1 Managed by UT-Battelle for the Department of Energy THE IMPACT OF A CARBON CONTROL PROGRAM ON LOW-INCOME CONSUMERS Joel Eisenberg ORNL October,

SOURCE: INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE

“The United States accounts for nearly as many emissions as the former Soviet bloc, the Middle East, Central and South America, and Africa combined. Use of fossil fuel in the United States is split roughly into three categories: commercial and residential buildings and appliances, industry, and transportation. More than a third of that fuel is used to generate electricity, two thirds of which goes to buildings and one third to industry.” SOURCE: THE CONGRESSIONAL BUDGET OFFICE

ALTERNATIVE CONTROL MECHANISMS VOLUNTARY MARKETS RENEWABLE PORTFOLIO STANDARDS- RPS COMPREHENSIVE EFFICIENCY INVESTMENTS CORPORATE AVERAGE FUEL EFFICIENCY-CAFE CARBON TAX CAP-AND-TRADE

WHAT IS “CAP-AND-TRADE”? IT IS A MECHANISM TO REGULATE CARBON EMISSIONS AND USE MARKET TRADING TO REDUCE THE COST. THE CAP- TOTAL EMISSIONS OF GREENHOUSE GASES WOULD BE LIMITED AND GRADUALLY REDUCED. REGULATED ENTITIES WOULD BE REQUIRED TO HOLD PERMITS (ALLOWANCES), EACH ALLOWING THEM TO EMIT A TON OF CO 2 PER YEAR UNDER THE CAP. THE TRADE- PERMIT HOLDERS WOULD BE FREE TO BUY AND SELL ALLOWANCES IN AN OPEN MARKET. OFFSETS-FOREIGN OR DOMESTIC- MIGHT BE USED TO REDUCE ALLOWANCE REQUIREMENTS.

CAP-AND-TRADE DESIGN ISSUES HOW HIGH A COST ARE WE WILLING TO PAY? WHO WILL NEED A PERMIT? HOW WILL ALLOWANCES BE ALLOCATED? HOW WILL DISTRIBUTIVE ISSUES BE ADDRESSED?

WHO WILL NEED A PERMIT? UPSTREAM –COMPREHENSIVE COVERAGE –SIMPLICITY OF ADMINISTRATION MIDSTREAM –TARGETED IMPACT –FOCUSED DECISION MAKING DOWNSTREAM –POINT OF PRICE IMPACT –ADMINISTRATIVE NIGHTMARE

HOW WILL PERMITS BE ALLOCATED? HISTORICAL-USAGE ALLOCATION –LOW REVENUE FLOW –REDUCED INITIAL IMPACT PURE AUCTION –HIGHEST CONSUMER IMPACT –GREATEST EFFICIENCY & REVENUE MIXED AUCTION/PUBLIC INTEREST –ECONOMIC EFFICIENCY –POLITICAL RESOURCE ALLOCATION

DISTRIBUTIVE IMPACT OF $15 PER TON CARBON TAX SOURCE: BROOKINGS INSTITUTION-HAMILTON PROJECT

Mean Low-Income Residential Electricity Expenditures Per Household With And Without A Cap-And Trade In 2030 By Primary Household Heating Fuel ($2005) YearNatural GasPropaneFuel OilElectricityAll Base- line $705$1,050$885$1,018$833 Cap & Trade $848$1,310$1,028$1,219$1,000 SOURCE: ORNL CALCULATIONS BASED ON EIA ANALYSIS OF S.280

Average Household Impact- $789 IMPACT OF CARBON CONTROL ON LOW-INCOME HOUSEHOLDS BY MAJOR EXPENSE CATEGORY IN 2030 IN 2005 DOLLARS

HOW WILL DISTRIBUTIVE ISSUES BE ADDRESSED? MAXIMIZE REVENUE RESTORATION –GET AS MUCH AS POSSIBLE IN CONSUMER HANDS –TREAT THIS AS AN INCOME PROBLEM TREAT THE ENERGY PROBLEM –PAYMENT ASSISTANCE TARGETING –USE EFFICIENCY FOCUSED ON HIGH IMPACT HOUSEHOLDS HYBRID PROGRAM –MAXIMIZED GENERAL REVENUE RETURN –WELL TARGETED ASSISTANCE AND EFFICIENCY

FIGURE 1 DISTRIBUTION OF LOW-INCOME RESIDENTIAL BLL INCREASES AS A RESULT OF CAP-AND-TRADE IN 2030 ($2006)

CHARACTERISTICS OF HIGH-IMPACT HOUSEHOLDS HIGHER ELECTRICITY CONSUMPTION 16,179 kWh compared to 8,971 kWh HIGHER TOTAL ENERGY CONSUMPTION MBtu compared to 86.6 MBtu HIGHER CONCENTRATION IN DETACHED HOUSING STOCK 81 Percent compared to 54 percent

THE EARLY DEBATE Inclination To General Income Maintenance Inclination To Utility Funding For Low- Income Programs A Lot Of Revenue And A Lot Of Special Interests It Looks A Lot Like Health Care During The First Clinton Term

CONCLUSIONS The Impact Of Carbon Control On Low-Income Households Will Be Significant But Will Take A Long Time To Emerge, Creating A Window Of Opportunity. General Income Transfers Would Fail To Adequately Address Energy-Specific Impacts. Appropriately Funded Low-Income Energy Assistance Has A Significant Role To Play. The Energy Usage Profile Of High-Impact Low-Income Households Mean They Stand to Benefit Substantially From Energy Efficiency Investments.