Assisting Households with the Costs of a Cap-and-Trade Program: Options and Considerations for Congress
Released: 2009-10-08T00:00:00

Introduction

Over the past century, particularly in recent decades, scientists have documented increases in global temperature and sea levels, decreases of sea ice in the Arctic, and melting of continental ice sheets and mountain glaciers. There is increasing evidence that human activities are at least partially responsible for some of these effects. This is based upon the combination of two conclusions. First, global temperature increases are linked in some manner to the measurable increases of greenhouse gas (GHG) concentrations in the atmosphere. Second, human activities (e.g., fossil fuel combustion, industrial processes, and deforestation) have contributed to the increased concentration of GHG emissions in the earth's atmosphere.

A variety of efforts that seek to reduce GHG emissions are currently underway or being developed on the international, national, and sub-national level (e.g., individual state actions or regional partnerships). One way in which GHG emissions may be reduced is through market-based approaches, such as a cap-and-trade or emission fees ("carbon tax") system. Recent legislative proposals have generally focused on using these market-based approaches to reduce GHG emissions, with cap-and-trade approaches generating far more congressional activity in terms of introduced bills and committee action than carbon taxes. As a result, this report uses both the general term "GHG control program" and the more specific "cap-and-trade program" to describe proposals to reduce GHG emissions.

This report discusses the potential impacts that a cap-and-trade program would have on U.S. households and options for how Congress might mitigate those effects. The first section of the report explains in greater detail why these impacts are expected and discusses the arguments for providing financial assistance to households under a cap-and-trade program, particularly lower-income households, to help them cope with expected cost increases. The second section examines various issues and considerations involved in providing assistance to households. The third section examines and compares different ways in which policymakers could alleviate some of the costs imposed on household consumers by a GHG emission control program. The fourth section outlines how active GHG emission reduction legislation in the 111 th Congress would address these concerns.

Cap-and-Trade and Household Impacts

A cap-and-trade approach to reducing GHG emissions would have economic consequences. By limiting the number of GHG emissions that can be generated in a given year, a cap-and-trade system would attach a new cost to activities that generate emissions, primarily fossil fuel combustion. In general, entities subject to the emissions cap may either (1) make their own emission reductions (e.g., install more efficient equipment or use energy sources that emit fewer GHGs) and embed the additional costs into their products (e.g., electricity, gasoline, cement, paper, steel) or (2) increase the price of their products with the expectation that the higher prices would decrease demand from their customers, thus lowering the emissions associated with the product's creation or use. In either case, households are expected to ultimately bear the brunt of the costs of the cap-and-trade program.

This section outlines the process by which these costs would filter down to households, and in particular, why lower-income households may face disproportionately high costs as a result of cap-and-trade legislation.

Emission Allowance Value Distribution

An emissions cap would be partitioned into emission allowances. The emission allowances would become a valuable new commodity, potentially accounting, in aggregate, for tens or hundreds of billions of dollars. The value of the allowances would be derived from their scarcity (i.e., the quantity limit imposed by the cap).

In designing a cap-and-trade program, policymakers must decide how and to whom to distribute the emission allowance value. Although the allowance distribution strategy would not affect the environmental integrity of the emissions cap, the allocation of allowances would have considerable economic consequences, because it would represent a wealth transfer of potentially substantial proportions.

Regarding the method of distribution, allowances could be (1) sold through an auction process, (2) allocated at no cost to covered sources, (3) provided to non-covered sources, which would, in turn, sell them to covered sources via the emissions trading market, or (4) some combination of these methods.

Arguably, the more important issue for policymakers is not how, but to whom and for what purpose the allowance value would be allotted. The value would be realized either as auction proceeds or from the revenue that entities (both covered under the cap and non-covered) could receive by selling the allowances. Policymakers could distribute the allowance value (e.g., no-cost allowances or auction revenues) to a wide range of parties to support various policy objectives. These include (1) minimizing the overall program costs imposed on society; (2) alleviating the costs borne by subgroups in society and economic sectors; and (3) providing funding to support other policy objectives, which may or may not relate to climate change mitigation. For example, the government could distribute allowances at no cost to certain entities—states or electricity local distribution companies (discussed below)—and charge those entities with using the emission allowance value to accomplish specified policy objectives, such as energy efficiency improvements or technological development, or assistance to energy consumers.

Cost Pass-Through in a GHG Control Regime

Absent the redistribution of allowance value (such as auction revenue) to help offset increased energy costs, households would likely bear a substantial portion of the costs imposed by a cap-and-trade program. This would be due to the ability of covered entities (e.g., power plants, petroleum producers/importers, large industrial facilities) to pass on the costs incurred from complying with the program.

Illustration of Relative Distribution of Costs

Figure 1 provides an estimate of the relative distribution of costs to different groups in a cap-and-trade program. The figure illustrates the relative distributions that would occur if all of the allowances were auctioned to fossil fuel producers, without redistributing the revenues to households or other entities (a scenario that is unrealistic because most proposals assume some form of redistribution). Households and businesses would experience the vast majority (89%) of the costs if allowance value is not redistributed by the government. Moreover, the household percentage is potentially understated, because many businesses would likely pass through to consumers some of their increased energy/electricity costs in the form of higher prices for their goods and services.

"Free" Allowances to Covered Entities and Cost Pass-Through

Although it may seem counterintuitive, covered entities are expected to raise the price of their products, even if the entities receive allowances at no cost. Economists point out that "free allowances" have value, and when covered entities submit an allowance to the government for compliance purposes, the entities forgo the opportunity (known as an "opportunity cost" in economics parlance) to sell the unused allowance in the emissions trading market. Therefore, economic principles predict that these entities (to the extent that they are able) would pass along their opportunity costs or purchase costs, respectively, in the same manner as an actual expense, such as installing more efficient technology or switching to more expensive (but less carbon-intensive) fuels. Thus, covered sources would receive both the financial benefit of the allowances and the gains associated with higher prices. These benefits are often described as "windfall profits." Covered sources have demonstrated this behavior in two cap-and-trade programs, in which the vast majority of allowances was provided at no cost: the European Union's Emission Trading System (EU-ETS) and the U.S. sulfur dioxide emissions trading program.

