Jun 22 2009, 10:00AM
Daily Chart: How Progressive is Cap and Trade?
Is cap and trade going to screw the poor? Turns out there is some debate about this. You have the Tax Foundation going on about how the costs of cap and trade will be "disproportionately borne by low-income households," and Warren Buffett saying that cap and trade is "probably going to be pretty regressive." And then you have the CBO's weekend estimate of what cap and trade will cost the individual families, which both Kevin Drum and Matt Yglesias use to make the point that poor families will actually do pretty well.
Cap and trade is a system for reducing carbon emissions in which the government sets the overall level of pollution that can occur (the "cap") and then auctions or distributes pollution permits that companies and households can sell (the "trade"). Because this puts a price on carbon emissions, it will raise companies' operating costs. (Of course, putting a price on carbon, and thus a price on damaging the environment, is the whole point.) And those costs will be passed onto consumers. But cap and trade also generates revenue -- if the permits are auctioned off -- and that revenue can be used to partially offset the increased household costs.
The CBO estimate says that, under the cap-n-trade plan currently being considered in the House, the average family will face additional costs of about $165 a year. Families in the lowest income quintile will actually see a benefit of $40, largely because some portion of the revenue will be used to fund a rebate and tax credit for low income families. Families in the top quintile will pay an extra $245 dollars a year. That looks pretty progressive. But families in the second highest quintile will end up with an additional burden of $340 a year -- more than the wealthiest Americans. How to make sense of this?
I thought I would make a chart of how the distribution of cap-and-trade costs compared with that of other federal taxes. In the chart below you can see who is paying for cap and trade, compared with (1) all federal tax liabilities; (2) the federal income tax; and (3) federal social insurance taxes. (All of the data is drawn from the CBO series on federal tax distribution.)
If you look at only the bottom quintile, C&T is more progressive than anything else in the federal tax system. But it's downhill from there: The share of cap and trade paid by the middle quintile is three times the federal tax system's average, and the share paid by the richest quintile is half that of the average.
I don't really have a strong normative point to make here. Progressivity is in the eye of the beholder and all that. Nonetheless, I hope this puts some of the debate over the burdens of cap and trade in context.
Housekeeping note: From now on I'm going to try to publish one original chart each weekday morning. If this proves too tiring or boring I will happily abandon the effort. And if I get lazy I might publish other interesting charts that I find around the Internet. But I like making these charts and, like Conor Friedersdorf, think it's an important part of blogging. Suggestions always welcome.
TrackBack
TrackBack URL for this entry:
http://correspondents.theatlantic.com/mt-42/mt-tb.cgi/10392
Listed below are links to weblogs that reference Daily Chart: How Progressive is Cap and Trade?:
» On Cap and Trade from Modeled Behavior
Conor Clarke has the specifics on the tax burdens from the proposed Cap and Trade legislation
This does a fair bit to alleviate some of my worst concerns about cap and trade, that even after the rebate the excess burden would leave lower income househ... [Read More]
I assume they stop auctioning permits after the startup period. The whole point is that the number of permits is fixed, limiting CO2 output.
So these rebate checks would also only be during the startup period. After that, it's all costs and no government check to make up for it.
Conor - Thank you for some useful information needed to assess proposed cap-and-trade legislation. Your chart shows cost distribution in terms of percentages, but if one looks at actual costs, the cap-and-trade impacts are much less formidable - e.g., an average liabiliy of $165 annually, which is not unaffordable for the average family. I also assume that although your chart refers to tax liabilities, the cap-and-trade component is the cost of increased energy, and not a federal tax per se.
Additionally, the costs burdens are progressive in quintiles 1-3, and regressiveness is only significant at quintile 5. At present, despite its imperfections, the plan, then, seems a reasonable burden overall compared with the ultimate costs of unmitigated greenhouse gas emissions.
Permit auctioning will apparently continue for decades, but rebates and credits for lower income families need not depend on that source alone. To the extent necessary, general revenues should be available to relieve undue burdens, probably beyond merely the lowest quintile, given that all of us can expect to share the benefits of climate protection. These might include additional tax incentives specifically targeted to energy conservation and substitution of alternative energy sources for sources derived from fossil fuels.
