Cost of cap-and-trade for U.S. households

December 18, 2009

– John Kemp is a Reuters columnist. The views expressed are his own –

How much are U.S. households prepared to pay to avert the threat of climate change? According to the latest polling data published by the Washington Post, the answer is not very much, probably not much more than $25 per month or $300 per year.

Most respondents (65 percent) believe the federal government should regulate greenhouse gases from sources like power plants, cars and factories, including those who believe this strongly (50 percent) or somewhat (15 percent). Only a minority think the government should not regulate them (29 percent).

While the margin favoring regulation has narrowed since the middle of the year (when it was 75 percent to 22 percent), probably in response to a vigorous opposition campaign, there is still a clear majority in favor of taking some action on climate change.

The problem is that, when respondents are confronted with a range of cost estimates, support starts to fall away rapidly.

When asked if they would be prepared to pay for a scheme that cut emissions significantly but raised monthly energy bills by $10, the 65-29 percent margin in favor of regulation shrank to just 60-37 percent. If the cost was $25 per month, the margin was just 55-42 percent.

The poll did not ask respondents about higher charges beyond $300 per year. But if support continues to fall away at this rate, survey respondents would probably not be prepared to pay more than $400 a year in total.

POLARIZATION ABOUT SCIENTISTS

Nor are voters reassured about the truthfulness of political leaders and scientists advocating the need for tough, early action. Sections of the public are becoming much more wary about what they are being told.

The proportion of respondents who trust what scientists are saying, either completely or a lot, has remained fairly constant around 30 percent over the past three years.

But the proportion who trust the scientists moderately has been squeezed from 40 percent to 30 percent, while those who believe scientists are lying or not telling the whole truth is up from 27 percent to 40 percent. Voters show increasing polarization on the issue.

Interestingly, growing distrust of the scientific argument is not being driven by an increasing belief that scientists cannot agree. The proportion thinking scientists agree with one another on global warming has remained constant at 35-40 percent for the last decade, while the percentage thinking scientists cannot agree is also static at 65 percent. Voters’ views on the cost of emissions reduction seem to be coloring their view of the science, rather than the other way around.

Political leaders do not fare any better. Survey respondents approve of the job President Barack Obama is doing on global warming, but only by the relatively narrow margin of 45 percent to 39 percent.

WILL PUBLIC SWALLOW CAP-AND-TRADE?

If voters are prepared to pay up to $300 or $400 per year, is that enough to implement an emissions reduction program?

The respected, non-partisan Congressional Budget Office (CBO) has estimated the net cost of the cap-and-trade provisions in the American Clean Energy and Security Act (HR 2454) approved earlier this year at just $22 billion per year by 2020, or $165 on average for U.S. households.

At first glance cap-and-trade appears politically feasible. But the low net figure conceals some large income transfers and may overstate the likely acceptability of the program.

The gross cost is much higher at $110 billion per year or $770 per household. Most of this represents the market value of the emissions allowances ($91 billion) plus some domestic and international offsets ($13 billion). These costs would be passed back to households in the form of higher prices for energy and energy-intensive items.

But payments for allowances would also create an income stream (for every buyer of an emissions permit there is a seller). Some 30 percent of this income ($28 billion) would be handed back directly to households via government-run rebates to low-income households ($14 billion), or free allowances given to gas and electricity distributors they would be required to pass on to their customers ($14 billion).

The rest would be received by banks and other businesses owning those permits, which would add to their net income and ultimately be returned to their shareholder-owners via dividends or rising share prices.
According to the CBO, almost all the cost of the permits would flow back to households in one form or another ($85 billion).

The only costs borne outright by U.S. households ($22 billion) which they would not recover through rebates or corporate income would be the cost of offsets purchased from abroad ($8 billion); the cost of producing domestic offsets ($3 billion); the cost of some retooling in energy and energy-intensive industries ($5 billion); and income leaking abroad because some permits are bought by foreigners (assumed around $6.5 billion).

INCOME RECYCLING

In theory, the $22 billion net cost ($165 per year) looks feasible. In practice households would be paying an extra $770 per year for energy and other items, though they would be getting most of it back through rebates from the government or their utility company, or through their ownership of equities.

So it depends crucially how the question is framed. If voters are asked whether they would be prepared to pay an extra $64 per month in higher energy bills and other prices, the answer is probably “no”. But if they are told that they will get most of it back in one form or another, and the net cost is only $13.75, the answer is probably “yes”.

This is why Democratic Senators Maria Cantwell (Washington) and Susan Collins (Maine) have introduced a new bill that would recycle revenues back to customers more directly, in a program they have rebranded “cap-and-dividend”.

VULNERABILITY TO PERMIT PRICES

But the idea that recycling will return most of the income on a fairly neutral basis that leaves most households with only small net losses (or gains) is sensitive to the assumptions made about the future cost of permits.

CBO estimates the gross costs of the program would range from $425 per year for households in the lowest income quintile to $1,380 for households in the highest (basically because high-income households drive more and have bigger homes and utility bills).

But households in the higher quintiles own more shares, so they will receive more of their gross payments back in the form of dividends. Households at the bottom of the income distribution are unlikely to receive relief from equity ownership, but will be compensated by utility rebates and targeted direct relief from the federal government. (See table here.)

This income-neutral recycling only works, however, if permit prices remain relatively low. CBO estimates prices will rise from $15 in 2011 to only $26 in 2019. If prices rise much more than this, gross costs will rise sharply. But while rich households should be compensated by their ownership of equities, poorer households will find their government rebates do not rise fast enough.

The political acceptability of cap-and-trade is really a gamble that households can be made to see costs in the round (including various rebates and offsets); and permit prices will not surge (because emissions reduction proves harder than expected or because speculative buying creates and artificial shortage). It is quite a risk.

References:

(1) “The Estimated Costs to Households from the Cap-and-Trade Provisions of HR 2454″, CBO, Jun 2009:

(2) “The Distribution of Revenues from a Cap-and-Trade Program for CO2 Emissions”, CBO, May 2009:

(3) “HR 2454 American Clean Energy and Security Act 2009 – Cost Estimate“, CBO, Jun 2009:

One comment

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Cap & trade is a scam. It has not worked well in previous formulations, since polluters can just move around their pollution credits and evade making significant changes. It will also become a new market, and boon for Wall St, however the profits will be rolled into price increases for the average consumer. The average person will likely shoulder a disproportionate burden. Simultaneously, adherence to cap & trade in developing countries will be difficult and far from transparent. Its basically an excuse for a big payday.

To be honest, the whole concept of climate change is wearing thin. We have to redirect our focus from CO2 emissions, to more dangerous, and proven, pollutants that go unregulated. We must also stop looking at climate change/ pollution as a global issue, we must start looking at it from a regional or local perspective. Cities, industrial centers, and transportation hubs are the main culprits, so why regulate pristine areas?

When we stop looking at this as “climate change” and “apocalyptic”, and start looking at it as addressing regional pollution, there would be much more support and progress. While the US is not innocent, we are far less of a polluter than China/SE Asia, with their permanent brown cloud. Climate change legislation would do little to stop particulate emissions, toxic chemical releases, and heavy metal and radioactive contamination. These are far more dangerous than one of the most common gases in our atmosphere.

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