Potentially Regressive Effects of Cap-and-Trade

Without some form of allowance value redistribution, lower-income households would likely bear a disproportionate share of the costs related to an emissions cap, because those households generally spend a higher percentage of their income on energy-related goods and services than do higher-income households. In public policy terms, this outcome is described as regressive. This section assesses the regressive nature of these costs on households and discusses other policies in the United States that ameliorate costs faced by low-income households.

Price Burdens Faced by Low-Income Households

Lower-income households may be more economically vulnerable to the potential price increases that could come with a GHG control program. On average, lower-income households already pay a larger share of their income toward the costs of their residential energy and for gasoline. These households are also less likely to have the financial resources to improve the energy efficiency of their dwelling units or to purchase energy efficient appliances or cars, which could help reduce high energy costs. And while it is possible to reduce the quantity or quality of consumption in order to reduce expenses, reducing reliance on residential energy and gasoline beyond a certain point may be unrealistic.

Residential Energy Burdens — The amount of funds spent by a household on residential energy relative to its income is sometimes referred to as an "energy burden." Data collected through the Department of Energy's Residential Energy Consumption Survey (RECS) show the differences in energy burdens faced by low-income households—defined as those who are eligible for the federal Low Income Home Energy Assistance Program (LIHEAP) but do not necessarily receive benefits —compared to non low-income households. In 2006, low-income households had a median individual energy burden of 9.5%, meaning that half of low-income households spent more than 9.5% of their income on residential energy and half spent less than 9.5%. This compared to 3.1% for non-low income households. The poorest households—those that actually receive LIHEAP benefits—had a median individual energy burden of 15.3%. (See Figure 2 .) These effects varied by region, with households in the Northeast of all income levels facing higher energy burdens than those in the Midwest, South, or West.

Consumer Spending on Utilities— Another measure of the cost burdens faced by low-income households comes from the Consumer Expenditure Survey (CES), which measures consumer out-of-pocket spending on a variety of goods and services, including utilities and gasoline. According to data from 2007, spending on utilities (as a percentage of all expenditures) declined from lower to higher income groups with few exceptions. For families with incomes between $5,000 and $10,000 per month, spending on utilities represented more than 10% of their total expenditures. (See Table 1 .) As income increased, the share of spending on utilities decreased incrementally for each income group above $20,000 to less than 5% for those with incomes at or above $150,000. Consumer Spending on Gasoline — The CES also surveys respondents about their spending on gasoline and motor oil. Families with incomes between $30,000 and $40,000 had the greatest share of expenditures on gasoline—5.75%. From there, the share of spending on gasoline by income group gradually declined, dipping below 5% for families with income above $80,000. The share of spending for lower-income families on gasoline—those with income below $20,000—was smaller than those with middle incomes, ranging between 4.74% for those with incomes below $5,000 to 5.47% for those with incomes between $15,000 and $20,000.

Estimates of Regressive Impacts from Cap-and-Trade Models

In recent years, multiple economic analyses have provided estimates of impacts that a GHG emission control program (cap-and-trade or carbon tax) would impose on households of varying income levels. As might be expected based on baseline energy spending per income group (discussed earlier), economic models have indicated that a GHG emission control program—without emission allowance value (or tax revenue) redistribution to households—would yield regressive effects. For example, a 2009 study from Resources for the Future found that—as a percentage of household income—the lowest income group would bear a cost almost five times the cost of the highest income group ( Table 2 ).

Arguments for Alleviating Regressive Impacts

Given the disproportionate impacts that a cap-and-trade system could have on lower-income households, some have argued that allowance value should be used to alleviate the burden those households would likely face. There are a number of policy rationales behind such an intervention. (Note that there are also rationales against alleviating regressive effects; for example, see the section of this report entitled " Potential Concerns Regarding Direct Assistance Options .") An economic rationale behind distributing income and in-kind assistance to lower-income individuals is based on the concept of marginal utility of income and the decreasing satisfaction that consumers receive from each additional dollar of income they gain. The theory is that the value of a dollar is greater for a person who has fewer of them. Under economic theory, then, if income is redistributed from a higher-income person to a lower-income person, societal well being (or utility) is maximized.

Economic theory presumably does not fully explain why society adopts policies to redistribute benefits to lower-income groups, however. Decisions to assist lower-income individuals and families may be driven by societal values—policymakers may consider it important to provide benefits so that some people will have a standard of living that they would not otherwise.

Precedents for Alleviating Regressive Impacts

The federal government targets assistance to lower-income individuals and families in numerous ways. The federal income tax system is progressive, with lower-income families paying lower marginal tax rates and, in some cases, paying no taxes at all or receiving refundable credits. The social welfare system in the United States, including such programs as Temporary Assistance for Needy Families, the Supplemental Nutrition Assistance Program (SNAP, formerly known as Food Stamps), and Medicaid, subsidizes families below certain income levels. Even social insurance programs such as Social Security, Unemployment Insurance, and Medicare are redistributive to some degree.

While Congress could choose to allow households to realize the full consequences of increased energy prices rather than to mitigate those effects in some way, there is precedent for mitigating adverse distributional consequences that occur as the result of government policies. In trade policy, for example, those workers who lose their jobs for trade-related reasons may receive a type of unemployment benefit called Trade Adjustment Assistance (TAA) for Workers; there is also TAA for farmers.

