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WHO GAINS AND WHO PAYS UNDER CARBON-ALLOWANCE TRADING? THE DISTRIBUTIONAL EFFECTS OF ALTERNATIVE POLICY DESIGNS
 
 
June 2000
 
 
NOTES

Numbers in the text and tables of this study may not add up to totals because of rounding.
 
 
Preface

Although scientists have long known that rising concentrations of carbon dioxide in the atmosphere affect the Earth's climate, considerable disagreement exists about what, if anything, should be done to reduce carbon emissions caused by human actions. One general area of agreement, however, is that if steps are taken to reduce emissions, they should achieve those reductions at the lowest possible cost. For that reason, policymakers and analysts have expressed interest in using economic incentives, such as a trading program for carbon-emission allowances.

This Congressional Budget Office (CBO) study examines how the potential costs of a carbon-allowance program would be distributed among U.S. households of different incomes. Those distributional effects could vary widely depending on the government's decisions about how to allocate the allowances and how to use any revenue that it received as a result of the policy. The analysis was done at the request of the Ranking Minority Member of the House Committee on Commerce.

Terry Dinan of CBO's Microeconomic and Financial Studies Division and Diane Lim Rogers, formerly of CBO's Tax Analysis Division, wrote the study. CBO staff members Mark Booth, Robert Dennis, Pamela Greene, Roger Hitchner, Mark Lasky, Robert McClelland, John Sabelhaus, Robert Shackleton, John Sturrock, David Weiner, Roberton Williams, and Thomas Woodward provided valuable comments and assistance, as did Suzi Kerr of Motu Economic and Public Policy Research in New Zealand, Gilbert Metcalf of Tufts University, and Ian Parry and Margaret Walls of Resources for the Future.

Chris Spoor edited the study, and Christine Bogusz proofread it. Rae Wiseman typed the drafts and produced the preliminary versions of the tables. Kathryn Quattrone prepared the study for publication, and Laurie Brown prepared the electronic versions for CBO's World Wide Web site.
 

Dan L. Crippen
Director
June 2000
 
 

Contents
 

SUMMARY

ONE - INTRODUCTION

TWO - THE OVERALL ECONOMIC EFFECTS OF A CARBON TRADING PROGRAM

THREE - DISTRIBUTING THE OVERALL ECONOMIC EFFECTS AMONG U.S. HOUSEHOLDS

TABLES
 
S-1.  The Distributional Effects and Potential for Efficiency Gains of Various Scenarios for Allocating Carbon Allowances and Recycling the Government's Revenue
1.  Comparison of Domestic and International Carbon-Allowance Trading Assuming a 15 Percent Cut in Emissions
2.  Price Increases for Various Consumer Goods Assuming a $100 Price per Carbon Allowance
3.  Households' Patterns of Consumption, by Income Group, 1998
4.  Increase in Average Household Costs Because of Allowance Costs and Substitution Costs
5.  Change in Average After-Tax Household Income Under Various Allowance-Allocation and Revenue-Recycling Scenarios, with Domestic Trading Only
6.  Change in Average After-Tax Household Income Under Various Allowance-Allocation and Revenue-Recycling Scenarios, with International Trading
7.  Change in Average After-Tax Household Income When Domestic Trading Is Replaced by International Trading
 
FIGURES
 
1.  Composition of Total U.S. Emissions of Greenhouse Gases, 1995
2.  Sources of U.S. Emissions of Carbon Dioxide, 1998
 
BOXES
 
1.  Key Assumptions Underlying the Estimates of Total Costs
2.  Considerations About International Trading of Allowances
3.  Offsetting the Additional Costs to Low-Income Households
4.  How a General-Equilibrium Analysis Might Change the Distributional Effects

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