Clean Energy Bill Addresses Costs for Low-Income Households

June 7, 2009

As has been widely reported, the House Energy and Commerce Committee has taken the first step toward one of President Obama’s top priorities–saving the planet from “the ravages of climate change.”

On May 21, it passed a massive bill–commonly known, after its cosponsors, as Markey-Waxman–that aims to reduce our nation’s greenhouse gas emissions through a combination of carrots and sticks. The carrots here are incentives to reduce energy consumption and/or switch from uses of fossil fuels to cleaner energy sources. The sticks are the costs of not doing that.

Both are embedded in a cap-and-trade scheme. Basically, the federal government will issue permits to emit a fixed amount of greenhouse gases, based on total caps that will be reduced over time. Companies that produce less than their share can sell their excess permits. Companies that produce more will have to buy them.

As this scheme kicks in, our home energy costs will go up. This is our incentive to use less–by switching to fluorescent lights, buying more energy efficient appliances, etc.

Costs of gasoline and other consumer products will go up too because they’ll cost more to produce and more to distribute. Last year’s spike in oil prices has already given us a taste of this.

Much of the recent debate has centered on the cap-and-trade concept–and on which interests should be fostered and which protected. We haven’t heard much about how the legislation may affect low-income households. But that doesn’t mean that no one’s been paying attention.

The Center on Budget and Policy Priorities has been working on the issue for some time. As its reports and testimony say, higher energy prices will have the greatest impact on low-income households because they spend a larger portion of their budgets on basic necessities. They are also less able to afford investments that will reduce their energy costs.

According to CBPP, the poorest fifth of households would see their costs go up by an average of $750 a year if greenhouse gas emissions were reduced by 15%. Their average annual income is just over $13,000, and the 2020 reduction target set in the Energy and Commerce bill is 17% below the 2005 emissions level.

So, sometime in the next 10 years, these households could face additional costs equivalent to 5.7% of their total income. These costs would rise as the emissions cap was lowered.

The House Energy and Commerce bill addresses rising energy-related costs in two ways. First, it gives free emissions permits to local utility companies, with the understanding that they’ll pass the savings on to their customers. This provision provides relief for all consumers, regardless of income.

Second, the bill adopts a version of CBPP’s recommendations for assisting low-income households. Basically, it commits revenues from the sale of emission permits to refunds based on how much the purchasing power of low-income households is reduced by higher energy prices.

Families that pay income taxes would receive a tax credit along the lines of the Earned Income Tax Credit. Other low-income households would receive their refunds through one of several mechanisms. For example, those who receive food stamps and/or certain other benefits would get theirs via their electronic benefits transfer cards.

That’s the good news. The not-so-good news is that the bill doesn’t address the above average cost increases that some low-income families will face–for example, because their apartments are drafty or their appliances old and inefficient. CBPP recommends more generous refunds and additional funding for the Low Income Home Energy Assistance Program.

I wonder what the prospects for these recommendations will be. The bill that Energy and Commerce passed gives away 85% of the emissions permits the government will issue. This leaves far less in revenues than would have been the case if proponents had been able to gain support for auctioning off all the permits, as President Obama wanted.

Competition for the limited revenues will be fierce. And there may be further needs to placate legislators who don’t much like the cap-and-trade scheme or want more benefits for certain industries.

In any event, the legislation has a long way to go. Eight other House committees have a piece of the action. And then there’s the Senate. Four committees have jurisdiction there, and they’ll need to produce something that can secure 60 votes.

So if ever there was a stay tuned, this is it.