In addition, the U.S. government has a history of helping low-income families with some of those very costs that are projected to increase as the result of a GHG emission control program—in particular, the costs of residential energy. Since the energy spikes of the 1970s, the Low Income Home Energy Assistance Program (LIHEAP) and Weatherization Assistance Program (WAP) have helped families weatherize (e.g., insulate or update heating and cooling systems) and pay home energy bills. And while no program exists to help consumers buy gasoline, legislative proposals have been made in previous Congresses to assist with the purchase of gasoline. Further, states participating in the Regional Greenhouse Gas Initiative (a cap-and-trade program comprised of 10 northeast and mid-Atlantic states) are targeting some revenues to assist low-income families. These existing programs help ease the cost burden faced by low-income families.

Direct Assistance to Households: Considerations

If Congress enacts a cap-and-trade program and determines to use some portion of emission allowance value to directly assist households, policymakers would face several questions when seeking to implement this objective. A primary consideration is which households or persons should receive allowance value: should value be distributed evenly to all households, or should particular household groups receive a higher proportion? Moreover, should policymakers seek to account for different costs that households in different regions may experience? In addition to these issues, this section examines potential concerns and unintended consequences that may occur by providing direct assistance to households.

Equal Assistance to All Households

One option for policymakers is to distribute an equal portion of allowance value to all households across the country without regard to income or other potential differences (e.g., regional energy price increases due to carbon constraint, discussed below). Some have referred to this method as a "lump-sum distribution" or a "cap and dividend" approach.

This approach could appeal to policymakers for a variety of reasons. This option is relatively easy to explain and would likely be easier to implement compared to alternatives that must consider income or other differences among households.

In addition, this approach would address the regressive impacts of a cap-and-trade program to some degree. Economic studies have found that distributing lump sum rebates to all households would yield progressive results. However, these economic models assumed that the majority of allowance value (through auction proceeds) would go to households. If Congress were to distribute value for other uses, such as investments in technology or assistance to workers in affected industries, there would be fewer dollars with which to compensate households and the distributional effects (i.e., progressivity) would be less clear. If that were the case, providing more substantial rebates to lower-income households may be necessary to ensure progressivity.

A question that may arise under this approach is whether Congress should consider different household sizes when allotting allowance value. Equal payments, if not scaled to household size, may benefit some consumers disproportionately, with payments not necessarily commensurate with increased energy costs faced by a consumer unit. However, distributing assistance by household size may present more implementation challenges.

Targeted Assistance to Specific Income Groups

Another approach would be to target assistance to households whose incomes make them more economically vulnerable to the increased costs of energy and the goods and services produced with regulated energy sources. Policymakers could choose to target funds to "low-income," "moderate-income," and/or "middle-income" individuals or groups, depending on their priorities or perceptions of need. As discussed earlier, the argument for providing more targeted assistance, in terms of income levels, relates to the disproportionate impacts that lower income level households would be expected to bear under a cap-and-trade program. However, a targeted approach based on income would likely require further debate among policymakers. For example, how should the emission allowance value be divided among different income groups and which groups should be targeted?

The terms "low-income household" or "low-income family" are sometimes used in the laws governing federal programs to describe those persons who qualify for a given benefit, but the meaning may vary depending on the program at issue. Some programs may use the federal poverty guidelines to determine benefits. For example, families qualify for SNAP if their incomes are at or below 130% of poverty. Other programs may use median income—the middle of the income range in a given area such as a state, a county, or a metropolitan area. For example, many HUD rental assistance programs consider low-income families to be those whose income is at or below 80% of area median income.

Unlike the term "low-income," the terms "moderate-income" and "middle-income" are rarely used to describe program eligibility in federal law. Some HUD multifamily housing programs target moderate-income families, defined as those with incomes between 80% and 95% of area median income, while some homeownership programs through HUD and the Department of Agriculture use 100% of area median income and 115% of area median income respectively. The term "middle income" is not defined in federal law, and may mean different things depending on how one chooses to use it. For example, the term is sometimes used to refer to those households in the middle income quintile as measured by the Census. According to the 2007 American Community Survey, household incomes in the middle quintile ranged from $40,254 to $62,601.

Targeted Assistance Based on Geographical Differences

Many expect geography to play a key role in determining household impacts, largely due to different energy uses across regions. Energy sources have varying levels of carbon content: coal has almost twice the carbon content (per unit of energy) of natural gas; the carbon content of electricity from nuclear, hydropower, and renewable energy sources is effectively zero. Thus, households in areas that rely on more carbon-intensive energy sources are generally expected to face disproportionate impacts from a cap-and-trade program (which establishes a price based on carbon content), compared to households that rely on less-carbon intensive energy. Many have argued that assistance to households should reflect these regional differences. Under this reasoning, instead of providing lump-sum household payments, policymakers may consider distributing allowance value in some proportion to the different cost increases that are projected across different regions. Although such a distribution strategy has received considerable attention, implementing such an approach would pose substantial challenges. Moreover, the underlying assumption upon which the strategy is based may be questioned to some degree. These issues are discussed below.

Evidence of Different Costs Across Regions

Two recent economic studies provide estimates of cost impacts to households by income group and geographic region. Table 3 includes the results from one of these studies (Resources for the Future), which examined the impacts of an emission allowance price of $20.91 (per metric ton of CO 2 ) on household spending patterns and income levels (in 2006 dollars). It is critical to note that these percentages do not account for any offsetting income from emission allowance (or auction revenue) distribution. The percentages illustrate the relative gross impacts to households under a cap-and-trade program without redistribution of allowance value—a scenario that is unrealistic, as was noted earlier.

