CBO

CONGRESSIONAL BUDGET OFFICE

SECOND AND D STREETS, S.W.

WASHINGTON, D.C. 20515

The Economic Effects of Legislation to 

Reduce Greenhouse-Gas Emissions

September 2009
Pub. No. 4001
CBO

Global climate change poses one of the nation’s most significant long-term policy 

challenges. Human activities are producing increasingly large quantities of greenhouse 

gases, especially CO2. A strong consensus has developed in the expert community 

that, if allowed to continue unabated, the accumulation of greenhouse gases in the 

atmosphere will have extensive, highly uncertain, but potentially serious and costly 

impacts on regional climates throughout the world. Those impacts are expected to 

include widespread changes in the physical environment, changes in biological systems (including agriculture), and changes in the viability of some economic sectors. 

Moreover, the risk of abrupt and even catastrophic changes in climate cannot be ruled 

out.1

Those expected and possible harms may motivate policy actions to reduce the extent 

of climate change. However, the cost of doing so may be significant because it would 

entail substantial reductions in global emissions over the coming decades. U.S. emissions currently account for roughly 20 percent of global emissions. As a result, substantially reducing global emissions would probably entail large reductions in U.S. 

emissions as well as emissions in other countries. Achieving such reductions would 

probably involve transforming the U.S. economy from one that runs on CO2-

emitting fossil fuels to one that increasingly relies on nuclear and renewable fuels, 

accomplishing substantial improvements in energy efficiency, or implementing the 

large-scale capture and storage of CO2 emissions. 

One option for reducing emissions in a cost-effective manner is to establish a carefully 

designed cap-and-trade program. Under such a program, the government would set 

gradually tightening limits on emissions, issue rights (or allowances) consistent with 

those limits, and then let firms trade the allowances among themselves. Such a capand-trade program would lead to higher prices for energy from fossil fuels and for 

energy-intensive goods, which would in turn provide incentives for households and 

businesses to use less carbon-based energy and to develop energy sources that emit 

smaller amounts of CO2. 

Changes in the relative prices for energy and energy-intensive goods would also shift 

income among households at different points in the income distribution and across 

industries and regions of the country. Policymakers could counteract some but not all 

of those income shifts by authorizing the government to sell CO2 emission allowances 

and using the revenues to compensate certain households or businesses, or to give 

allowances away to some households or businesses.

1. For additional information, see Congressional Budget Office, Uncertainty in Analyzing Climate 

Change: Policy Implications (January 2005).
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This report makes the following key points:

B Climate change is an international problem. The economic impacts of climate 

change are extremely uncertain and will vary globally. Impacts in the United States 

over the next 100 years are most likely to be modestly negative in the absence of 

policies to reduce greenhouse gases, but there is a risk that they could be severe. 

Impacts are almost certain to be serious in at least some parts of the world.

B The economic impact of a policy to ameliorate that risk would depend importantly 

on the design of the policy. Decisions about whether to reduce greenhouse gases 

primarily through market-based systems (such as taxes or a cap-and-trade program) 

or primarily through traditional regulatory approaches that specify performance or 

technology standards would influence the total cost of reducing those emissions 

and the distribution of those costs in the economy. The cost of a policy to reduce 

greenhouse gases would also depend on the stringency of the policy; whether other 

countries also imposed similar policies; the amount of flexibility about when, 

where, and how emissions would be reduced; and the allocation of allowances if a 

cap-and-trade system was used.

B Reducing the risk of climate change would come at some cost to the economy. For 

example, the Congressional Budget Office (CBO) concludes that the cap-andtrade provisions of H.R. 2454, the American Clean Energy and Security Act of 

2009 (ACESA), if implemented, would reduce gross domestic product (GDP) 

below what it would otherwise have been—by roughly 1⁄4 percent to 3⁄4 percent in 

2020 and by between 1 percent and 31⁄2 percent in 2050. By way of comparison, 

CBO projects that real (inflation-adjusted) GDP will be roughly two and a half 

times as large in 2050 as it is today, so those changes would be comparatively modest. In the models that CBO reviewed, the long-run cost to households would be 

smaller than the changes in GDP. Projected GDP impacts include declines in 

investment, which only gradually translate into reduced household consumption. 

Also, the effect on households’ well-being of the reduction in output as measured 

by GDP (which reflects the market value of goods and services) would be offset in 

part by the effect of more time spent in nonmarket activities, such as childrearing, 

caring for the home, and leisure. Moreover, these measures of potential costs 

imposed by the policy do not include any benefits of averting climate change.

B Climate legislation would cause permanent shifts in production and employment 

away from industries focused on the production of carbon-based energy and 

energy-intensive goods and services and toward the production of alternative 

energy sources and less-energy-intensive goods and services. While those shifts were 

occurring, total employment would probably be reduced a little compared with 

what it would have been without a comparably stringent policy to reduce carbon 

emissions because labor markets would most likely not adjust as quickly as would 

the composition of demand for different outputs. 
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B CBO has estimated the loss in purchasing power that would result from the primary cap-and-trade program that would be established by the ACESA. CBO’s 

measure reflects the higher prices that households would face as a result of the 

policy and the compensation that households would receive, primarily through the 

allocation of allowances or the proceeds from their sale. The loss in purchasing 

power would be modest and would rise over time as the cap became more stringent 

and larger amounts of resources were dedicated to cutting emissions, accounting 

for 0.2 percent of after-tax income in 2020 and 1.2 percent in 2050. 

B The expected distribution of the loss in purchasing power across households 

depends importantly on policymakers’ decisions about how to allocate the allowances. The allocation of allowances specified in H.R. 2454 would impose the 

largest loss in purchasing power on households near the middle of the income distribution. Which categories of households would ultimately benefit from the allocation of allowances is more uncertain in 2020 than in 2050. A large fraction of the 

allowances in 2020 would be distributed to households via private entities, and the 

distribution of the allowance value would depend on whether those entities passed 

the value on to customers, workers, or shareholders. In contrast, most of the value 

of allowances in 2050 would flow to households directly. 

Aggregate Economic Impacts of Climate Change

Many of the natural changes that are likely to result from climate change (such as 

more frequent storms, hurricanes, and floods) will affect agriculture, forestry, and 

fishing; the demand for energy; and the nation’s infrastructure. Despite the wide variety of projected impacts of climate change over the course of the 21st century, published estimates of the economic costs of direct impacts in the United States tend to 

be small.2

 Most of the economy involves activities that are not likely to be directly 

affected by changes in climate. Moreover, researchers generally expect the growth in 

the U.S. economy over the coming century to be concentrated in sectors—such as 

information technology and medical care—that are relatively insulated from climate 

effects. Damages are therefore likely to be a smaller share of the future economy than 

they would be if they occurred today.

As a consequence, a relatively pessimistic estimate for the loss in projected real gross 

domestic product is about 3 percent for warming of about 7° Fahrenheit (F) by 

2100.3 However, even for the levels of warming that have been examined, most of the 

estimates cover only a portion of the potential costs. Other costs in the United States 

could come from nonmarket impacts (which are not measured in GDP) and from the 

potential for abrupt changes:

2. For additional information, see Congressional Budget Office, Potential Impacts of Climate Change 

in the United States (May 2009).

3. See Dale W. Jorgenson and others, U.S. Market Consequences of Global Climate Change (Arlington, 

Va.: Pew Center on Global Climate Change, 2004), p. 36. 
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B Nonmarket impacts. Some types of impacts are very difficult to evaluate in monetary terms because they do not directly involve products that are traded in markets. 

Although such difficulties apply to effects on human health and quality of life, they 

are particularly significant for biological impacts, such as loss of species’ habitat, 

biodiversity, and the various resources and processes that are supplied by natural 

ecosystems. Experts in such issues generally believe that those nonmarket impacts 

are much more likely to be negative than positive and could be large. 

B The potential for abrupt changes. Experts believe that there is a small possibility that 

even relatively modest warming could trigger abrupt and unforeseen effects during 

the 21st century that could result in large economic costs in the United States. Two 

examples of such possible effects are shifts in ocean currents that could change 

weather patterns and affect agriculture over large areas, and rapid disintegration 

of ice sheets, which could dramatically raise sea levels around the world. The 

sources and nature of such abrupt changes, their likelihood, and their potential 

impacts remain very poorly understood.

The most comprehensive published study includes estimates of nonmarket damages 

as well as costs arising from the risk of catastrophic outcomes associated with about 

11°F of warming by 2100.4 That study projects a loss equivalent to about 5 percent of 

U.S. output and, because of substantially larger losses in a number of other countries, 

a loss of about 10 percent of global output. 