"increasd cost of energy", not "cost of increased energy"
Conor,
First you say that we at the Tax Foundation are "going on about" the cap-and-trade burden, implying that we're ranting and wrong. But by the end, your own data support our academic conclusion that cap-and-trade is regressive. The only reason you found a more gentle impact on the bottom quintile is that you were looking at a legislative proposal that includes a tax credit for that group, a provision that wasn't part of the legislation our report analyzed. (We've now released a calculator based on the study you pointed to.)
An often overlooked feature of cap-and-trade is how it will affect state and local governments which are massive energy consumers. In some cases their purchases will be protected by exemptions, but when they do pay higher prices, they'll raise other taxes to pay for them. So cap-and-trade is not only a hefty tax in itself; it will increase pressure to raise other taxes, most often retail sales.
--Bill
Bill, thanks for your note. I didn't intend the "going on about" line to imply that you guys were ranting, and I'll happily change it to something else if you like. But I do think your conclusion is really very different from the one the CBO came up with. (I don't know enough about the methodology to say if it's wrong.)
Can it really be the case that the "only reason" the numbers are different is the tax credit? The CBO has an average gross cost -- ie, not including any direct tax relief or allocation benefits -- of $770 per household. Your calculator puts it at $1,218. I assume that is gross cost and not net cost?
Conor
BTW, I should be clear in saying I DON'T think cap and trade is regressive, and I don't think my comparison shows that. I think it shows a tax that is progressive across four quintiles and, on the whole, less progressive than other parts of the federal tax system. My feeling is that whether you call such a creature progressive or regressive is a political judgment call and not an 'academic conclusion.'
Thanks again for the comment -- always nice to have your input.
Conor
Conor,
Nice chart, but let's get back to basics...
As a voice from Ireland
Why are you Americans catching our European bureaucracy disease?!
Cap and Trade has been a disaster here, whether you agree with emission reduction or not.
1. Waxman-Markey made Very Easy:
--Deal with the Problem
--Keep Life Simple
--Work with -not against- Business and Consumers
Electricity generation (coal/gas) and transport (automobiles) cause nearly 80% of fossil fuel emissions (EPA data) - a focus on them alone reaches first phase 2020 reductions without elaborate expensive cap and trade solutions.
All other industry is only brought on board in second phase reduction 2020 as judged needed there and then.
Win-win for America: energy changes (incl grid restructuring) to electricity and transport, benefit Americans regardless of emission reductions
Cost to consumer is kept down by equity and long term loan finance, the latter fed/state guaranteed to keep down interest rates, with slow payback giving little affected consumer electricity bills or car costs.
No messing up of American business practice and planning, by emission trading. No volatile extra emission trading costs for a range of businesses, passed on to consumers.
Understanding Cap and Trade + why it is bad for America, see
http://ceolas.net/#cce5x
2. RE The Congressional Budget Office (CBO) costing you mention....
The assumption is that all energy efficiency legislation is GOOD for consumers.
WRONG.
Inefficient products need to have special advantages or noone would want them.
The fact is that efficiency regulation on a product sacrifices performance, construction and price features, and does not necessarily give the savings suggested anyway.
See
http://ceolas.net/#cc2x
onwards regarding efficiency regulation effect on buildings, lightbulbs, cars, dishwashers and other products
Let us believe in a
go-ahead positive unfettered America, dealing directly and efficiently with energy and emissions, and leaving consumers free to buy what they want.
Conor,
The lower burden for the high income group is from tax relief to businesses. The CBO attributes all of the tax relief to businesses as going to the shareholders and of course the wealthy hold most of the shares.
This is my extremely high tech that graph that explains it all.
Dude I suck
http://modeledbehavior.com/2009/06/22/on-cap-and-trade/#CnPGraph
The sooner the environmentalists are out, the better.
Lets be honest about what cap and trade really is...its yet another tax. It also a tax that is somewhat regressive as it shifts the bulk of the burden of the tax onto the nearly rich (but also barely above middle class). According to the census data, the fourth quintile of family income ranges from about $80,000 to $135,000. To put that in perspective, thats about what a family of two mid level state employees could expect to bring home. How is not regressive that, under this plan, this hypothetical family would end up shouldering more of the burden than a hedge fund manager?
