Progressive Voices

We are faced with a fundamental challenge: How can we move to a low greenhouse gas emission economy that will stave off environmental catastrophe in a way that does not increase the ranks of the poor or make things worse for those already there? And how can the shift be made fairly, without creating winners and losers from the process? The path chosen to the new greener economy will have profound implications for North Carolina.

Recently, the U.S. Senate missed an opportunity to pass the Climate Security Act when the bill failed to get the 60 votes needed to prevent a filibuster. The bill was arguably the most important piece of federal legislation in the last forty years. That it failed on this first attempt should not dissuade legislators from renewing their efforts in 2009. It is highly encouraging that the bill’s “cap and trade” method for reducing greenhouse gas emissions has bipartisan support, including that of Senator Dole.

The bill would have created a much needed regulatory scheme whereby major greenhouse gas producers, including coal-reliant energy producers like Duke Energy and Progress Energy, would face limits on the amount of greenhouse gas they could emit into the atmosphere. The bill aimed for an 18% reduction on 2005 greenhouse gas emission levels by 2020, and 71% reduction by 2050.

Under the scheme, companies that pollute a great deal participate in an auction for a fixed number of pollution permits. These permits set the “cap” that limits greenhouse emissions. Each permit gives the winning bidder the right to release into the air a certain amount of greenhouse gases. The number of permits available would decrease through 2050. Until 2030, some of these permits would be given away free to specific groups of very high polluters.

Owners of permits would be allowed to re-sell them. This is the “trade”, and rewards companies who are “green” innovators and have more permits than they need.

Critics of cap and trade schemes argue that they are unfair on low and middle income people. They reason that the cost of energy will rise as energy companies switch to more expensive, greener energy sources and technology and try to manage a finite conventional energy supply. But the proceeds of permit auctions can and should be used to provide income relief for consumers, and not solely for corporate compensation and incentives.

Unfortunately, the Climate Security Act provided household budget relief for lower-income consumers that fell short of what is needed, and created income delivery mechanisms that were fundamentally flawed. When the bill gets revived in 2009, as it surely will, the budget relief provisions will need to take heed of the best research available.

The Center on Budget and Policy Priorities (CBPP), a highly respected DC-based budget analysis non-profit, estimates that a reduction of 15% in greenhouse gas emissions, which is less than the 2020 targets proposed, will cost the poorest 20% of households an average of $750 per year. CBPP estimates that around one-seventh or 14% of the permit auction proceeds will be necessary to offset the increase in energy, food, goods and services costs for low-income households.

The Climate Security Act allocated low income households only around 7 ½ % of the permit auction proceeds initially or around half of what the CBPP calculates will be necessary to hold them harmless. That assistance would have come in unspecified forms of tax and heating oil rebates.

The bill also allocated around one-seventh of permit auction proceeds to utility companies to distribute to low and middle-income consumers and small businesses in the form of rebates. This provision was badly flawed because energy companies are unable to accurately identify all the low income consumers they serve. Many low income renters, of course, pay a combined rent and utility charge to their landlord. Even with safeguards, many households would not be identified and would miss out on their rebate.

The best way to deliver the one-seventh of auction proceeds necessary to offset the increase in energy prices for low and middle income consumers is via existing tax and benefits transfer channels, either via Electronic Benefit Transfer or the annual Earned Income Tax Credit (EITC). The CBPP estimates that 1.2 million households in North Carolina would receive some kind of “climate rebate” under these schemes.

As a matter of fairness and as a way to build voter support for cap and trade, these delivery mechanisms and level of expenditure should be front and center in any new legislation.

Stephen Jackson is a Policy Analyst at the N.C. Budget and Tax Center

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This entry was posted on Monday, June 30th, 2008 at 5:48 am and is filed under Progressive Voices. You can follow any responses to this entry through the RSS 2.0 feed.