ The 
analysis supporting the proposal does not examine how the direct cost 
of fuels would lead to different household impacts.
---------------------------------------------------------------------------
    \6\ Stone, C., et al., 2009, ``Cap and Trade Can Fight Global 
Warming Effectively While Also Protecting Consumers,'' Center on Budget 
and Policy Priorities, Washington, D.C.
---------------------------------------------------------------------------
    Since today's tax credits and income support systems vary only by 
adjusted income, family size and employment status, changes or new 
approaches would be required to solve the re-distribution problem. The 
Center proposes a small set-aside of auction revenues to provide to 
states to use for offsetting household burdens in unspecified ways and 
proportion.
    Cap-and-dividend proposals circulated by several groups give every 
individual in the nation the same ``climate dividend.'' Since low-
income households are smaller on average than others, the plan not only 
locks in, but actually, exacerbates the regressive nature of the 
increase in direct and indirect increases in the price of energy.
The Analysis Tools Limit Undersrtanding: or Better Thinking Comes from 
        Complete Information
    The analyses of consumer impacts offered by CBO, the Center on 
Budget and Policy Priorities, and RFF all use the Consumer Expenditure 
Survey (CEX) to determine what low- and moderate-income
    Americans spend on energy directly and also on other products whose 
costs change because of the price of energy. The CEX is a snapshot of 
the past, but using it limits the predictive power of these analyses 
because it does not reflect the type of household fuel used. Those 
homes with the highest CO2 content, including coal-fired 
electricity, will cost far more proportionately than natural gas and 
nuclear power. What's more, there will be a proportional shift among 
the consumer groups based on fuel and location. Those now using coal-
based power have some of the lowest-cost electricity in the nation; it 
will rapidly become the most expensive. Electric bills make up the 
majority of low-income household expenditures today.
    The 2005-2006 CEX data patterns will not be the burden distribution 
in a carbon-constrained future. In fact, the residential energy 
expenditures in those years were lower than normal so that expenditures 
that were below normal weather requirements are the basis for those 
analyses predictions about future needs.
    The combination of the DOE Residential Energy Consumption Survey 
and the National Energy Modeling System, as used by ORNL, can offer 
fuels data that can be projected for different auction scenarios (and 
different weather forecasts). It lacks the data on all expenditures 
that would allow calculations of total household burden. However, those 
increases will be essentially the same percentage increase nationwide.
    Conclusion: The analysis of what a cap-and-trade policy will cost 
households and what to do as a remedy is incomplete, and its tools are 
too limited. The 30-year framework proposed for re-distributing 
revenues requires imaginative and flexible policy tools; the analyses 
result in recommendations that are limited by today's income 
redistribution mechanisms and by the faulty analytic base.
    A thorough investigation of the direct and indirect household 
impacts of the major policy alternatives is an essential first step. 
The second is to undertake a fresh approach to designing program tools, 
including, but not limited to, targeted tax ``rebates'' to protect all 
American consumers equally as well as the economy they support while a 
future-directed climate change policy drives up the cost of all fossil 
fuels.
    Disclaimer: ``This report was prepared as an account of work 
sponsored by an agency of the United States Government. Neither the 
United States Government nor any agency thereof, nor any of their 
employees, makes any warranty, express or implied, or assumes any legal 
liability or responsibility for the accuracy, completeness, or 
usefulness of any information, apparatus, product, or process 
disclosed, or represents that its use would not infringe privately 
owned rights. Reference herein to any specific commercial product, 
process, or service by trade name, trademark, manufacturer, or 
otherwise does not necessarily constitute or imply its endorsement, 
recommendation, or favoring by the United States Government or any 
agency thereof. The views and opinions of authors expressed herein do 
not necessarily state or reflect those of the United States Government 
or any agency thereof.''

                                  