The Effects of Policy Design Choices

The economic impact of any policy to reduce greenhouse-gas emissions would 

depend on a variety of policy and program design decisions that would be made by 

the Congress or the regulatory agencies that implemented such a policy. Most importantly, the economic impact would depend on whether the policy worked primarily 

through taxes on emissions, a cap-and-trade program for emissions, regulatory standards to reduce emissions, or a combination of those approaches. The economic 

impact would also depend on the stringency of the cap, whether other countries also 

adopted programs to reduce emissions, and other factors that would be specific to the 

approach chosen.

Approaches to Reducing Emissions

The most fundamental choice facing policymakers is whether to adopt conventional 

regulatory approaches, such as standards for energy-using machinery and equipment, 

or to employ market-based approaches, such as taxes on emissions or cap-and-trade 

programs. Market-based approaches, most experts conclude, would generally limit 

emissions at a lower cost than command-and-control regulations would. Whereas 

conventional regulatory approaches would impose specific requirements that might 

4. William D. Nordhaus and Joseph Boyer, Warming the World: Economic Models of Global Warming

(Cambridge, Mass.: MIT Press, 2000), pp. 95–96.
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not be the least costly means of reducing emissions, market-based approaches would 

provide more latitude for firms and households to determine the most cost-effective 

means of accomplishing that goal.

A tax per unit of emissions would effectively fix the incremental cost of reducing 

emissions in any given period. Proposals for such taxes would generally specify rates 

that gradually increased year by year, with the aim of making activities that produced 

emissions increasingly expensive. A cap-and-trade system, by contrast, would explicitly restrict the annual quantity of emissions. Under such programs, allowances would 

be allocated or sold, and the trading of allowances would permit emissions reductions 

to be achieved in the lowest-cost manner. If caps increased in stringency over time, 

then the incremental costs of reducing emissions would rise as well.

If policymakers had full and accurate information about the cost of reducing emissions, taxes and caps could be equivalent: Policymakers could set a cap, and they 

would know what allowance price it would yield, or they could set a tax at that same 

allowance price and achieve the same reduction in emissions as under the cap. 

However, because policymakers face uncertainty, there is a crucial difference between 

the two approaches: A tax would leave the resulting amount of emissions uncertain, 

whereas a fixed cap would leave the resulting allowance price uncertain. 

Most economists conclude that in the face of uncertainty about the cost of reducing 

emissions, a policy that set a year-by-year price path for greenhouse-gas emissions 

(such as a gradually increasing tax) would probably cost less overall than a policy 

that specified year-by-year emissions targets.5 That conclusion is based on three 

observations: 

B Climate change results from the accumulation of greenhouse gases in the atmosphere over many decades and centuries. As a result, reducing the potential risk of 

climate change would entail reducing cumulative emissions of greenhouse gases 

over multiple decades, but year-to-year fluctuations in emissions have little effect 

on the climate. By contrast, the economic cost of reducing emissions can vary a lot 

from year to year—depending on the weather, economic activity, and the prices of 

fossil fuels. A tax would motivate firms to cut their emissions more when the cost 

of doing so was relatively low and allow them to emit more when the cost of cutting emissions was high. A cap-and-trade program would offer firms less flexibility 

(although such a program could incorporate features, such as banking and borrowing of allowances, that would allow a degree of flexibility, as described below). 

5. For additional information on the difference between taxes and cap-and-trade programs, see 

Congressional Budget Office, Policy Options for Reducing CO2 Emissions (February 2008).
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B There is such great uncertainty about how a given quantity of emissions would 

ultimately affect global temperatures that there is very little additional certainty to 

be gained from choosing a fixed emissions goal (even one that is set over multiple 

decades) rather than a price path that is expected to achieve the same emissions 

goal—but that may exceed or may fall short of it depending on actual cost 

conditions. In essence, the additional certainty that a cap-and-trade program could 

provide about the amount of cumulative emissions would be bought at a relatively 

high cost without yielding corresponding certainty about the amount of climate 

change that would occur.

B The greater certainty about the price of emissions in the future that a tax would 

offer would provide affected firms and households with greater certainty about the 

conditions they would face in adjusting to restrictions than a cap would provide. 

That greater certainty would ease planning for capital investments and could lower 

the risk associated with developing new technologies.

Many proposals would augment basic cap-and-trade or tax provisions with subsidies 

for activities that reduced emissions or with regulations (such as standards for energyusing machinery and equipment). Some such approaches—subsidies for basic energy 

research, for example—would probably be useful and effective supplements to market-based approaches. Standards might also be the most effective regulatory approach 

in cases where market forces are unable to convey appropriate incentives, such as 

when a tax on energy would not provide an incentive for building owners to make 

efficiency improvements when renters are responsible for their electricity bills. 

Moreover, subsidies could help protect certain people or industries from the adverse 

economic effects of reducing emissions. However, to the extent that such additional 

elements supplanted the effective reliance on market forces to determine the lowestcost means of reducing emissions, they might increase the overall economic costs of 

the program even though they might result in a lower allowance price in a cap-andtrade program.6

Government policy beyond research and standards directly tied to climate change 

would also indirectly affect the cost of restricting emissions. The tax treatment of 

investment could influence the cost and availability of particular technologies. Many 

experts believe that nuclear power could easily displace a significant amount of fossil 

fuel use, but only if the regulatory framework was adjusted to allow it. Similarly, existing land-use regulations and highway building might limit efforts to increase urban 

density and to foster the development of public transportation networks.

Cap-and-Trade Design Features

Many proposals for reducing emissions would include cap-and-trade systems to limit 

emissions of carbon dioxide and other greenhouse gases. Such systems raise numerous 

6. Congressional Budget Office, How Regulatory Standards Can Affect a Cap-and-Trade Program for 

Greenhouse Gases, Issue Brief (September 16, 2009).
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design issues. Four issues are especially important in considering the economic effects 

of a cap-and-trade system: the coverage and stringency of the cap, the degree of international coordination, flexibility in the timing of emissions reductions, and the allocation of emission allowances. 

Coverage and Stringency. Under a cap-and-trade system, policymakers would face 

decisions about which emissions to control and when and how much to reduce them. 

Coverage could sharply affect costs: A given quantity of reductions in greenhouse-gas 

emissions could be achieved at a lower cost if the cap covered more types of gases and 

more sources of emissions. For example, although carbon dioxide emissions account 

for roughly 80 percent of greenhouse-gas emissions, some cuts in emissions of other 

greenhouse gases, such as methane or nitrous oxide, could be achieved at a relatively 

low cost. Likewise, even though research suggests that the bulk of reductions in CO2

emissions would probably come from the electricity-generating sector, cost-effective 

reductions could also be found in other sectors, such as the transportation and residential sectors. Thus, a cap-and-trade program that covered as many types of greenhouse gases and sources of emissions as possible would be most likely to yield the 

most cost-effective reductions. 

Most recent policy proposals would control nearly all CO2 emissions from the burning of fossil fuels and would cover at least some emissions of non-CO2 gases. In recognition of the difficulties in monitoring and measuring emissions, no proposal would 

include all types of emissions from all sources. Nevertheless, many proposals would 

provide incentives for sources of emissions that are not covered under the program to 

voluntarily participate. For example, landowners could earn credits by planting trees 

that absorb CO2 from the atmosphere—credits that might then be sold to covered 

entities who would submit them in lieu of emission allowances. Some proposals 

would limit the use of such “offsets” to a fixed annual amount or a fixed fraction of 

total emissions. Greater latitude for such activities by uncovered sources could help 

moderate the costs of achieving a given emissions target because cheap reductions by 

uncovered sources could substitute for expensive reductions by covered ones. However, difficulties in ensuring the credibility and permanence of offsets could at least 

partially undermine their effectiveness in reducing overall costs.7

Cumulative U.S. greenhouse-gas emissions through 2050 are projected to total more 

than 300 billion metric tons of CO2 equivalent (CO2e). Recent legislative proposals 

vary in the magnitude of the reduction in cumulative emissions that they would 

require. Because requiring larger cuts in emissions would typically require deploying 

increasingly costly technologies, doubling the magnitude of the cuts required would 

be expected to more than double the cost of achieving them.