Table 3 shows that the average household costs of a hypothetical cap-and-trade program as a percentage of income ranged from 1.3% in California to 1.6% in the Ohio Valley—a 23% difference. The regional difference is more pronounced for lower-income households: the lowest-income household in California would (on average) experience costs of 4.0% of its income; the corresponding household in the Ohio Valley region would bear costs of 5.5% of its income—a 38% difference.

The perception of these percentage differences may depend on the magnitude of the cost impacts. The RFF study estimated, for example, that the average lowest-income household in the Ohio Valley region would bear $100 more in annual costs than a corresponding household in California. Considering the potential implementation challenges (discussed below) involved, a question for policymakers is whether this disparity is worth addressing through an emission allowance distribution strategy that accounts for regional differences.

Implementation Challenges

In a cap-and-trade program, the electricity sector, which accounts for 34% of total U.S. GHG emissions, would contribute a large portion of the emissions cap-related costs imposed on households. The more carbon intensive the electricity, the more allowances (and expense) would be required to produce it. Thus, if policymakers are concerned about cost disparities across different regions of the country, policymakers would need to account for the different carbon intensities of electricity (i.e., fuel mix used to generate electricity). The carbon intensity of electricity varies based on the energy source used to generate the electricity—for example, electricity produced with coal has a higher carbon content than that produced with natural gas, and so on. As the geographic area in question becomes more refined—moving from a region to a state, or a state to a local distribution company (LDC) —a carbon intensity of electricity determination becomes more difficult.

The difficulty relates to data availability. Data exist to determine the carbon intensity of electricity at the level of the individual power plant. However, in many cases, an electricity LDC does not have a complete picture of the energy sources used to produce its power supply. Depending on the distribution utility's circumstances, it may have almost no relevant information. Neither state governments nor the federal government collect data needed to accurately and routinely tie electricity deliveries to the generating source. Because of the complexity of power market transactions, in which a block of power can change hands several times before final delivery and the mix of fuels is constantly changing over time, it is unlikely that such a data collection process could be designed and implemented. H.R. 2454 would require such a data collection process.

Some groups have suggested using existing regional estimates in lieu of LDC-specific data. For example, EPA has developed output emission rates for subregions in the agency's Emissions and Generation Resource Integrated Database (eGRID). However, these estimates are not the same as carbon content of electricity consumed , because electricity may be generated in one region and exported for consumption to another region. Therefore, if policymakers use data that measures carbon content of electricity generated to distribute allowance value, regions that are net exporters of high-carbon electricity may be overcompensated at the expense of regions that are net importers of high-carbon electricity. The customers in net importing regions would be the group that would bear the emission cap carbon price.

Moreover, distributing allowance value to LDCs based on regional data may overcompensate some LDCs at the expense of others. The regions that would likely be considered comprise multiple states in many cases. Within a particular region (or state), the LDCs' carbon intensities of electricity likely span a wide range. For example, if one LDC were to purchase power solely from a nuclear power plant, while an LDC in a neighboring area purchased solely from a coal-fired generator, the two LDCs' carbon intensities would vary dramatically.

Potential Concerns Regarding Direct Assistance Options

Some approaches to providing assistance to households may raise concerns and perhaps yield unintended consequences—specifically, the failure to encourage energy efficiency improvements among households. A primary concern shared by some observers regards the impact of certain assistance mechanisms on the carbon price signal. By design, a GHG emissions control program, such as cap-and-trade, places a price on carbon. This price is expected to affect behavior—for example by encouraging or promoting activities that are less carbon-intensive. The carbon price will be reflected in higher energy prices (electricity and gasoline) as well as other materials that are produced through energy use. As stated by the Director of the Congressional Budget Office (CBO):

The price increases would be essential to the success of a cap-and-trade program because they would be the most important mechanism through which businesses and households would be encouraged to make economically motivated changes in investment and consumption that reduced CO 2 emissions.

If the price signal is channeled to economic sectors that have higher marginal costs of abatement, the overall cost of the cap-and-trade program would increase. For example, the Director of the CBO recently described the effects of using emission allowance value to hold electricity bills steady:

Muting the increase in electricity prices would increase the overall cost of the policy because it would reduce households' incentives to undertake measures to reduce their electricity consumption, such as choosing more efficient appliances or turning down their thermostats.

Demonstrating this concept, a 2008 study from Resources for the Future modeled emission allowance prices under different emission allocation strategies. Compared to a 100% auction approach, a free distribution of allowances to LDCs based on electricity emissions (for the purpose of alleviating electricity price increases on consumers) would raise the allowance price by approximately 13%, thus increasing the overall cost of the program.

Moreover, if the price signal is dampened in one sector of the economy or for a particular subgroup of society, the signal will move to other sectors or other groups. During the same testimony, the CBO Director described this possibility:

As a result [of muting the increase in electricity prices], the burden of meeting the cap would fall more heavily on other sectors, and that additional burden would be reflected in higher prices for other goods and services that households purchase. (For example, the price of gasoline would probably increase more than would otherwise be the case.)

Mechanisms for Returning Funds to Households

Policymakers have a variety of options available for distributing allowance value to households. Proposed delivery mechanisms in both the 110 th and 111 th Congress have included:

distributing equal dividends to all households, or to all individuals; providing energy tax credits for low- and/or middle-income households with earned income or qualifying retirement income, or expanding the Earned Income Tax Credit; reducing Social Security payroll taxes; distributing allowances to electricity and natural gas local distribution companies (LDCs) to be used to "mitigate economic impacts on low- and middle-income consumers," or to assist all consumers; allocating auction proceeds to the Low Income Home Energy Assistance Program and the Weatherization Assistance Program; and creating rebates for low-income households.

