Impact of cap-and-trade policies for reducing greenhouse gas emissions on U.S. households

Proposals being considered by the U.S. Congress would establish a cap-and-trade system to cut greenhouse gas (GHG) emissions approximately 2% annually through 2050. Past cap-and-trade policies for other pollutants have distributed allowances free to the regulated companies, leaving consumers uncompensated for passed-through costs needed to achieve the required reductions. Social equity concerns were not a major issue because the total costs were relatively small. However, Americans currently spend about $1 trillion/year on energy, directly and indirectly via the goods and services they consume. If a cap on carbon emissions results in significant increases in energy prices, social equity concerns could quickly dominate the debate over climate policy. This paper confirms earlier studies that a traditional cap-and-trade policy is regressive and would cause the cost of reducing GHG emissions to fall disproportionately on low income households. This paper explores ways to ameliorate those effects, using highly disaggregated data available on consumer expenditures and energy-input-output analyses of the U.S. economy. Emissions are estimated based on direct and embodied energy use at the household level. Social equity concerns are taken into account and the consequences of cap-and-trade policies are assessed by quantifying the extent to which the expenditure patterns of the poor are significantly more energy intensive than those of the rich.