International Coordination. Climate change is an international problem that cannot 

be resolved without significant international cooperation and coordination. Emissions 

7. For additional information, see Congressional Budget Office, The Use of Offsets to Reduce 

Greenhouse Gases, Issue Brief (August 3, 2009).
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from anywhere in the world contribute to the global change in climate, so reducing 

emissions in any single country—even the United States—will do relatively little to 

avert climate change. Moreover, the stringency of foreign efforts to reduce emissions 

could strongly influence the cost of limiting them domestically. As long as a significant fraction of the world did not adopt similar policies, some of the reductions in the 

United States would probably be offset by increases in emissions elsewhere. For example, foreign consumption of oil would rise as declining domestic consumption pushed 

down international oil prices, and energy-intensive production overseas (and exports 

of such products to the United States) would most likely grow as domestic manufacturing costs rose relative to foreign costs. Such emissions “leakage” would lead 

countries that were controlling emissions to incur greater costs while achieving smaller 

reductions in global emissions.

Leakage could be avoided if most or all countries restricted emissions at the same 

time. Moreover, if a domestic cap-and-trade system was linked to similar systems in 

other countries, the United States might benefit from being able to buy low-cost foreign allowances—or it could find that prices for domestic allowances were driven up 

by foreign demand.

Flexibility in the Timing of Emissions Reductions. Offering firms subject to the cap 

flexibility as to when they made cuts in greenhouse gases—by including provisions 

that would require them to meet the annual caps only on average—could result in 

substantial cost savings while producing the same effect on the climate.8 The ability 

to shift efforts to cut emissions over time could lower costs while achieving an equivalent reduction in warming because of the long-run nature of climate change. 

Options for granting flexibility in the timing of emissions reductions fall into two categories. The first category would permit firms to transfer allowances across time. One 

important such provision would allow regulated entities to “bank” allowances in any 

given year for use many years after they were initially allocated. If, for example, reducing emissions this year proved less costly than expected, a firm might choose to do so 

and save some allowances for use in future years. A similar “borrowing” provision 

would allow firms to use allowances from future years (to be repaid with interest) during earlier periods when particularly high demand led to spikes in the cost of reducing 

emissions. A variant would create a “reserve pool” of allowances from future years that 

could be used in earlier years only under certain circumstances, such as when allowance prices rose above a threshold. 

The second category of provisions would allow regulators to manage the price or 

quantity of allowances in a manner that induced a cost-effective time pattern of emissions reductions by specifying a path for allowance prices over time. For example, one 

such provision would allow annual caps to be exceeded if the market price for allow8. For additional information, see the statement of Douglas W. Elmendorf, Director, Congressional 

Budget Office, before the House Committee on Ways and Means, Flexibility in the Timing of 

Emission Reductions Under a Cap-and-Trade Program (March 26, 2009).
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ances rose above some specified value (referred to as a “safety valve”). That value—

typically specified to rise over time—would determine the maximum incremental cost 

in any given period. An alternative provision would set a ceiling and a floor—sometimes called a “price collar”—for the price of allowances.9

Allocation of Allowances. A key decision is how to distribute the value of the allowances. One option would be to have the government capture the value of the allowances by selling them, as it does with licenses to use the electromagnetic spectrum. 

Another possibility would be to give the allowances to energy producers, some energy 

users, or other entities at no charge. The European Union has used that approach in 

its cap-and-trade program for CO2 emissions, and nearly all of the allowances issued 

under the 14-year-old U.S. cap-and-trade program for sulfur dioxide emissions are 

distributed in that way. Giving the allowances away to specific entities is equivalent to 

selling the allowances and giving the entities cash because those allowances could be 

sold in a liquid secondary market and thus could be easily converted into cash. 

How policymakers decided to use the value of the allowances would affect the overall 

cost of a policy. For instance, the government could use the revenues from auctioning 

allowances to reduce existing taxes that tend to dampen economic activity. Some of 

the effects of a CO2 cap would be similar to those of raising such taxes: The higher 

prices caused by the cap would reduce real wages and real returns on capital, which 

would be like raising marginal tax rates on those sources of income. Using the value of 

the allowances to reduce taxes could help mitigate the overall economic impact of a 

cap. Alternatively, policymakers could increase the cost of meeting the desired cap on 

emissions if they gave the allowances away in a manner that undermined the market 

incentives that the cap-and-trade program was intended to provide. For example, if 

electricity generators were given allowances on the basis of the amount of electricity 

that they produced with no further restrictions, they would be less likely to pass on 

the cost of meeting the cap to their customers in the form of higher prices. As a result, 

their customers would lack an incentive to find cost-effective ways to reduce their use 

of electricity. Moreover, as discussed below, decisions about how to allocate the allowances would have significant implications for the distribution of gains and losses 

among U.S. households.

The American Clean Energy and Security Act of 2009

H.R. 2454, the American Clean Energy and Security Act of 2009, as passed by the 

House of Representatives on June 26, 2009, would create two cap-and-trade programs for greenhouse-gas emissions—one applying to CO2 and most other greenhouse gases, and a much smaller one for hydrofluorocarbons—and make a number of 

other significant changes in climate and energy policy. The cap-and-trade program 

9. Ibid.; also see the statement of Douglas W. Elmendorf, Director, Congressional Budget Office, 

before the Senate Committee on Finance, The Distribution of Revenues from a Cap-and-Trade 

Program for CO2 Emissions (May 7, 2009). 
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would restrict greenhouse-gas emissions from covered entities to 17 percent below 

2005 levels by 2020 and 83 percent below 2005 levels by 2050. 

In the main cap-and-trade program, covered entities would be phased into the program between 2012 and 2016. When the phase-in was complete, the cap would apply 

to entities that account for roughly 85 percent of total U.S. greenhouse-gas emissions. 

H.R. 2454 would not restrict the types of entities or individuals that could purchase, 

hold, exchange, or retire emission allowances in the main cap-and-trade program. An 

unlimited number of allowances could be banked for future use or sale, and a limited 

number of allowances could be borrowed from future allocations. A portion of each 

entity’s compliance obligation could be met by purchasing offset credits from either 

domestic or international providers; in the aggregate, entities could use offset credits 

in lieu of reducing up to 2 billion tons of greenhouse-gas emissions annually, or more 

than half the emissions reductions projected around the middle of the policy period 

(roughly in 2030).

CBO estimates that the price of the allowances under H.R. 2454 would be $15 in 

2012, the initial year that the cap took effect, and would rise at an annual real rate of 

5.6 percent over the course of the policy, reaching $23 in 2020 and $118 by 2050 (all 

in 2007 dollars).10 As a result of the price on emissions, the prices of goods and services throughout the economy would increase in rough proportion to the emissions 

associated with their production and consumption. At the same time, the allowances 

would become a source of income for the government or others. The government 

could capture the value of the allowances by selling them, or it could allow others to 

capture the value by giving them the allowances for free.

Key design features of H.R. 2454’s cap-and-trade policy that influenced CBO’s price 

estimate included: 

B Coverage and stringency. CBO found that allowing firms to comply by purchasing 

offset credits (from both domestic and international providers) would reduce the 

allowance price by 70 percent.

B Timing flexibility. If covered entities were required to use all of their allowances in 

the designated year, then the price of the allowances would rise at a rate that was 

dictated by the speed at which the cap became more stringent. Banking helps to 

smooth out the price path—and compliance costs—over time. In CBO’s projections, firms would bank allowances in the early years of the program, when the cap 

was relatively lenient, leading them to make more emissions reductions than neces10. For additional information, see Congressional Budget Office, cost estimate for H.R. 2454, the 

American Clean Energy and Security Act of 2009, as ordered reported by the House Committee on 

Energy and Commerce on May 21, 2009 (June 5, 2009). The costs in that estimate refer to federal 

budgetary costs and not the effects on the U.S. economy described in this report. The cost estimate 

reports allowance prices in nominal dollars. CBO estimates that the price of allowances in nominal 

dollars will rise from $16 in 2012 to $26 in 2019.
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sary under the cap and pushing up the price of allowances. The accumulated supply of banked allowances would enable firms to meet their requirements under the 

cap in succeeding periods, helping to moderate allowance prices in later years.

Firms would continue to bank allowances up to the point at which the rate of 

increase in the price of allowances was 5.6 percent, CBO’s projection of the rate of 

return that they would make on alternative investments.

B Allocation. In general, the allocation of allowances in a cap-and-trade program 

would not affect the allowance price. An exception to that conclusion would occur 

if the allowances were allocated in a manner that would tend to undo the higher 

prices for energy-intensive goods and services that would result from the cap-andtrade program. CBO estimated that the allowance allocation in H.R. 2454 would 

have a small effect on the allowance price. 

