Will carbon cap-and-trade hurt the poor?
We recently brought you the story of how the John Locke Foundation of North Carolina has been leading the attack on states' efforts to regulate greenhouse gases while failing to disclose that it's funded by business interests with a financial stake in stopping such regulations. Well, this week the market-fundamentalist think tank fired another shot in its war against efforts to address global warming with a report on how cap-and-trade programs for carbon dioxide emissions -- one of the options being considered by state lawmakers -- would "hurt consumers and the poor disproportionately."
After we recovered from the shock of hearing an organization that's defended post-disaster price gouging and balancing the state budget with human-service program cuts expressing concern for consumers and the poor, we decided to check out their claims.
As it turns out, they're not completely accurate. Whether carbon cap-and-trade will hurt the poor depends on how those programs are designed.
The Center on Budget and Policy Priorities -- a Washington-based think tank that analyzes policies for their impact on low- and moderate-income families -- recently turned its attention to cap-and-trade programs. The conclusion of their report, released earlier this month? The government can reduce greenhouse-gas emissions with cap-and-trade programs in a way that does not increase poverty or otherwise harm low-income households:
Higher energy prices affect households with limited incomes the most. They spend a larger share of their budgets on energy than better-off households do. They also are less able to afford investments that can reduce their energy demand, such as a more efficient car or heating and cooling system.
Fortunately, well-designed climate-change policies can provide sufficient revenue to cushion the impact on vulnerable households and meet other legitimate public needs, such as expanded research on alternative energy sources. A carbon tax can accomplish these goals. So can a "cap-and-trade system" -- as long as it treats the emission allowances as a resource to be auctioned off for public purposes rather than handed to energy companies free of charge. In contrast, giving away the allowances would provide "windfall profits" for energy companies, according to the Congressional Budget Office, and would amount to "corporate welfare," according to Greg Mankiw, the former chairman of President Bush's Council of Economic Advisers.
If policymakers do not adequately protect vulnerable households from the increase in energy prices, many low-income Americans will slip into poverty and those who are already poor will grow poorer. Alternatively, if policymakers address these and other public needs but do so through deficit spending because they fail to auction enough of the emission allowances to cover the costs, the federal budget deficit -- already on course to reach unsustainable levels in future decades -- will grow still larger.
Well-designed climate-change policies can avoid both of these outcomes. In other words, they can slow global warming without increasing poverty and hardship among low-income households and without enlarging the deficit.
The CBPP report notes that policymakers need to reserve only an estimated 14 percent of the total value of the emission allowances under a cap-and-trade system to fund so-called "climate rebates" that protect vulnerable households from higher energy costs. It puts forth a number of principles for doing this, which include providing relief through existing systems rather than creating new bureaucracies, focusing not only on utility bills but also taking into account higher prices for gas and other products, and adjusting relief to reflect changing needs over time. The organization is now developing policy options based on these principles.
Meanwhile, a United Nations Development Programme report released this week points out that doing nothing to rein in carbon emissions would itself have a devastating impact on the world's poor. Said UNDP Administrator Kemal Derviş in a statement announcing the report:
An increase of a worldwide average of 3 degrees centigrade (compared to pre-industrial temperatures) over the coming decades would result in a range of localized increases that could reach twice as high in some places. The effect that increased droughts, extreme weather events, tropical storms and sea level rises will have on large parts of Africa, on many small island states and coastal zones will be inflicted in our lifetimes. Increased exposure to droughts, floods and storms is already destroying opportunity and reinforcing inequalities. Thus, while climate change is a challenge for all, it is primarily and most immediately a challenge for developing countries in the lower latitudes which will face the impact of global warming not within centuries, but within decades.
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