In addition, President Obama's FY2010 budget proposed to implement a cap-and-trade program and devote a majority of the proceeds to the "Making Work Pay" tax credit, a reduction in payroll taxes for those workers below a certain income threshold. (The tax credit was created as part of the American Recovery and Reinvestment Act ( P.L. 111-5 ).)

This section of the report describes some of the delivery options that have been proposed for returning allowance value to households. In evaluating these options, there are a number of considerations that might be relevant to policymakers in choosing and implementing a distribution system. Among considerations are the ability of a system to reach large numbers of households, the existence of an administrative infrastructure and the costs of distributing funds, and the ease of tailoring benefits to different consumer incomes and regions of the country. For each of the potential delivery options, this section of the report discusses some of the considerations that could make the options more or less appealing. This is not an exhaustive discussion and is meant only to raise potential considerations. A table summarizing these options is available in the Appendix . The considerations discussed in this section are:

A bility to R each Households —A distribution system would have to reach millions of potential beneficiaries (this would be true even in a system targeted only to low-income households). For already-existing delivery mechanisms such as the income tax system, we have some knowledge about their ability to deliver funds. For untried mechanisms, such as universal rebates through an electronic transfer or check, their effectiveness may be more speculative. A dministrati on —Implementing a delivery system would have administrative costs. Some proposed delivery systems may have an administrative infrastructure already in place, others may need to have an existing administrative system adapted to distribute funds, while still others may need to create a new system. The way in which funds are targeted would also have an effect on the administrative costs. In general, the more targeted benefits are, the higher the administrative costs of the system. For example, a program with complicated income eligibility rules and verification processes or a program that delivers multi-tiered benefits is likely to be more expensive to administer than one with simple eligibility rules and standard benefits for all recipients. Consumer F lexibility —A system could deliver cash or in-kind benefits to consumers. For example, funds that are targeted for energy assistance such as LIHEAP and the Weatherization Assistance Program (WAP) can only be used for specific purposes. However, if revenues were to be distributed as cash, consumers would decide how best to use the benefit. According to economic theory, beneficiaries may be better off with a cash transfer than with an in-kind benefit of the same amount because they are not constrained in the way they use the benefit. However, there is a tension in public policy between consumer flexibility and limiting flexibility to ensure that policy priorities are achieved. As discussed earlier, a flexible cash benefit may mean that consumers would not reduce energy consumption as much as they might otherwise, potentially reducing the effectiveness of a cap-and-trade program. Tailoring Benefits for Household Size and Income —Allowance value may be distributed to all households or to those that meet certain income eligibility requirements. They may be the same for everyone or may vary based on household size. Some existing federal benefit systems tailor their benefits by income and number of family members, with benefits phased out at certain income levels. An example is the Earned Income Tax Credit. In the case of other delivery systems, a formula or eligibility determination process might need to be created to take account of factors such as income and household size. Accoun t ing for Regional Differences —Congress may want to account for regional differences when distributing allowance value. Some existing programs such as LIHEAP and WAP take account of energy sources in determining how funds are distributed. In the case of other delivery systems, a formula may need to be created to incorporate energy price data. This approach may require new data collection. Although it would be possible to tailor rebates based on expected regional differences, doing so may decrease the transparency of particular mechanisms. As discussed above, applying a regional calculation to individual households would be imprecise and would likely (1) overcompensate regions at the expense of others and (2) create winners and losers within a particular region. Promoting E nergy E fficiency —It may be desirable to use proceeds in a way that promotes energy efficiency. Some options, such as funding for weatherization, may increase energy efficiency, while lump sum payments may not necessarily encourage increased efficiency beyond any conservation that might take place due to increased prices. As a result, consumers might not reduce consumption to the same degree they would if there were no reimbursement to households. Policymakers could complement the rebate mechanism with an educational/outreach program. The program could offer suggestions of ways households could spend the rebates in terms of energy efficiency activities and explain the long-term (financial) benefits of improving a home's energy efficiency.

On their own, individual options such as those described in this section may have limitations that do not allow them to reach all the households that Congress may wish to target. However, the options could be used in combination to assist everyone from those living in poverty to those considered middle-class, to all consumers, whether working, unable to work, or retired.

Direct Payments

One method of allocating proceeds from a cap-and-trade program would be to provide direct payments, or rebates, to consumers via check or electronic transfer in order to compensate for increased energy costs. This option is sometimes referred to as "cap-and-dividend," and is usually proposed as an equal payment for all consumers. Proposals have been made that would deliver funds to individuals or to households.

Considerations that could be relevant in setting up a direct rebate system include the following:

