Paying for the ‘American Power Act’: An Economic and Distributional Analysis of the Kerry-Lieberman Cap-and-Trade Bill

Abstract

The “American Power Act” proposed by Sen. John Kerry and Sen. Joseph Lieberman would establish a broad-based U.S. cap-and-trade system. Using an input-output model we estimate the distributional cost of the cap-and-trade portions of the bill to households by income, age group, U.S. region and family type, as well as the value of various industry subsidies granted by the bill. In a typical year (2020), households would face a gross annual burden of $125.9 billion per year or $1,042 per household, with costs disproportionately borne by low-income households. On a net basis, the large quantity of allowances distributed freely to companies leads households in the top income quintile to benefit financially, redistributing to these households roughly $12.3 billion per year from the bottom 80 percent of earners. Finally, we explore two theoretical issues: (1) we offer microeconomic evidence that shareholders rather than households are most likely to benefit from the bill’s free allowances to electricity and natural gas utilities; and (2) we show how the bill’s exclusion of petroleum refiners from quarterly auctions reduces efficiency by introducing a source of additional systematic price volatility at quarterly auctions.

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

JEL Classification: H23, K20