CBO: Free cap and trade CO2 credits won’t reduce consumer costs

Our guest bloggers are Daniel J. Weiss, a Senior Fellow and Director of Climate Strategy at the Center for American Progress (CAP) Action Fund, and Kalen Pruss, a CAP intern and a U. Mich. junior majoring in environmental studies. See also Obama: “If you’re giving away carbon permits for free … it doesn’t work.”


Major United States utilities have long opposed binding reductions in the greenhouse gases emitted by their coal fired power plants. Now that reducing global warming is a priority for President Barack Obama, these same companies want to bear as little of the clean up costs as possible by asking for free pollution allowances.

A group of investor-owned utility companies are pressuring Congress and the administration to give them 40 percent of any cap and trade system’s emission credits for free. “We want to make sure we mitigate the cost impact on our customers,” said David Ratcliffe, CEO of Southern Co., which happens to be the most carbon polluting utility company in America.

However, the Congressional Budget Office (CBO) testified on March 12 that providing free allowances to utility companies won’t do anything to help their middle and low-income families cope with higher energy costs caused by reducing pollution. Terry Dinan, senior CBO advisor on climate issues, told the House Ways and Means Committee that giving away allowances would not help utility customers:

Under a cap-and-trade program, firms would not ultimately bear most of the costs of the allowances but instead would pass them along to their customers in the form of higher prices. Such price increases would stem from the restriction on emissions and would occur regardless of whether the government sold emission allowances or gave them away.

Instead, low-income families could enjoy a net benefit from a cap-and-trade system if all emissions allowances are sold in the free market:

These families could be better off as a result of the policy (even without including any benefits from reducing climate change) if the government chose to sell the allowances and use the revenue to pay an equal lump-sum rebate to every household in the United States….. [rebate payments] could actually more than offset the average increase in spending on energy-intensive goods by low-income households.

Unsurprisingly, Dinan reported that only the wealthiest Americans and corporations would be better off if allowances are given away for free. Even if carbon-belching companies don’t have to purchase emission allowances, they would still reap in “windfall profits, which could be very large” from the rise in prices of goods and services that they sell. Utility companies’ pleas for free allowances are an attempt to boost their own revenues while asking middle and low income families to bear the burden of greenhouse gas clean up costs.

This post was first published by Wonk Room.

3 Responses to CBO: Free cap and trade CO2 credits won’t reduce consumer costs

  1. Harrier says:

    Didn’t OMB Director Peter Orzag make a similar point recently? I seem to recall it. If he did, it’s a good sign that the White House is going to push this in the right direction.

  2. Jay Alt says:

    comments please on a new ‘too costly’ theme in the conservative blogosphere-

  3. Cyril R. says:

    Not only do free credits do little for reducing consumer costs, they also defeat most of the purpose of the whole credit system. Which is a bit silly to use an understatement.

    It’s like, going to the bakery, expecting to get a bread for nothing, and then expecting it to be of excellent quality.

    Corporate lobbying-logic metaphorized.