American Households Would Face Annual Burden of $144.8 Billion Under Cap-and-Trade System; Costs Would Be Disproportionately Bor

March 17, 2009

American Households Would Face Annual Burden of $144.8 Billion Under Cap-and-Trade System

Costs Would Be Disproportionately Borne by Low-Income Households, Those Under Age 25 and Over 75 Years

Washington, DC, March 17, 2009 - With climate change legislation becoming a top congressional priority in recent months, a new study shows that a cap-and-trade system curbing greenhouse gas emissions would place an annual burden of $144.8 billion on American households. The average annual household burden would be $1,218, which would be approximately 2% of the average household income.

In Tax Foundation Working Paper No. 6, "Who Pays for Climate Policy? New Estimates of the Household Burden and Economic Impact of a U.S. Cap-and-Trade System," Tax Foundation Adjunct Scholar Andrew Chamberlain explains that this burden would be disproportionately borne by low-income households, those under age 25 and over 75 years, those in southern states, and single parents with dependent children. The bottom 20 percent of income earners has an annual cap-and-trade burden that is equal to 6.2% of their household cash income. The second quintile has a burden equal to 3.2% of household cash income, the third quintile 2.4%, the fourth quintile 2.0% and the top quintile 1.4%.

"Lawmakers weighing the costs and benefits of climate policy should be aware that cap-and-trade would impose a significant and regressive annual burden on U.S. households," Chamberlain argues.

Chamberlain also observes that with lawmakers facing two basic options for climate policy (a federal carbon tax or a cap-and-trade system), cap-and-trade is often viewed as more politically attractive because of lawmakers' unwillingness to be associated with explicit tax increases. But it would not represent a "tax free" way to reduce greenhouse gas emissions.

"A cap-and-trade system offers lawmakers a way to curb greenhouse gas emissions through regulations rather than tax increases - a less visible approach that enjoys the popular perception of being less burdensome to households," says Chamberlain. "Contrary to this perception, economic theory teaches that cap-and-trade and carbon taxes impose nearly identical economic burdens on households."

Working Paper No. 6 can be found at http://www.taxfoundation.org/publications/show/24472.html.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.