Ability to Reach Households —Currently, there is no existing benefit distribution system that reaches every individual who is lawfully present in the United States; nor is there a single repository of information that contains relevant data such as name, address, Social Security number, and residency status for every person. Creating one would likely require the involvement and coordination of more than one federal agency. Between them, the Social Security Administration (SSA) and Internal Revenue Service (IRS) may be able to reach a large percentage of Americans. The Social Security Administration (SSA) has name, address, and Social Security number records for millions of Americans due to its role in distributing benefits to retirees and persons unable to work due to disability. In addition, SSA tracks the covered earnings of workers who pay Federal Insurance Contributions Act (FICA) taxes in order to fund Social Security and Medicare. The Internal Revenue Service has information about taxpayers and their dependents. The IRS would not have records for those people who do not file taxes, generally those whose income does not reach the threshold required to file. A source of information for picking up those individuals who may not be captured by either the Social Security system or the federal income tax system may be state public benefit programs. Individuals who do not have earned income, retirement income, or disability income may qualify for public benefits such as SNAP and Temporary Assistance for Needy Families (TANF). State systems would, in most cases, have contact information for those individuals and their family members who qualify for benefits. Administrati on —There is not currently a unified administrative infrastructure in place that would reach all Americans. The costs of a system would depend in part on the frequency with which funds would be delivered as well as whether payments would be tailored for income, family size, energy prices, or for other reasons. In addition, the manner of delivery—paper versus electronic—would make a difference; according to the Treasury Department, it costs the government $1.03 to send a paper check and 10.5 cents to deliver benefits electronically. The way in which benefits under recent economic stimulus bills were distributed may be instructive. When the federal government distributed rebate checks pursuant to the Economic Stimulus Act of 2008 ( P.L. 110-185 ), the administrative costs of extending rebates to around 119 million tax filers were approximately $215 million. In 2009, the American Recovery and Reinvestment Act ( P.L. 111-5 ) provided funds so that each Social Security recipient (approximately 50 million individuals in 2008) and SSI recipient (approximately 7.5 million individuals) would receive a payment of $250. Congress appropriated $90 million to SSA for administering these payments. Consumer Flexibility —Households would have flexibility in how they chose to use a direct rebate. Funds could be used for utility bills, gasoline expenses, or any other good or service. Tailoring Benefits for Household Size and Income —Rebates could be increased to account for lower income levels or greater numbers of household or family members. As discussed above, however, this flexibility could affect administrative costs of the rebates by requiring the periodic collection of income and other financial data as well as the calculation of benefit levels. Accounting for Regional Differences —Although it would be possible to tailor rebates based on expected regional differences, doing so would decrease the transparency of the mechanism. As with income and family size it would likely add to the administrative expense, particularly if new data were to be incorporated frequently. Promoting Energy Efficiency —A direct rebate would not necessarily promote energy efficiency beyond any conservation that might take place as the result of increased prices. This could potentially reduce the effectiveness of a cap-and-trade program.

Fund Disbursal Through the Tax System

Funds from a GHG emission control program could also be delivered to households through the tax system, specifically through either the FICA (Federal Insurance Contributions Act) Social Security and Medicare contributions system or the federal income tax system. One option would be to reduce the amount of income taxes or FICA taxes that are withheld from earned income in workers' paychecks. (These taxes, together with income taxes withheld at the state and local levels, are sometimes referred to collectively as payroll taxes.) Another option would be to deliver a refundable tax credit to households through the federal income tax system.

Considerations that could be relevant in using the tax system to distribute benefits include the following:

Ability to Reach Households — Payroll Taxes— Delivery of funds by reducing payroll taxes would reach those individuals who work and have taxes withheld from their pay. According to CBO, about 80% of households would be eligible for a payroll tax rebate, with about 54% of those in the lowest income quintile qualifying. In the case of FICA taxes, employers and employees each pay half of the total tax withheld, so one consideration could be whether to calculate a reduction based on just the employee's contribution or both the employer's and employee's contributions. Income Tax Credit— A tax credit would reach those individuals who file income taxes. There is a portion of the population that does not file taxes at all, in general because they do not reach the income thresholds required to file. However, those individuals could be encouraged to file in order to receive a tax credit. In addition, a portion of those who file taxes do not owe federal income taxes. Some tax credits can only be used to offset income tax liability and do not extend beyond the amount of taxes that someone owes; a refundable tax credit would be necessary to reach those who do not owe taxes. Administrati on —Using the tax system to deliver funds would not require creation of a new administrative infrastructure to reach households because existing tax collection systems could be used for this purpose. However, there would likely be increased administrative costs depending on the elements of the program. There could be increased numbers of individuals filing taxes in order to take advantage of a new tax credit or costs involved in adjusting withholding for payroll tax reductions. Consumer Flexibility —Households would have flexibility in how they chose to use funds delivered through the tax system. Funds could be used for utility bills, gasoline expenses, or any other good or service. Tailoring Benefits for Household Size and Income —The IRS already gathers taxpayer information regarding number of dependents and income, so this information would not have to be collected separately in order to tailor benefits through the income tax system to household size and income. However, information regarding those who pay FICA taxes may not include information regarding total household size, nor does it necessarily represent total household income. Information about household members and income would have to be collected if funds were to be tailored under FICA reductions. Accounting for Regional Differences —The tax system does not currently have a deduction or credit that takes account of energy prices. To do so would add a layer of complexity to the process of determining funds to which a household would be entitled. Promoting Energy Efficiency —A rebate through the tax system would not necessarily promote energy efficiency beyond any conservation that might take place as the result of increased prices. This could potentially reduce the effectiveness of a cap-and-trade program.

Allowances to Energy Distributors

Another mechanism of providing assistance to household consumers is through the distribution of allowance value to local energy distributors, called local distribution companies (LDCs). LDCs are the entities that deliver electricity or natural gas to consumers, local businesses, and industry within a geographic area; typically they receive the energy supply from generators (in the case of electricity) and producers (in the case of natural gas). Under this approach, the energy distributors would be required to pass along the value of the allowances for the benefit of energy consumers. This could occur in several ways, and Congress could stipulate certain provisions in the legislation. For example, policymakers could require the LDC to sell the allowance and use the proceeds to support energy efficiency efforts, which would ultimately benefit consumers. In addition, policymakers could authorize LDCs to use the proceeds to provide rebates for portions of consumers' energy bills.

This mechanism could be used to alleviate price burdens on all energy consumers or certain subgroups.

