The National Association of Manufacturers (NAM) network television advertisements on the "cap and trade" legislation that passed the House and that is now under Senate consideration (the American Clean Energy and Security Act or ACES) touches a raw voter nerve in these uncertain times. The misleading ads dub the cap and trade proposals as an energy tax – one that supposedly can't be afforded in a recession.

Consumers need to understand that these advertisements neglect to mention that the bill that passed the House contained various provisions that specifically provide household consumer relief. The average soccer mom portrayed in the NAM ad worrying over her budget documents at the dining room table is clearly misinformed about the impact of the bill on her household. Either that or she has some kind of nervous disorder.

The bill can be improved

A basic knowledge of ACES can quickly alleviate the misplaced fears that ads like the NAM one are trying to inspire. While the House bill has some flaws – it should have given more relief to middle-income people and gives too much relief to the wealthiest – the Senate can clearly improve upon it in ways that will reduce emissions even more and get more relief to low and middle income households.

Cap and trade in brief

What cap and trade does is place a price on a harmful by-product of economic activity – carbon-based and other greenhouse gas pollution – that had no direct price before. Because this pollution has no price other than regulatory compliance costs, in the absence of direct or sufficient regulation (i.e. the situation right now), there is little incentive for producers to reduce it.

The price for the right to pollute is set by requiring polluters to hold permits or allowances for every ton of GHG pollution they emit, and then placing a cap on the number of allowances. Allowances can be initially bid on or given away by the government, and holders can re-sell them if they wish at whatever price the market can stand.

Assuming you agree with the consensus scientific view that carbon-based pollutants are causing a warming of the planet (and ignoring the odd naysayer who is inevitably bought and paid for by oil companies or major polluters), placing a price on pollution in this way is generally understood to be the most economically efficient way to reduce the external harm caused by greenhouse gas pollution.

The creation of allowances also generates a great deal of public revenue. This is what the NAM ads now showing conveniently forget. Under the House and Senate bills this revenue will be used in one of three ways – for consumer or business relief, to encourage sustainable energy generation or to encourage more and better energy efficient practices.

Consumer relief in the House bill

Under the bill that passed the House, in 2020 15% of the allowance value will be used for low income relief – either through the food stamp debit card program to households at or below 160% of the federal poverty level or through expansion of the Earned Income Tax Credit for workers without children. About 70 million people will receive relief in these two ways. In addition, another 14% of the allowances will be given to local utility companies with the instruction that the money be passed onto consumers in the forms of rebates or credits on their energy bills.

The Congressional Budget Office (CBO) estimates that these two initiatives would mean that the poorest 20% of US households would receive a net benefit of around $40 per year. The second poorest 20% would pay an extra $40 per year while the middle and next to top quintiles would pay $235 and $340 respectively. The average household increase would be $165 or $3.17 a week.

Forgoing a couple of beers or a burger a week per household on average, in other words, could go a substantial way to averting the slow environmental disaster of global warming and the massive costs associated with that for future generations. This is hardly cause to reach for the calculator and start worrying about the household budget.

Improving the bill

The bill is by no means perfect.

First, the Senate bill needs to down-size the giveaway to utilities of the pollution allowances that the House bill mandates. In the House bill, around 45% of the allowances would be given to local utility companies with the direction they be used for the benefit of retail customers. By selling these allowances, these companies will generate money to offset the higher cost of energy and pass these savings onto customers.

Since private-sector use accounts for over 60% of the end-use of energy, business will get the lion's share of these savings. For well-established economic reasons too detailed to go into here (but explained in CBO documents for the curious), these savings will tend to boost profits and by extension, the returns to shareholders and owners of these businesses. Consumers are unlikely to see the giveaway in reduced prices. Since wealthier people are more likely to hold stocks or hold them in greater numbers, the CBO has estimated that almost two-thirds of the allowance value given to utility companies will end up in the pockets of the wealthiest 20% of households.

Second, the Senate should prefer direct consumer relief via income tax credits and debit card transfers to channeling allowance value through utility companies. In addition to the problem identified above, it is unclear whether the utility rebate mechanism will alter consumer energy consumption habits as effectively as a relief scheme based on monthly credits on government debit cards or annual EITC lump sums. Ultimately this failure to change habits will be reflected in higher allowance and energy costs.

It is heartening to hear is that key Senate leaders on the bill are promoting improved low and middle-income protection in their version of the bill. This is the way to go and appears to be a far more useful and constructive approach than the tired "no tax" refrain promoted by the National Association of Manufacturers.

In the end, that message is much ado about not much at all.