B Standards and subsidies. In general, the imposition of some regulatory standards 

and the provision of subsidies to develop new technologies would reduce the price 

of allowances to the extent that those standards or subsidies would change the 

source of emissions reductions from those that would have occurred with just the 

cap-and-trade program alone to others that would be motivated by the standard or 

subsidy. CBO estimated that the standards and subsidies in H.R. 2454 (including 

those for energy efficiency and for electricity generation that would capture and 

store CO2) would lower the allowance price by roughly 10 percent. Most of that 

reduction would stem from the subsidy for carbon capture and storage. (However, 

reductions in allowance prices stemming from standards and subsidies could lead 

to higher, not lower, economywide costs because—to the extent that they generated changes in emissions patterns different from those that would arise from the 

cap-and-trade program alone—those reductions would not all be made in the most 

cost-effective manner.)

Economywide Effects of the Cap-and-Trade 

Provisions of the ACESA

By gradually increasing the prices of fossil fuels and other goods and services associated with greenhouse-gas emissions, climate legislation—including the cap-and-trade 

provisions of H.R. 2454—would tend to reduce long-run risks from climate change. 

Such legislation would also reduce economic activity through a number of different 

channels, although the total effect would be modest compared with expected future 

growth in the economy. The key channels are:

B Shift production, investment, and employment away from industries involved in 

the production of carbon-based energy and energy-intensive goods and services 

and toward industries involved in the development and production of alternative 

energy sources and non-energy-intensive goods and services;
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B Reduce the productivity of existing capital and labor, which are currently geared to 

relatively inexpensive energy;

B Reduce domestic households’ income, thus tending to reduce domestic saving;

B Discourage investment by increasing the costs of producing capital goods, which is 

a relatively energy-intensive process;

B Reduce net inflows of capital from abroad (because lower productivity and higher 

production costs for capital goods in the United States would make it more attractive for investors to invest in other countries);

B Reduce the total supply of labor by raising the prices of consumer goods and thus 

reducing workers’ real wages; and

B Interact with the distortions of economic behavior imposed by the existing 

tax system.

Taken together, those changes would affect the levels and composition of gross 

domestic product and employment and would thus influence households’ economic 

well-being.

Effects of Emissions Restrictions on Gross Domestic Product

Researchers often report the likely effect of climate policies on the economy in terms 

of their projected impact on GDP. On the basis of a review of estimates by other analysts, CBO concluded that climate legislation that would significantly reduce greenhouse-gas emissions in the United States would probably reduce GDP by a modest 

amount compared with what it would be without the legislation. The studies 

reviewed by CBO yielded a wide range of estimates of losses in GDP from climate 

policies, but all of them concluded that, all else being equal, higher prices for emission 

allowances would impose greater losses in GDP. On the basis of those studies, CBO 

concluded that GDP losses over the entire period of the policy were likely to fall 
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Table 1.

Projected Changes in Gross Domestic Product in 

Selected Years from the Implementation of H.R. 2454

Source: Congressional Budget Office based on its review of other studies.

in the range of 0.01 percent to 0.03 percent per dollar of allowance price.11 CBO 

then estimated losses in GDP by combining its own estimates for the prices of allowances under H.R. 2454 with the range of predicted GDP losses per dollar of allowance price.

Using that approach, CBO concluded that the cap-and-trade provisions of H.R. 2454 

would reduce the projected average annual rate of growth of GDP between 2010 and 

2050 by 0.03 to 0.09 percentage points, resulting in progressively larger reductions in 

the level of GDP over time relative to what would otherwise occur (see Table 1). To 

place the size of those changes into perspective, CBO projects that real GDP in the 

United States will grow at an average annual rate of about 2.4 percent between now 

and 2050 and will be roughly two and a half times as large in 2050 as it is today.

11. In a 2003 review of studies of the potential impacts of the Kyoto Protocol, CBO concluded that 

GDP would be reduced by 0.018 percent to 0.028 percent per dollar of allowance price (measured 

in 2007 dollars) for each metric ton of CO2 equivalent, depending on how the policy was implemented. See Mark Lasky, The Economic Costs of Reducing Emissions of Greenhouse Gases: A Survey of 

Economic Models, CBO Technical Paper 2003-3 (May 2003). A more recent review of estimates of 

the economic effects of H.R. 2454 and similar policies found that the predictions differ considerably for the short and medium term, mainly because the studies incorporate different assessments 

about the rates at which important markets can be expected to adjust in response to the new policies, but the long-term predictions agree much more closely. After 2030, point estimates of the percentage losses in GDP per dollar of allowance price yield average values similar to the range implied 

by the 2003 CBO analysis but suggest a wider range. (The high end of that range comes from a 

model that assumes that the supply of labor responds very sharply to changes in wages.) The studies 

that CBO reviewed include Environmental Protection Agency, Office of Atmospheric Programs, 

“EPA Analysis of the American Clean Energy and Security Act of 2009 H.R. 2454 in the 111th 

Congress” (June 23, 2009); Energy Information Administration, Energy Market and Economic 

Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007, Report No. SR-OIAF/2008-

1 (April 2008); Sergey Paltsev and others, The Cost of Climate Policy in the United States (Cambridge, Mass: MIT Joint Program on the Science and Policy of Global Change, April 2009); Warwick McKibbin and others, “Consequences of Cap and Trade” (fact sheet, Brookings Institution, 

2009); and David Montgomery and others, Impact on the Economy of the American Clean Energy 

and Security Act of 2009, H.R. 2454 (Washington, D.C.: CRA International, May 2009).

Year Percentage Change

2020 -0.2 to -0.7

2030 -0.4 to -1.1

2040 -0.7 to -2.0 

2050 -1.1 to -3.4 
14

CBO

The uncertainty about the effects of H.R. 2454 on GDP is probably even greater than 

is expressed by that projected range of effects, even though the studies reflect a wide 

range of assumptions about possible future technological developments that might 

decrease the cost of reducing emissions, and about the degree to which people would 

adjust their decisions about working, saving, and investing in response to the legislation. All of the analyses that CBO reviewed characterize the economy in a very similar 

manner; none of them accounts for all of the possible economic effects of the legislation; and none explicitly addresses the uncertainty of its point estimates.

Unchecked increases in greenhouse-gas emissions would also probably reduce output 

over time, especially later in this century. Those climate-change-induced reductions in 

output would be moderated if actions that the United States took to reduce emissions 

were accompanied by similar efforts by other major emitting countries. Nonetheless, 

CBO concludes that the net effects on GDP of restricting emissions in the United 

States—combining the effects of diverting resources to reduce emissions and moderating losses in GDP by averting warming—are likely to be negative over the next few 

decades because most of the benefits from averting warming are expected to accrue in 

the second half of the 21st century and beyond.

Effects of Emissions Restrictions on Employment

By raising the prices of goods and services in proportion to the covered greenhousegas emissions associated with their production and consumption, climate legislation 

would affect the total level of employment as well as the distribution of employment 

among industries. Although supply-and-demand responses in many markets would 

influence the magnitude of industry-specific and total employment effects, a key consideration is how quickly and extensively labor markets would respond to sustained 

increases in energy prices. If businesses and workers treated each successive increase in 

energy prices as a surprise, then adjustment would be slow, and the policy would lead 

to slightly higher unemployment for some time. If, conversely, businesses and workers 

exercised foresight and acted in their self-interest, adjustment would occur more 

quickly, and the policy would have little effect on overall unemployment. In either 

case, a cap-and-trade program would have adverse effects on workers in specific industries and geographic areas; some provisions of H.R. 2454 are intended to ameliorate 

those effects. 

Economywide Employment. The cap-and-trade program established by H.R. 2454 

would probably have only a small effect on total employment in the long run, but 

changes induced by the program would still have costs for workers. The increases in 

the price of energy caused by the program would reduce workers’ real wages. Total 

employment would be lower in the long run to the extent that some workers chose to 

work fewer hours or not at all—but for nearly all workers, the choice in the long run 

would probably be to remain in the workforce and accept the prevailing wage. Moreover, experience shows that, apart from recessionary periods, the dynamic U.S. economy provides jobs for most people who want to work. 
15

CBO

Employment in Different Industries. The small effect on overall employment would 

mask a significant shift in the composition of employment over time. A cap-and-trade 

program for carbon dioxide emissions would reduce the number of jobs in industries 

that produce carbon-based energy, use energy intensively in their production processes, or produce products whose use involves energy consumption, because those 

industries would experience the greatest increases in costs and declines in sales. The 

industries that produce carbon-based energy—coal mining, oil and gas extraction, 

and petroleum refining—would probably suffer significant employment losses over 

time. Reductions also would be likely to occur in industries that use those forms of 

energy intensively or purchase emissions-intensive inputs to their production process 

from other industries, including chemicals, primary metals, minerals mining, nonmetallic mineral products, transportation, and construction. Among those industries, 

employment losses in chemicals and transportation services could be relatively large.

