Posted By Marc Morano - Marc_Morano@EPW.Senate.Gov - 10:45 AM ET

CBO Warns that Cap-And-Trade Approach Could Create ‘Windfall' Profits & Harm Poor

The non-partisan Congressional Budget Office's (CBO) director, Peter Orszag, testified before the House of Representatives on November 1 and cautioned that giving emission allowances away to companies under a cap-and-trade system "could create 'windfall' profits for those firms." 

The CBO also warned that "price increases would disproportionately affect people at the lower end of the income scale" and said a tax on emissions "is generally the more efficient approach" than a cap-and-trade system. (LINK)

Orszag's testimony before the House Budget Committee was entitled "Approaches to Reducing Carbon Dioxide Emissions."  The U.S. Senate Environment and Public Works Committee is currently holding hearings on the Lieberman-Warner cap-and-trade bill (S2191).

According to the CBO testimony: "Obtaining allowances-or taking steps to cut emissions to avoid the need for such allowances-would become a cost of doing business for firms that were subject to the CO₂ cap. However, those firms would not ultimately bear most of the costs of the allowances. Instead, they would pass along most such costs to their customers (and their customers' customers) in the form of higher prices. By attaching a cost to CO₂ emissions, a cap-and-trade program would thus lead to price increases for energy and energy-intensive goods and services that contribute the most to those emissions. Such price increases stem from the restriction on emissions and would occur regardless of whether the government sold emission allowances or gave them away."

The CBO also stated poor Americans would bear the brunt of these policies.

"The rise in prices for energy and energy-intensive goods and services would impose a larger burden, relative to income, on low-income households than on high-income households. For example, not incorporating any benefits to households from lessening climate change, CBO estimated that the price increases resulting from a 15 percent cut in CO₂ emissions would cost the average household in the lowest one-fifth of the income distribution about 3.3 percent of its income but the average household in the top quintile about 1.7 percent of its income," the CBO said.

Finally, the CBO found that "studies typically find that over the next several decades, a well-designed tax would yield higher net benefits than a cap-and-trade approach."

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