Greenhouse Gas Revenues in the Budget

Just an initial reaction to how the Obama administration's new budget treats the revenues it plans to raise through cap-and-auction limits on greenhouse gas emissions. The New York Times reports that the Obama administration intends to auction off all greenhouse gas emissions permits eventually raising about $80 billion in new revenues per year. Some $15 billion will be earmarked annually for federal renewable energy reseach and development programs and $65 billion will be returned as tax credits to the public. The goal is to cut U.S. emissions by 14 percent below 2005 emissions by 2020.

As it happens, a Congressional Budget Office analysis in 2007 calculated the income effects of a 15 percent cut in carbon emissions: the average household in the lowest one-fifth of income earners would pay about $560 per year more and households in the highest quintile would pay $1,800 per year; however, $560 represents 3.3 percent of the average income of households in the lowest fifth, while $1,800 is just 1.7 percent of income for households in the top fifth.

The CBO then looked at what would happen if the federal government were to return all of the net auction revenues as an equal lump sum rebate to every household. Such a rebate would more than fully offset the burden that increased prices would impose on the lower two income quintiles. Their household incomes would rise by $310 and $140 respectively. 

The CBO also calculated that if all the revenues were used to cut payroll taxes, then after-tax household incomes of the bottom quintile would drop by 2.6 percent. In fact, 80 percent of households would see lower incomes, while household incomes in the top quintile would rise by 0.4 percent. 

More to come.