The shifts in demand caused by the policy would also create new employment opportunities in some industries. Businesses that produce the machinery necessary to generate energy without CO2 emissions and that produce that energy—for example, electricity generated by the wind or the sun—would hire more workers. Employment 

would also probably increase in industry sectors that supply goods and services that 

use less energy in their production or that require consumers to purchase less energy 

when using the industry’s product. In the automobile industry, for instance, employment would shift from producing vehicles that rely solely on internal-combustion 

engines fueled by gasoline to producing vehicles with hybrid or electric engines. The 

largest gains in employment would probably be in service industries.

The shift in employment between sectors of the economy would occur over a long 

period, as the cap on emissions became progressively more stringent and the allowance price (and, therefore, the price of emissions) became progressively higher. The 

experience of the U.S. economy over the last half-century in adjusting to a sustained 

decline in manufacturing employment provides evidence that the economy can 

absorb such long-term changes and maintain high levels of overall employment. From 

a peak of almost 20 million jobs in 1979, manufacturing employment fell to about 14 

million jobs in 2007. Although manufacturing employment rose and fell with the 

business cycle over the period, the larger story is one of offsetting job creation and 

shifts of workers to other sectors of the economy. For example, from 2000 through 

2007, employment in manufacturing fell by 3.5 million jobs, while nonmanufacturing private employment increased by 8.2 million jobs.12

12. For an analysis of the economy’s adjustment to a declining demand for U.S. manufacturing, see 

Congressional Budget Office, Factors Underlying the Decline in Manufacturing Employment Since 

2000, Issue Brief (December 2008).
16

CBO

Job turnover is always large in U.S. labor markets. In 2008, for example, employers 

reported that they hired about 56 million workers and that about 59 million workers 

left their jobs.13 In reviewing several studies that addressed the aggregate employment 

effects of climate legislation, CBO found a wide range of implied estimates of annual 

workforce turnover—gross jobs created and gross jobs lost—and concluded that the 

annual churning in the workforce might range from hundreds of thousands of jobs to 

several million jobs depending on the year.14 Even at the high end of that range, the 

churning of jobs that would be spurred by climate legislation would be small compared with what normally occurs.

The process of shifting employment can have substantial costs for the workers, families, and communities involved. For example, one-quarter of the workers who were 

displaced from their jobs in 2003—that is, workers who were permanently separated 

from their jobs because their employers closed or moved, there was insufficient work 

for them to do, or their positions were abolished—and who were subsequently 

reemployed were jobless for 27 weeks or more.15 Finding a new job might require 

substantial worker flexibility. Some workers would need to migrate to new geographic 

areas. An earlier study indicated that in states whose industries were hit by significant 

adverse shocks between 1950 and 1990, the rate of unemployment generally 

decreased only when workers moved to different states, a process that often took more 

than five years to unfold.16 And some workers might need to acquire new skills more 

suited to the employment opportunities available to them. 

Moreover, some workers would never find the new employment they were seeking. 

Some might end up working fewer hours than they might prefer. And some might 

leave the labor force entirely. Almost half of the unemployment spells completed in 

2003 ended with the individuals leaving the labor force rather than becoming 

13. See Department of Labor, Bureau of Labor Statistics, Job Openings and Labor Turnover: January 

2009, USDL 09-0245 (March 10, 2009), Tables 11 to 14.

14. CBO reviewed a number of studies that addressed the effects of policies like those that H.R. 2454 

would put in place, including David Kreutzer and others, The Economic Consequences of WaxmanMarkey: An Analysis of the American Clean Energy and Security Act of 2009, CDA09-04 (Washington, D.C.: The Heritage Foundation, August 5, 2009); McKibbin and others, “Consequences of 

Cap and Trade”; Environmental Protection Agency, Office of Atmospheric Programs, “EPA Analysis of the American Clean Energy and Security Act of 2009 H.R. 2454 in the 111th Congress”; 

Montgomery and others, Impact on the Economy of the American Clean Energy and Security Act of 

2009 (H.R. 2454); Energy Information Administration, Energy Market and Economic Impacts of 

S. 2191, the Lieberman-Warner Climate Security Act of 2007; Paltsev and others, The Cost of Climate 

Policy in the United States; and Mun S. Ho, Richard Morgenstern, and Jhih-Shyang Shih, Impact of 

Carbon Price Policies on U.S. Industry, Discussion Paper 08-37 (Washington, D.C.: Resources for 

the Future, November 2008).

15. Data for people who lost jobs in 2003 are from Congressional Budget Office, Long-Term 

Unemployment (October 2007), p. 11.

16. Oliver Jean Blanchard and Lawrence F. Katz, “Regional Evolutions,” Brookings Papers on Economic 

Activity, no. 1 (1992).
17

CBO

employed.17 Women, less-educated workers, and older workers who lose their jobs 

appear to be more likely to leave the labor force than men, more-educated workers, 

and younger workers who lose their jobs.18 Some workers leaving the labor force, 

especially older or less-educated workers, might opt to seek disability payments that 

they would not have claimed otherwise. 

Even workers who find new jobs might suffer permanent adverse effects. For example, 

reductions in employment that occur rapidly in particular geographic areas or industries could lead to significant reductions in the lifetime earnings of some affected 

workers. Even 15 to 20 years later, men who separated from their stable jobs in a mass 

layoff during the 1982 recession had annual earnings that were 20 percent lower than 

similar workers who did not experience such a job loss.19

Provisions of H.R. 2454 Intended to Ameliorate Those Employment Effects. Some 

provisions of the bill—those that would subsidize the development and deployment 

of technologies that reduced emissions or that would subsidize production by specific 

industries and firms—would dampen the effects of the policy on employment in 

industries and areas where they are expected to be most severe. 

B Selected provisions of the bill would subsidize petroleum refiners through 2026 

and trade-exposed, energy-intensive industries—those in which domestic firms 

compete with foreign firms that do not bear the cost of complying with comparable policies to control emissions—through 2035. Those subsidies would be linked 

to output, causing the firms receiving them to produce more than they otherwise 

would under the cap-and-trade system and in doing so employ more people 

(although that process also dampens the reallocation of output and employment to 

industries that produce fewer carbon emissions). 

B The bill also includes measures that would decrease the negative effects of the capand-trade system on output and employment in the coal mining and processing 

industries. Those provisions would establish and provide funding for the Carbon 

Storage Research Corporation. That entity would, in the 15 years after enactment 

of the bill, support the development of technologies to capture and store carbon, 

potentially enabling coal-fired plants to generate electricity without releasing 

greenhouse gases into the atmosphere. Through 2050, utilities or merchant generators that invested in and operated plants that used those technologies to generate 

electricity would be paid subsidies to offset the higher costs of that technology. 

17. See Randy Ilg, “Analyzing CPS Data Using Gross Flows,” Monthly Labor Review (September 2005), 

pp. 10–18.

18. Henry Farber, “What Do We Know About Job Loss in the United States? Evidence from the 

Displaced Workers Survey, 1984-2004,” Economic Perspectives (2005), pp. 13-28.

19. Till von Wachter, Jae Song, and Joyce Manchester, Long-Term Earnings Losses Due to Mass Layoffs 

During the 1982 Recession: An Analysis Using U.S. Administrative Data from 1974 to 2004 (April 

2009), www.columbia.edu/~vw2112/papers/mass_layoffs_1982.pdf.
18

CBO

Those subsidies would increase demand for coal and boost output and employment in the coal industry relative to what would occur under the emissions restrictions in the legislation but without those subsidies. 

B The bill also would establish the Climate Change Worker Adjustment Assistance 

program and provide funding of $4.1 billion through 2019 for that program. That 

program would aim to cushion the effects of the emissions-control policies on 

workers who lost their job as a consequence of the policy. It also would seek to 

complement the flexibility evident in U.S. labor markets by providing job training 

and assisting workers searching for employment.

The Overall Burden on Households

Households’ well-being depends on the amount and composition of goods and services they consume as well as how much time they have for nonmarket household 

activities including leisure. Policies to restrict emissions could affect all elements of 

households’ well-being, and the legislation’s overall burden would be determined by 

the value that people place on those various elements. For example, if people found 

products and activities that were not greenhouse-gas-intensive to be good substitutes 

for ones that were, they would be more willing to switch between them. As a result, 

they would find rising prices for greenhouse-gas-intensive products and activities less 

burdensome than if there were no good substitutes for them.