Considerations that could be relevant in relying on energy suppliers to compensate households for increased costs of energy include the following:

Ability to Reach Households —Those households that use natural gas, electricity, heating oil, and propane to heat their homes represent more than 96% of all occupied housing units in the country. Therefore, if a GHG emission control program directed natural gas and electricity LDCs to sell allowances for the benefit of their customers, and if states were given the responsibility for compensating heating oil and propane customers, then nearly all households in the United States could be reached. It is possible, though, that renters whose utilities are included in rent may not see a benefit delivered through LDCs and states. In addition, the household benefits would largely depend on how the LDCs chose to return the allowance value to customers. Policymakers may consider including detailed instructions to avoid inconsistent applications across the country that may otherwise occur. Administrati on —Presumably LDCs would be able to pass on benefits to households through their billing systems without the need for additional administrative infrastructure. If a system were to target household customers based on their income or household size, administrative costs could increase. There may also be a need for an additional layer of administration, with state and/or federal governments overseeing a program in which LDCs are given discretion to help consumers. If states were to oversee a program to channel funds to heating oil and propane users, an application system may have to be established. This could occur through existing low-income energy assistance programs (described in the next section of this report). Consumer Flexibility —The way in which households could use funds under a system administered by LDCs would depend on whether fund transfers took the form of cash rebates or credits toward energy bills. A direct cash rebate could be used for any purpose, while a credit would only help households with their home energy expenses. However, reducing utility bills could free up funds for other uses. Tailoring Benefits for Household Size and Income —LDCs such as natural gas and electricity suppliers presumably do not have readily available information about the households they serve, such as number of people living in the household and household income. Although it would be possible to tailor benefits based on these factors, as discussed above, it would require additional administrative responsibility to gather the necessary information and to implement a tiered benefit system. Accounting for Regional Differences —Proponents of this mechanism maintain that one of its strengths is its ability to account for regional differences, and thus distribute allowance value in a more equitable fashion (so they argue). For instance, Congress could distribute allowances to LDCs based on measures that vary by local energy provider: energy delivered, carbon-content of energy delivered, or some combination of both (see discussion of H.R. 2454 below). However, this potential ability to account for regional differences is not unique to this mechanism. Indeed, this approach may not have a particular advantage over other approaches in this regard. As discussed earlier, local electricity providers (i.e., LDCs) do not collect data regarding the carbon content of the electricity they deliver, a critical measurement in the debate over regional differences. Federal agencies (e.g., EPA and EIA) have prepared approximations of this data at the regional (or subregional) level, but this data could be used in other mechanisms to tailor allowance value distributions to regional differences. Promoting Energy Efficiency —Depending on the way in which a program were to be implemented, it would be possible to improve energy efficiency. For example, benefits could be tied to reductions in energy use. Moreover, policymakers could stipulate (as is done in H.R. 2454 , discussed below) that certain percentages of the allowance value be used to support this objective. Conversely, if funds were used to reduce rates, a system might discourage energy conservation.

Existing Energy Assistance Programs

Policymakers may consider using allowance value to increase support for existing energy assistance programs. Two of these programs are discussed below.

The Low Income Home Energy Assistance Program

The Low Income Home Energy Assistance Program (LIHEAP) is a block grant program under which the federal government gives states, tribes, and territories annual grants to operate home energy assistance programs for low-income households (defined as those with incomes at or below 60% of state median income or 150% of poverty, whichever is greater ). States may use funds to help eligible households pay heating or cooling bills; pay for low-cost weatherization projects; provide services to reduce need for energy assistance; and help with energy-related emergencies such as preventing utility disconnection or repairing a furnace.

A number of GHG emission control proposals introduced in the 110 th Congress would have allocated a portion of allowance auction proceeds to LIHEAP to mitigate higher energy prices. Considerations that could be relevant in using LIHEAP to help low-income consumers face the increased costs of energy include the following:

Ability to Reach Households —LIHEAP benefits are targeted to assist low-income households, federally defined as those with incomes at or below 150% of poverty or 60% of state median income. However, LIHEAP does not reach all households defined as "low income." First, states have some flexibility within the federal income eligibility guidelines, and they may set income eligibility as low as 110% of poverty. In addition, unlike some other means-tested programs such as SNAP or Medicaid, where meeting eligibility standards entitles one to benefits, LIHEAP has not reached everyone who is eligible due, in large part, to funding limitations. According to the most recent data available from the Department of Health and Human Services (HHS), less than 20% of federally eligible LIHEAP households received benefits in FY2006. However, it is possible that supplements to the program through a GHG emission control program would provide funding to serve a greater number of eligible households. Administrati on —As an existing program, no administrative infrastructure would have to be developed to deliver funds through LIHEAP. The program allows grantee states, tribes, and territories to use up to 10% of their grants for administrative purposes. In FY2006, approximately 7.7% of total LIHEAP funds were used for administration. If funding for the program were increased or the number of beneficiaries served grew as part of a greenhouse gas reduction program, it is possible that the amount of funds necessary to administer LIHEAP benefits would also increase. Consumer Flexibility —LIHEAP funds would address higher residential energy costs and would not directly address potential price increases in gasoline or other energy-intensive goods and services. It is possible, however, that a LIHEAP payment toward utility bills may free up funds for other expenses. Tailoring Benefits for Household Size and Income —States have the discretion to adjust LIHEAP benefits based on household size and income. In fact, the LIHEAP statute requires states to target households with "the lowest incomes and the highest energy costs or needs in relation to income." As a result, LIHEAP-recipient households are typically more needy than the population that is eligible to receive LIHEAP benefits. Accounting for Regional Differences —LIHEAP has a statutory formula that allocates funds to states based on both the type of fuel used by low-income households as well as the price by fuel type. However, there is a lag in data used in the formula that might not make it immediately responsive to the effects of a GHG emission control program. The availability of recent data may be more important in distributing allowance auction proceeds, where price fluctuations could be an important part of determining need. Promoting Energy Efficiency —Although the LIHEAP statute allows states to use 15% of funds for weatherization (up to 25% with a waiver from HHS), the majority of LIHEAP expenditures currently go toward direct subsidies for heating and cooling. In fact, some states choose not to weatherize at all.

