Who Benefits from Free Emission Allowances? An Economic Analysis of the Waxman-Markey Cap-and-Trade Program

Abstract:     
Recent Congressional Budget Office (CBO) estimates of H.R. 2454, the “American Clean Energy and Security Act of 2009,” suggest the bill’s costs would be progressive across income groups. However, the analysis relies on assumptions about the incidence of free emission “allowances” that are not supported by microeconomic theory. We provide alternative estimates of the costs faced by U.S. households from the legislation. We find the bill - both on a gross and net basis - to be regressive, imposing the largest burdens on low- and middle-income households. On a gross basis, the bill would cost $106 billion per year or $892 per household, ranging from $451 to $1,531 depending on income. On a net basis, households in the four lowest-earning quintiles would pay between $31 and $512 per year, while households in the highest-earning quintile would actually profit by $604 per year - effectively redistributing roughly $14 billion per year to the highest-earning households in the U.S. We also examine the bill’s distribution of free allowances to various industries, finding that the legislation is likely to generate large windfall profits for various politically favored industries at the expense of U.S. consumers. As debate over climate policy moves to the U.S. Senate, lawmakers should be wary of these flaws in the structure of the Waxman-Markey cap-and-trade bill.

Keywords: Distributional analysis, cap-and-trade, environmental policy, policy analysis

JEL Classifications: H23, K20

Working Paper Series