Greenstein gave this testimony before the Committee on Ways and Means. Legislators from all around the world should take heed of the principles outlined here.
Thank you for the opportunity to testify today. The main message of my testimony is that climate change legislation can fight global warming effectively while protecting consumers if it is designed appropriately.
Fighting global warming requires policies that significantly restrict greenhouse gas emissions, and an emission cap can serve this purpose. Under a cap, the price of fossil-fuel energy products — from home energy and gasoline to food and other goods and services with significant energy inputs — will rise. Those higher prices will create incentives, sometimes referred to as a “price signal,” for energy efficiency and conservation measures and for the development and increased use of clean energy sources. But they will also put a squeeze on consumers’ budgets, and low- and moderate-income consumers will feel the squeeze most acutely.
Fortunately, climate change policies can be designed in a way that preserves the incentives from higher prices to change the way that we produce and consume energy, while also offsetting the effect of those higher prices on consumers’ budgets. Well-designed climate policies will generate substantial revenue that can be used for consumer relief, as well as to meet other critical needs related to climate change.
To capture this revenue under a cap-and-trade system, it is essential that most or all of the allowances or permits used to limit emissions be auctioned rather than given away free to emitters. Giving away, or “grandfathering,” allowances is sometimes portrayed as a way to keep down costs for consumers, but that argument does not withstand scrutiny. If allowances are given away free to firms that are responsible for emissions, the firms and their shareholders will reap unwarranted benefits. The Congressional Budget Office has explained that these firms would receive “windfall profits:” they would be able to charge higher prices for their products due to the effects of the emissions cap but would not have to pay for their emissions allowances. Greg Mankiw, former chair of the Council of Economic Advisers for President George W. Bush, has written in a similar vein that consumer prices will rise regardless of whether allowances are given free to emitters and that grandfathering the allowances would constitute “corporate welfare.” There is little disagreement among economists about this effect.
Protecting low- and moderate-income consumers should be the top priority of consumer relief provisions included in climate change legislation. These consumers are the most vulnerable because they spend a larger share of their budgets on necessities like energy than do better-off consumers and already face challenges making ends meet. They also are the people least able to afford purchases of new, more energy-efficient automobiles, heating systems, and appliances. Middle-income consumers also will feel the squeeze from higher energy-related prices, and they should receive consumer relief as well.
Much of the Center on Budget and Policy Priorities’ work on climate change policy has focused on developing concrete proposals to protect the budgets of low- and middle-income consumers in a way that is effective in reaching these households, efficient (with low administrative costs), and consistent with energy conservation goals. With these goals in mind, we have designed a “climate” or “energy” rebate, that would offset the impact of higher energy-related prices on low-income households — who are most vulnerable to these price increases — and middle-income households, who also will feel the squeeze. Such consumer assistance should offset the increases in households’ energy-related expenses for an array of items, not just the increases in their utility bills, which will account for less than half of the overall impact on their budgets.
As explained below, we recommend that consumer relief be provided through the tax system and existing benefit delivery systems.  Under the proposal we have developed, approximately 95 percent of households in the bottom fifth of the income distribution and more than 98 percent of households in the next two income quintiles would be reached automatically. (With outreach, these figures would go still higher.) Because the rebates would build on existing tax and benefit delivery mechanisms, this approach would not require new bureaucratic structures, and the administrative costs would be low, compared with alternative delivery mechanisms. The size of the energy rebate, and how far up the income scale it would extend, would depend on the amount of funding (i.e., the share of the allowance value) that Congress decided to make available for consumer relief.
This is decidedly preferable to an alternative approach — providing funds to utility companies to artificially suppress price increases in electric bills that otherwise would occur under an emissions cap. Artificially keeping electric bills down would undercut the incentives the emissions cap is supposed to create to reduce electricity use. As a result, this approach would lead to larger increases in prices for other energy products than would otherwise occur — since the use of other forms of energy would have to decline more to meet the emissions cap . The resulting inefficiency would place some burden on the economy. This approach also would fail to offset increases in energy-related costs other than home utilities, which as noted above, account for the majority of the impact on consumers.
This testimony provides principles for crafting consumer relief and then describes our proposal for efficiently providing relief to low- and middle-income families.