I would also cynically point out that most Congressmen and Senators are well into the top quintile of wage earners.
Germany fought WWII with gasoline made from coal. It is proven technology developed in 1917.
America is the Saudi Arabia of coal with 1/4th of the deposits on the planet. The US could eliminate American dependence on foreign oil.
And reducing America’s trade imbalance would keep money, technology and jobs here in America. It is estimated that every billion in trade deficit equals 13,000 US jobs lost. And we could quit sending billions to countries that sponsor terrorism.
But coal is rich in CO2. Isn’t the timing interesting? The world is in recession, US unemployment figures are hovering around 10% and the EPA determines CO2 is a pollutant that must be regulated.
SO WHO BENEFITS FROM CAP AND TRADE AND KEEPING AMERICAN COAL IN THE GROUND:
The United States agreed to transfer jobs and technology to developing countries under INTERNATIONAL AGREEMENT Algiers Declaration Algiers, Algeria, 4-6 March 1975
In this context, they emphasize the necessity for the full implementation of the Programme of Action adopted by the United Nations General Assembly at its VI Special Session, and accordingly they emphasize the following requirements [excerpt from full declaration]
"With regard to the depletable natural resources, as OPEC’s petroleum resources are, it is essential that the transfer of technology must be commensurate in speed and volume with the rate of their depletion, which is being accelerated for the benefit and growth of the economies of the developed countries"
A major portion of the planned or new petrochemical complexes, oil refineries and fertilizer plants be built in the territories of OPEC Member Countries with the co-operation of industrialized nations for export purposes to the developed countries with guaranteed access for such products to the markets of these countries. [Excerpt from declaration] Read sections 10 and 11]
The Concept of CO2 Cap and Trade is Absurd
The real reason Cap & Trade is being foisted on the world is it creates a 3 trillion dollar commodity market for you guessed it: hot air. Finally politicians have found a way to put a price on their most abundant resource! And for politicians there is no downside as nothing has to be actually produced.
The real beneficiaries are the rich special interest who will get wealthier setting up and trading in this new commodities market. But citizens will pay more taxes to operate new regulatory bureaucracies and more for goods as business passes the cost along.
And all this is based on the premise that operating automobiles is resulting in global warming. Question: did Fred Flintstones truck fleet cause the last period of global warming or is global warming a cyclical event that is more affected by sun spot cycles. The Earth has had multiple tropical and glacial ages over the millennia. The most recent news is that the oceans of the world will be cooling for the next 25-30 years.
Furthermore, it is my understanding that the most prevalent hot house gas is water vapor. Should citizens of earth try to stop the rain cycle?
And if we are going to implement Cap and Trade who will decide what the optimal CO2 carrying capacity of Earth is?
And there are questions about how to implement financial controls and reliably audit such a system. Will every person and business on the planet be issued C02 permits? Is the permit an asset a business can liquidate when it goes out of business? If a business in California goes out of business and sells its CO2 permit to a company in England, will a new company in California have to find another seller to open his business and replace lost jobs? After all, if there is an optimal CO2 carrying capacity then an increasing population of people and businesses means a lower standard of living and reduced CO2 allotment for each new person or business.
Upon their death can Mom and Dad leave their CO2 permits to their children? Should Mom and Dad be limited to having two children?
What about the countries that do not subscribe to Cap & Trade. Will multi-national companies export new construction and jobs to 3rd world non-subscribing countries? And the flipside, will the people of the Amazon miss out on new opportunities because an American company bought 1000s of acres to be left unused to acquire carbon sequestration credits.
Conner,
I am guessing you and some others deal with Quintiles frequntly, but I think it would be helpful for average people when you make these graphs to also insert incomes (average or lowest) for each of the 5 groupings. I think Quintiles mean quite a bit to some people, but it is my opinion that if you look at the salaries and see that you are asking someone make $$$,$$$ to pay $$ amount more(or less) in taxes that it make it easier for the average person to comprehend.
EVVJSK