Some of those components of well-being—mainly the consumption of marketed 

goods and services—are included in GDP, but other components are not. Conversely, 

some components of GDP, such as exports and investment, do not directly affect 

households’ well-being in the same way that consumption does, although they support jobs and provide for the future. A substantial proportion of projected GDP 

impacts are due to declines in investment, mainly from the increased costs of producing energy-intensive capital goods. Declines in investment translate only gradually 

into reduced household consumption. As another example, if the policies caused output and real wages to fall, the burden of lower consumption might be partly offset if 

people also chose to supply less labor and instead devoted more time to valuable nonpaid activities not included in GDP, such as childrearing, production within the 

home, and leisure activities. 

Measuring the overall burden of policies like those embodied in H.R. 2454 requires 

estimates not only of supply and demand responses in many markets but also of 

households’ valuation of activities that take place outside markets. Such estimates 

are difficult to obtain and very uncertain. Only two of the analyses of H.R. 2454 

reviewed by CBO provide estimates of the overall burden, and the results differ 
19

CBO

considerably, reflecting differences in assumptions about households’ behavior.20 On 

the basis of those estimates and of estimates of the burden of other types of policies 

such as tax shifts and trade liberalization, CBO concludes that the overall burden of 

H.R. 2454 is likely to be smaller than the projected loss in GDP.

CBO developed an estimate of households’ loss in purchasing power as a rough indication of the direct effect that the cap-and-trade program established in H.R. 2454 

would have on households. That loss in purchasing power equals the costs of complying with the policy minus the compensation that would be received as a result of the 

policy.21 Compliance costs include the cost of purchasing allowances and offsets, and 

of reducing emissions—costs that businesses would generally pass along to households 

in the form of higher prices. Compensation includes the free allocation of allowances, 

receipt of proceeds from the sale of allowances, and profits earned from producing 

offsets; much of that compensation would be passed to households from businesses 

and governments.

Although CBO’s measure of the loss in purchasing power provides an estimate of the 

direct effect of the cap-and-trade program on households, it ignores some channels of 

influence on economic activity and households’ well-being that cannot be readily 

quantified. Some of the omitted channels lead CBO’s measure to overstate households’ true burden, and some lead CBO’s measure to understate the burden. The latest research in this area does not reach a clear conclusion about the relative magnitude 

of those channels, but it appears that CBO’s measure of the loss in purchasing power 

probably understates to a small degree the true burden of the cap-and-trade program.

On the one hand, in keeping with the standard procedures followed by CBO, the 

Office of Management and Budget, and the Congressional Budget Committees in 

identifying federal budgetary costs, CBO estimated the price path for allowances that 

20. Some models—including one that provides an estimate of the burden—assume that households are 

very willing to work less and to shift their consumption away from goods and services that become 

relatively more expensive. Such models conclude that cap-and-trade policies to reduce carbon dioxide emissions would have a larger effect on GDP (because households would provide less labor to 

produce goods and services and would save less as well) but would impose only a small overall burden (because households could easily substitute relatively cheaper goods and services for more 

expensive ones and substitute household production or leisure for work). Much empirical work 

suggests that the supply of labor is significantly less flexible than those models assume, and CBO’s 

own models and analyses in other areas generally assume less flexibility. By contrast, models that 

assume that households are relatively inflexible about shifting their consumption of goods, services, 

and leisure generally (including the other model in CBO’s review that provides an estimate of the 

burden) conclude that policies would have smaller effects on GDP but larger effects on the overall 

burden (although still somewhat smaller than the GDP effects). Those estimates of the burden do 

not include any value people place on averting climate change by reducing emissions.

21. Once the compensation received by U.S. households is deducted from the compliance costs, the 

remaining loss in purchasing power stems from the cost of reducing emissions and producing 

domestic offsets, expenditures on international offsets, and the value of allowances that would be 

directed overseas. 
20

CBO

would reduce emissions to the levels defined by the annual caps without accounting 

for the effect that the policy might have on GDP. Because the program would reduce 

GDP (and thus lessen the overall demand for energy), the allowance price required to 

meet the cap would be slightly lower than CBO’s estimate. A lower allowance price, in 

turn, would lead to a smaller loss in purchasing power. CBO’s estimate of the loss in 

purchasing power, therefore, is slightly larger than would be the case if the agency had 

accounted for the potential decline in GDP when it estimated the price of allowances. 

In addition, CBO’s measure ignores ways in which the program might interact with 

distortions of economic behavior (and, thus, costs ultimately imposed on households) 

generated by the existing tax system. Some of those interactions would tend to reduce 

overall economic costs. For example, the existing incentive for overconsumption of 

housing from the mortgage interest deduction might be countered to some extent by 

higher energy prices, as housing is energy intensive.

On the other hand, CBO’s estimate of the loss of purchasing power does not capture 

all of the ways in which the cap-and-trade program could impose costs on households. 

There would be transition costs of lost earnings by workers who would become temporarily unemployed or underemployed during the adjustment to higher prices for 

energy from fossil fuels. There would also be indirect effects on household consumption relative to what would happen in the absence of the cap-and-trade program. The 

premature obsolescence of existing long-lived capital, such as coal-fired power plants 

that would no longer generate as much electricity, would reduce household wealth a 

little (through shareholders’ losses) and in turn reduce consumption. Both lower 

household wealth and higher costs of producing energy-intensive capital goods would 

reduce domestic saving and investment, leading to slightly lower economic growth 

and household consumption. Finally, some interactions of the cap-and-trade program 

with existing taxes could tend to add to economic costs. For example, the increase in 

prices for fossil fuel energy and energy-intensive goods and services would tend to 

aggravate distortions in the labor market caused by existing taxes on earnings.

The loss in purchasing power would rise over time as the cap became more stringent 

and larger amounts of resources were dedicated to cutting emissions—for example, by 

generating electricity from natural gas rather than coal or by improving energy efficiency. As a share of GDP, the aggregate loss of purchasing power would be 0.1 percent in 2012 and 0.8 percent in 2050, CBO estimates, and would average 0.4 percent 

over the entire 2012–2050 period. Measured at the projected 2010 level of income, 

the average per-household loss in purchasing power would be $90 in 2012 and $925 

in 2050 and would average about $455 per U.S. household per year over the 2012–

2050 period. 

Effects on Households in Different Income Groups

Estimates of the average loss in purchasing power per household do not reveal the 

range of effects that the program would have on households in different circumstances, including their income level, sectors of the economy in which they work, and 
21

CBO

regions of the country in which they live. CBO does not have the capability to estimate effects by region or by sector of employment, but the agency does estimate 

effects on households of different income levels. 

Specifically, CBO estimated the effects of the cap-and-trade program established by 

H.R. 2454 on households in each fifth of the population arrayed by income (and 

adjusted for household size) on the basis of the provisions of the program as defined 

for both 2020 and 2050. The loss in purchasing power that would be faced by households at each point in the income distribution would depend on the amount of compliance costs they would bear minus the amount of offsetting real income they would 

receive as a result of the policy. To show the burden of the loss in purchasing power 

that households would experience, CBO presents those losses as shares of after-tax 

income. 

Avenues by Which Households Would Incur Costs and Receive Compensation

Estimating the effects of the cap-and-trade program on households in different 

income brackets entails accounting for the various means by which households would 

bear compliance costs and receive compensation in their various roles as consumers, 

workers, shareholders, taxpayers, and recipients of government services. 

Compliance Costs. CBO assumed that businesses would pass the costs of acquiring 

emissions allowances, purchasing domestic and international offset credits, and reducing emissions on to their customers through higher prices for goods and services. 

(That assumption, which is standard in distributional analyses, stems from the fact 

that the price of an item in the long run generally reflects the incremental cost of producing that item.) CBO estimated price increases for categories of goods and services 

using a model of the U.S. economy that relates final prices of goods to the costs of 

production inputs. Households and governments would bear those costs through 

their consumption of goods and services. Households account for the bulk of total 

spending, and they would bear an estimated 87 percent of the compliance costs. 

Those costs were allocated among households on the basis of their consumption of 

those goods and services as reported in the Consumer Expenditure Survey from the 

Bureau of Labor Statistics.22

The federal government and state and local governments would bear the remainder of 

compliance costs (an estimated 13 percent) through their spending on goods and ser22. The database for the analysis was constructed by statistically matching income information from 

the Statistics of Income data (from the Internal Revenue Service), households’ characteristics from 

the Current Population Survey (reported by the Census Bureau), and data on households’ expenditures from the Consumer Expenditure Survey (from the Bureau of Labor Statistics). The data are 

from 2006, the latest year for which information from all three sources was available, and thus 

reflect the patterns of income and consumption in that year. The data were extrapolated to 2010 

levels using the estimated overall growth in population and income. For the purposes of this analysis, CBO allocated the cost of reducing all of the gases covered in the cap-and-trade program among 

households and governments on the basis of their contributions to emissions of carbon dioxide, 

which constitute more than 85 percent of greenhouse gases. 
22

CBO

vices. CBO did not distribute governmental costs across households because their 

incidence was unclear. If governments chose to increase taxes across the board, the 

cost would fall on households in proportion to their share of federal, state, and local 

taxes. In contrast, if governments chose to cover the additional expenses by cutting 

back on the services they provide, the cost would fall on households that no longer 

received those services.

