The Costs of Enviros' Carbon Trading Schemes

In July, the non-partisan Congressional Budget Office released a report titled, “Shifting the Cost Burden of a Carbon Cap-and-Trade Program.” In short, the study’s conclusions may astonish supporters of carbon trading schemes. As CBO makes abundantly clear, such schemes:

1) are regressive, meaning they impose a greater burden on the poor than everyone else;

2) they cause “significant welfare losses” to society in the form of lower stock prices, job losses, and higher prices for energy and electricity;

3) they would devastate the coal industry, which provides 52 percent of the nation’s electricity; and

4) they would depress government revenues, exacerbating federal deficits.

Moreover, any attempts by government — namely, welfare programs — to defray the costs of carbon trading schemes are inefficient and may make the most vulnerable in society worse off. The following are some of the study’s key passages:

CBO on Regulating Carbon Dioxide

CBO: “The price increases resulting from a carbon cap would be regressive — that is, they would place a relatively greater burden on lower-income households than on higher-income ones. Higher-income households would face larger costs in dollar amounts, but those costs would make up a smaller share of their average annual income. For example, one study estimated that the price increases resulting from a 15 percent cut in carbon emissions would cost the average household in the lowest one-fifth of the income distribution about $560 a year, or 3.3 percent of its average income. Households in the top one-fifth of the income distribution would pay an additional $1,800 a year, or 1.7 percent of their average income.”

TRANSLATION: Carbon cap-and-trade would hurt the poor, the elderly, and those on fixed incomes — the most vulnerable in our society — the most.


CBO: “A cap-and-trade program for carbon emissions could impose significant costs on the economy in the form of welfare losses. Those losses would include the value of society’s resources (capital, labor, and natural resources) that would be devoted to producing goods in ways that yielded lower carbon emissions. They would also include the net value of decreased production and consumption that would result from the carbon cap. Welfare losses are real costs to the economy in that they would not be recovered elsewhere in the form of higher income. Those losses would be borne by people in their roles as shareholders, consumers, and workers.”

TRANSLATION: A carbon cap-and-trade program would harm the U.S. economy — in particular, it would create a drag on growth, wages, and the stock market.


CBO: “Losses to industry — in the form of lower stock values — would be broadly distributed among investors, to the extent that they have diversified portfolios. Losses to workers would be more concentrated. For example, many coal workers could lose their jobs if carbon emissions were reduced significantly.”

TRANSLATION: Stock markets would be lower, causing retirees and others living on fixed investments to suffer. Workers would see declines in the value of their 401(k)s and pension plans, and coal states, such as Pennsylvania, Ohio, and West Virginia, would incur significant job losses.


CBO: “The government could use the allowance value to partly redistribute the costs of a carbon cap-and-trade program, but it could not cover those costs entirely. The reason is that the total costs of the program — including the cost of the allowances — would be greater than the allowance value. For example, if policymakers decided to sell allowances to regulated firms in an auction and use part of the resulting revenue to compensate workers who lost their jobs because of the program, there would not be enough funds available to fully compensate the entities that had to bear the costs of the allowances.”

TRANSLATION: Government can redistribute taxpayer dollars through a welfare program to mitigate increases in energy costs caused by carbon cap-and-trade, but it can’t help everyone. Even more importantly, what taxpayers could not cover through taxes would have to be paid for through increased prices on consumer goods.


CBO: “Available research indicates that providing compensation could actually raise the cost to the economy of a carbon cap. In general, paying compensation would preclude the government from using auction revenue in ways that were more economically efficient. Moreover, in some circumstances, it might exacerbate existing inefficiencies in the pricing of electricity.”

TRANSLATION: Even if government redistributes income, such a program would be inefficient, raise costs to the economy even further, leaving the poor, the elderly, and those on fixed-incomes worse off.


CBO: “A cap on carbon emissions would cause a reduction in the production of fossil fuels and carbon-intensive goods, such as electricity.”

TRANSLATION: Carbon cap-and-trade would result in the goal long sought by environmental extremists: consumers using less energy and suffering with a lower standard of living.


CBO: “Declines in equity values for those industries could be significant. For example, one study predicted that equity values for coal producers would fall by 50 percent if carbon emissions were reduced by 23 percent.”

TRANSLATION: Carbon cap-and-trade would devastate the coal industry, which provides 52 percent of the nation’s electricity.


CBO: “A carbon trading program would affect government outlays and tax receipts in several ways. First, it would cause the government (like other consumers) to pay higher prices for carbon-intensive goods. Second, because the payments of some government programs, such as Social Security, are indexed to changes in the overall price level, higher prices could result in greater spending on those payments. Third, a cap-and-trade program for carbon emissions would lead to a decline in economic activity and a corresponding decrease in tax collections.”

TRANSLATION: Democrats have been screaming to the heavens about the “immorality” of deficits. Carbon cap-and-trade will exacerbate deficits and reduce tax revenues for other government programs.