Cap and Trade Will Burden the Rich, Ease Costs For the Poor

Indian coal power plant


One of the biggest arguments against cap and trade (aka carbon emissions trading) is that it burdens consumers. In a cap and trade scheme, energy companies have a fixed allotment of CO2. Should they need more, they can buy from other companies that that have remaining emissions credits, and that expense will be transferred to the consumer. But a study set to appear in The Berkeley Electronic Journal of Economic Analysis and Policy claims that hiked-up energy prices resulting from cap and trade legislation under debate in Congress will take from the rich–but leave the poor relatively unaffected.

That’s because, according to MIT Sloan Senior Lecturer John Reilly, low-income households are insulated from the effects of rising prices by their reliance on inflation-adjusted income from government programs (i.e. welfare and social security). Wealthier households, however, rely more on income from wages and capital, which are both vulnerable to inflation.

But not all cap and trade proposals for distributing revenue from carbon allowance auctions are the same. In a statement, Reilly explains:

“Some proposals have elaborate approaches for distributing allowances,”
he said. “They aim the revenue from their auctions to assist low income
households and states and regions that are likely to be more negatively
affected. Other proposals focus on a cap and dividend approach, where
allowance revenue is distributed on a per capita basis, with each
household receiving a check.

Ultimately, all of these proposals lead to the same end result: a monetary benefit for low-income households. Will Reilly’s study influence what kind of policy makes it through the Senate? Probably not, but it does give us a better idea of who will reap the benefits of a future cap and trade system.


Ariel Schwartz can be reached on Twitter or by email.