Emissions Allowances. Under H.R. 2454, the distribution of allowances would 

change between 2020 and 2050, which would alter the distribution of the loss in purchasing power across households. 

In 2020, the government would issue most of the allowances at no cost to private 

entities, state governments, or the federal government. More specifically: 

B 15 percent of the value of the allowances would be set aside for an energy rebate 

program for households whose gross income does not exceed 150 percent of the 

federal poverty level or that are receiving benefits through the Supplemental Nutrition Assistance Program, the Medicare Part D low-income subsidy, the Supplemental Security Income program, or other low-income assistance, and for an expansion 

in the earned income tax credit payable to individuals without qualifying children; 

B 16 percent of the value of the allowances would be given to companies that distribute electricity and natural gas, with instructions to pass those benefits on to their 

residential customers;

B 29 percent of the value of the allowances would be given to those same distributors 

of electricity and natural gas, with instructions to pass the value on to their commercial and industrial customers; 

B 15 percent of the value of the allowances would be given to what are termed 

trade-exposed, energy-intensive industries—which would be less able to pass their 

compliance costs on to their customers than would other industries facing less 

international competition—and oil refiners;

B 18 percent of the value of the allowances would be directed to the federal government and to state governments to spend within the United States (not including 

the amount used to fund the energy rebate and tax credit). For example, the bill 

would direct a portion of the value to be spent encouraging the development of 

particular technologies (such as electricity generation that includes the capture and 

storage of carbon dioxide) and improvements in energy efficiency; and 

B 7 percent of the allowance value would be spent overseas, to fund efforts to prevent 

deforestation in developing countries, encourage the adoption of more efficient 

technologies, and assist those countries in adapting to climate change. 
23

CBO

The allocation of allowances under the 2050 provisions of the ACESA is quite different from that in 2020, with a much larger fraction of the allowance value flowing 

directly to households: 

B 15 percent of the value of the allowances would continue to be used to fund the 

energy rebate program and the expansion in the earned income tax credit;

B 54 percent of the allowance value would be used to fund a Climate Change Consumer Refund Account and would be paid on a per capita basis;

B 21 percent of the value would be directed to federal and state governments (not 

counting the shares allocated for household rebates, tax credits, and refunds) to be 

spent on various objectives, including encouraging investments in clean energy 

technology, increasing energy efficiency, facilitating adaptation, and protecting 

wildlife; and

B 10 percent of the value would be spent overseas to fund efforts to prevent deforestation in developing countries, encourage the adoption of more efficient technologies, and assist those countries in adapting to climate change. 

For the allowances given to local distributors of electricity or national gas with 

instructions to pass the benefits on to their residential customers, CBO assumed that 

the value of those allowances would be received by those households. For the allowances given to those local distributors with instructions to pass the benefits on to their 

commercial and industrial customers, CBO assumed that the value of those allowances would be received by shareholders, because that allocation of allowances would 

not generally reduce the cost of producing an incremental unit of output and thus 

would not generally be passed through to households in the form of lower prices.23

For the allowances given to trade-exposed industries and oil refiners, CBO assumed 

that the value would be passed through in the form of lower prices for customers.24

With the exception of the allowances used to fund household rebates, refunds, or tax 

credits, CBO lacked sufficient information to distribute the value of allowances that 

were given to federal or state governments to spend within the United States. CBO 

also did not distribute among U.S. households the value of allowances that would be 

spent overseas.

23. All increased profits, net of taxes, were allocated to households according to their holdings of equities, which were estimated from the Federal Reserve’s Survey of Consumer Finances for 2004. 

Those holdings include equity held through mutual funds and private pension accounts. 

24. That approach was used to account for CBO’s inability to distribute the initial cost of the cap 

among such firms. The cost of the emissions cap would tend to fall on workers and shareholders in 

those industries; correspondingly, the relief aimed at those industries (which would be linked to 

their level of production) would tend to offset costs that workers and shareholders in those industries would otherwise incur. Because of data limitations, CBO assumed for this analysis that the 

cost of complying with the cap would lead to price increases for those industries. Correspondingly, 

CBO reflected the value of allowances allocated to those industries as offsetting price decreases.
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CBO

Domestic Offset Credits. Covered entities would purchase domestic offset credits to 

comply with the cap under both the 2020 and 2050 provisions of ACESA. Spending 

on domestic offsets would rise over time because the increase in the price of allowances would make it cost-effective for firms to comply by purchasing increasingly 

costly offsets. Suppliers of domestic offset credits would experience increases in net 

income—the gross income received from selling the offsets minus the costs incurred 

to generate them.25

Additional Financial Transfers and Costs That Would Affect Households. The capand-trade program under H.R. 2454 would result in some additional transfers of 

income—and additional costs—that are not reflected in the gross compliance costs, 

the disposition of the allowance value, or the net income from domestic offset production. Households would receive additional income in three ways:

B The value of the rebates and tax credits for low-income households in excess of the 15 

percent of the allowance value that the bill would set aside to pay for them.

26 That 

amount would add to the sums received by households but would also increase the 

cost to the government.

B Increases in government benefit payments that are pegged to the consumer price index, 

such as Social Security benefits. Under the assumption that the costs of compliance 

would be passed through to consumers in the form of higher prices and that the 

Federal Reserve would not act to offset those price increases, the rise in the consumer price index would trigger increased cost-of-living adjustments in benefits 

from certain government programs. The increase in those transfer payments would 

help offset the higher expenditures for the households that received them but 

would also impose a cost on the federal government.

B Reduced federal income taxes. Because the federal income tax system is largely 

indexed to the consumer price index, an increase in consumer prices with no 

increase in nominal income would reduce households’ federal income tax payments. That effect would increase households’ after-tax income but would also add 

to the federal deficit.

Because each of those transfers of income would have equal and offsetting costs 

(increased Social Security benefits would ultimately need to be paid for by higher 

taxes or reductions in other government spending, for example), they would neither 

25. Like other profits, increased after-tax net income by providers of domestic offsets was allocated to 

households according to their holdings of equities, which were estimated from the Federal Reserve’s 

Survey of Consumer Finances for 2004. Those holdings include equity held through mutual funds 

and private pension accounts.

26. Estimates of the low-income rebates and tax credits were made by CBO and the staff of the Joint 

Committee on Taxation, respectively.
25

CBO

Figure 1.

Average Gain or Loss in Households’ Purchasing Power 

from the Greenhouse-Gas Cap-and-Trade Program in 

H.R. 2454, by Level of Income: 2020 Policy Measured at 

2010 Levels of Income

(Effects as a percentage of after-tax income)

Source: Congressional Budget Office.

add to nor reduce the loss in purchasing power associated with the policy. However, 

because CBO was able to distribute the benefits associated with the transfers but 

lacked sufficient information to distribute the costs, the transfers do affect the estimated distribution of the loss in purchasing power described below.

Effects of the Policy’s Provisions in 2020

CBO estimates that households in the lowest income quintile in 2020 would see an 

average gain in purchasing power of 0.7 percent of after-tax income, or about $125 

measured at 2010 income levels. Households in the highest income quintile would see 

a loss in purchasing power of 0.1 percent of after-tax income, or about $165 at 2010 

income levels (see Figure 1 and Table 2), and households in the middle quintile would 

experience a loss in purchasing power equivalent to 0.6 percent of after-tax income, or 

about $310 at 2010 income levels.

Although households in the lowest income quintile would experience a net gain in 

purchasing power in 2020 under the provisions of H.R. 2454, they would experience 

Effects of

Compliance Costs

Effects of

Allowance Allocations and

Other Transfers

Net Gain or Loss in

Purchasing Power

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Lowest Quintile

Second Quintile

Middle Quintile

Fourth Quintile

Highest Quintile
26

CBO

Table 2.

Average Gain or Loss in Households’ Purchasing Power 

from the Greenhouse-Gas Cap-and-Trade Program in 

H.R. 2454: 2020 Policy Measured at 2010 Levels of Income

Source: Congressional Budget Office.

Note: The figures are 2010 levels based on the 2006 distribution of income and expenditures. 

Households are ranked by adjusted household income. Each quintile contains an equal number of people. Households with negative income are excluded from the bottom quintile but 

are included in the total. The loss from compliance costs is distributed to households on the 

basis of their carbon consumption.

a. Unallocated compliance costs reflect the governments’ share of carbon consumption. 

b. CBO did not allocate allowances for which the recipients were unspecified (for example, allowances given to the government to distribute for energy-efficiency improvements). Unallocated 

gains and losses from other transfers are the net government cost of funding transfers in excess 

of the allowances allocated for that purpose. On net, the unallocated allowances and unfunded 

transfers increase purchasing power for the 2020 policy because the unallocated allowances are 

greater than the unfunded transfers.

the largest financial burden prior to compensation. The price increases triggered by 

the compliance costs would cause a loss in purchasing power of 2.5 percent of aftertax income for households in the lowest quintile, compared with 0.7 percent of aftertax income for households in the highest quintile. Although the dollar increase in outof-pocket expenditures stemming from the compliance costs would be substantially 

larger for high-income households ($1,400) than for low-income households ($430), 

it would impose a larger proportional burden on low-income households because 

Lowest Quintile -430 555 125

Second Quintile -560 410 -150

Middle Quintile -685 375 -310

Fourth Quintile -825 455 -375

Highest Quintile -1,400 1,235 -165

Unallocated -120 a 130 b 10

All Households -900 740 -160

Lowest Quintile -2.5 3.2 0.7

Second Quintile -1.5 1.1 -0.4

Middle Quintile -1.3 0.7 -0.6

Fourth Quintile -1.1 0.6 -0.5

Highest Quintile -0.7 0.6 -0.1

Unallocated -0.2 a 0.2 b 0

All Households -1.2 1.0 -0.2

Gain or Loss as a Percentage of After-Tax Income

Compliance Costs

Effects of Allowance

Average Dollar Gain or Loss per Household

Allocations and Other Transfers

Effects of Net Gain or Loss in

Purchasing Power
27

CBO

those households consume a larger fraction of their income and because energyintensive goods and services make up a larger share of expenditures by low-income 

households. 

In estimating households’ loss of purchasing power, CBO lacked sufficient information to allocate across households in different income brackets the benefits of some 

proposed government spending programs. In addition, the agency was not able to 

allocate across households the 13 percent of compliance costs that would be borne by 

the government as well as other expenditures that the federal government would face 

as a result of the policy and that would not be funded by revenue from the allowances. 

The government could finance those expenditures in various ways, including increasing taxes or reducing other spending, which could have very different effects on 

households at different points in the income spectrum. In 2020, the aggregate 

amounts of benefits and costs that CBO was not able to allocate across households 

roughly canceled each other out. As a result, the loss in purchasing power that CBO 

allocated across households in different income brackets was nearly the same as the 

average loss in purchasing power experienced by all households in aggregate (0.2 percent of after-tax income, or $160 per household when measured at 2010 income 

levels).27

Effects of the Policy’s Provisions in 2050

The cap-and-trade program in H.R. 2454 would have different impacts across households in 2050 than in 2020. CBO estimates that households in the lowest income 

quintile in 2050 would see an average increase in purchasing power equal to 2.1 percent of their after-tax income, or $355 measured at 2010 income levels (see Table 3 

and Figure 2). Households in the highest income quintile would see a loss in purchasing power of 0.7 percent of after-tax income, or about $1,360 measured at 2010 

income levels, and households in the middle quintile would have a loss in purchasing 

power of 1.1 percent of after-tax income, or about $590 at 2010 levels. 

In 2050, the aggregate amount of costs that CBO was unable to allocate across households would exceed the aggregate amount of unallocated benefits. In particular, the 

magnitude of the rebates and tax credits for low-income households in 2050 would be 

significantly larger than the 15 percent of the allowance value set aside to pay for 

them. In addition, more revenue would be required to fund the increases in indexed 

benefits (such as Social Security income) that would be triggered by higher prices. As 

a result, the loss in purchasing power allocated across households in different income 

27. That average loss in purchasing power in 2020 is slightly lower than the $175 reported in CBO’s 

June 2009 analysis (and which CBO referred to as “net economywide cost”) because of refinements 

in CBO’s methodology and subsequent changes in legislative provisions. In addition, the allocation 

of the loss in purchasing power across households is different than in the June 19th analysis because 

the final version of the bill targeted more relief at households in the lowest income quintile. For 

more information, see Congressional Budget Office, “The Estimated Costs to Households from the 

Cap-and-Trade Provisions of H.R. 2454,” letter to the Honorable Dave Camp (June 19, 2009).
28

CBO

Table 3.

Average Gain or Loss in Households’ Purchasing Power 

from the Greenhouse-Gas Cap-and-Trade Program in 

H.R. 2454: 2050 Policy Measured at 2010 Levels of Income

Source: Congressional Budget Office.

Note: The figures are 2010 levels based on the 2006 distribution of income and expenditures. 

Households are ranked by adjusted household income. Each quintile contains an equal number of people. Households with negative income are excluded from the bottom quintile but 

are included in the total. The loss from compliance costs is distributed to households on the 

basis of their carbon consumption.

a. Unallocated compliance costs reflect the governments' share of carbon consumption. 

b. CBO did not allocate allowances for which the recipients were unspecified (for example, allowances given to the government to distribute for energy-efficiency improvements). Unallocated 

gains and losses from other transfers are the net government cost of funding transfers in excess 

of the allowances allocated for that purpose. On net, the unallocated allowances and unfunded 

transfers decrease purchasing power for the 2050 policy because the unallocated allowances are 

less than the unfunded transfers.

Lowest Quintile -675 1,030 355

Second Quintile -880 580 -300

Middle Quintile -1,075 485 -590

Fourth Quintile -1,295 500 -795

Highest Quintile -2,190 830 -1,360

Unallocated -190 a -200 b -390

All Households -1,410 485 -925

Lowest Quintile -3.9 6.0 2.1

Second Quintile -2.4 1.6 -0.8

Middle Quintile -2.0 0.9 -1.1

Fourth Quintile -1.7 0.7 -1.0

Highest Quintile -1.1 0.4 -0.7

Unallocated -0.3 a -0.3 b -0.5

All Households -1.9 0.6 -1.2

Gain or Loss as a Percentage of After-Tax Income

Average Dollar Gain or Loss per Household

Allocations and Other Transfers

Effects of Net Gain or Loss in

Compliance Costs

Effects of Allowance

Purchasing Power
29

CBO

Figure 2.

Average Gain or Loss in Households’ Purchasing Power 

from the Greenhouse-Gas Cap-and-Trade Program in 

H.R. 2454, by Level of Income: 2050 Policy Measured at 

2010 Levels of Income

(Effects as a percentage of after-tax income)

Source: Congressional Budget Office.

brackets is only about 60 percent of the estimated aggregate loss in purchasing power 

(1.2 percent of after-tax income, or $925 per household when measured against 2010 

income levels). 

Comparison of the Effects of the 2020 and 2050 Policy Provisions

The 2020 and 2050 policy provisions and the losses in purchasing power associated 

with them have some similarities and some differences. 

First, the loss in purchasing power stemming from both the 2020 and 2050 policy 

provisions would impose the largest burden (measured as a fraction of after-tax 

income) on households in the middle and next-to-highest income quintiles (see Figures 1 and 2). 

Second, the amount of compensation received by households in the lowest income 

quintile would be substantially higher in 2050 than in 2020. Households in the bottom quintile would receive greater relief in 2050 because they would continue to 

Effects of

Compliance Costs

Effects of

Allowance Allocations and

Other Transfers

Net Gain or Loss in

Purchasing Power

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Lowest Quintile

Second Quintile

Middle Quintile

Fourth Quintile

Highest Quintile
30

CBO

receive protection in their loss of purchasing power through the low-income rebate 

and tax credit provisions and would also receive refunds through the Climate Change 

Consumer Refund Account. If the low-income rebates and tax credits that households 

received were reduced to account for the Climate Change Refunds that they would 

also receive, the net gain by the average household in the lowest quintile would be 

about $135.

Third, the ultimate beneficiaries of the value of the allowances would be more certain 

in 2050 than in 2020 because most of the allowances in 2020 would be distributed to 

households via private entities or government programs designed to promote new 

technologies or energy efficiency. As a result, CBO had to make assumptions as to 

how the allowances given to private entities would ultimately accrue to households. In 

contrast, most of the allowance value in 2050 would flow to households directly via 

rebates from the federal government.