The Weatherization Assistance Program

The Weatherization Assistance Program (WAP) provides low-cost home weatherization services to low-income families, defined as those with incomes at or below 200% of poverty, although states may choose to use LIHEAP eligibility guidelines (which go up to 60% of state median income). Through WAP, funds are distributed to states, the District of Columbia, Puerto Rico, tribes, and territories via formula; they, in turn, distribute funds to public or private nonprofit organizations to administer the program and undertake the weatherization activities in specific geographic areas around the state.

As with LIHEAP, a number of the GHG emission control proposals introduced in the 110 th Congress would have allocated a portion of allowance value to the WAP. Considerations that could be relevant in using WAP to help low-income consumers face the increased costs of energy include the following:

Ability to Reach Households —Like LIHEAP, WAP does not reach all low-income households that are eligible for services. In 2006, the most recent year for which data are available, 104,382 dwellings were weatherized. (Note, however, that the American Recovery and Reinvestment Act (ARRA, P.L. 111-5 ) provided $5 billion for WAP over three years compared to previous appropriations levels between $200 and $300 million.) A possible limitation in the ability of WAP to serve eligible households is its historic focus on weatherizing single-family homes rather than multifamily structures. States may choose to prioritize single-family homes, and program rules may also present barriers to weatherizing multifamily developments. These limitations may become more flexible, at least in regard to multifamily housing funded through the Department of Housing and Urban Development (HUD). In response to ARRA, the Department of Energy and HUD entered into a memorandum of understanding so that WAP funds could be used in HUD-subsidized multifamily dwelling units with streamlined income verification of residents. HUD spends an estimated $4 billion per year (more than 10% of its budget) to pay energy costs in subsidized multifamily housing. Administration —Grantees may use up to 10% of WAP funds for administrative expenses. In addition, a portion of WAP funds are allocated to training and technical assistance for the Community Action Agencies that administer WAP funds in local communities. In FY2008, $4.5 million, approximately 2% of the total WAP allocation, was used for this purpose. Consumer Flexibility —WAP funds are used for the purpose of reducing the costs of home energy, so the program would not directly address potential price increases in gasoline or other energy-intensive goods and services. However, as with LIHEAP, reducing home energy bills may free up funds for other expenses. Tailoring Benefits for Household Size and Income —States are required to target needy populations for WAP services. WAP gives priority to elderly residents, those with a disability, families with children, high residential energy users, and households with high energy burdens. In terms of adjusting benefits for household size and income, once program eligibility is determined, the amount of WAP funds used per household is based on the condition of the dwelling unit and the need for weatherization services. Accounting for Regional Differences —WAP uses a formula that takes account of energy consumption and expenditures in determining how funds are allocated to the states, though with similar time lags encountered with the LIHEAP formula. Promoting Energy Efficiency —Weatherization activities may prevent future energy usage, thereby reducing overall household energy costs. An analysis of statewide weatherization programs in 19 states found that after weatherization, the average household using natural gas for heating saw a 22.9% reduction in British thermal units (Btus) consumed for all home energy uses and a 32.3% reduction in Btus used for home heating.

Subsidies Through Other Income-Based Programs

Congress may consider using other, non-energy-related programs to provide assistance to households. Two possible options are discussed below.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) could be another method of delivering funds from a GHG emission control program to low-income households. The EITC is a refundable tax credit for low-income workers based on their income, age, and number of qualifying children. Under current law, workers earn a credit for every dollar of earned income up to a certain income level based on their tax filing status and the number of children claimed on their tax return. The credit is refundable so that even those individuals who have no tax liability can benefit from the EITC. For the 2008 tax year, the maximum credits ranged from $438 for filers with no children to $4,824 for those with two or more children.

Considerations that could be relevant in using the EITC to help low-income consumers face the increased costs of energy include the following:

Ability to Reach Households —Currently the EITC is designed to reach workers with earnings that do not exceed a certain level. Unlike LIHEAP or Weatherization, those who are eligible for the tax credit can receive it as long as they file their taxes appropriately. For the 2006 tax year, the number of EITC recipients was approximately 23 million. However, the EITC does not reach those individuals and families who do not have earned income, which would leave out some low-income households, including retired persons. The credit may also leave out families with incomes too high to qualify for the EITC, but who face burdensome energy price increases nonetheless. If Congress wanted to expand the reach of the program to higher-income families, it could increase the credit rate or the phase out level, increase income eligibility, or both. Administrati on —Any expansion of the EITC to distribute funds to households would be administered through the federal income tax system. The EITC has been found to have administrative costs that range between 1% and 3% of benefits claimed. Consumer Flexibility —Households would have flexibility in how they chose to use funds delivered through the tax system. Although many individuals claim the EITC in one lump sum when they file their taxes, they also have the option of spreading payments over the course of the year by including them in their paychecks. This could help recipients deal with higher prices as they occurred. Tailoring Benefits for Household Size and Income —The EITC is somewhat responsive to household size, although for those families with more than four members (two adults and two children) the credit does not grow with additional children. The EITC is responsive to household income. The credit grows as earned income grows, reaches a plateau, and is then phased out as income continues to grow. Accounting for Regional Differences —The EITC as it is currently administered would not take account of energy prices faced by households in determining benefits. Although it would be possible to incorporate regional differences when determining benefits, this would add a layer to the administrative process. Promoting Energy Efficiency —A benefit delivered through the EITC would not necessarily promote energy efficiency beyond any conservation that might take place as the result of increased prices. This could potentially reduce the effectiveness of a cap-and-trade program.

Electronic Benefit Transfer Systems

Another option for reaching low-income households specifically would be to deliver funds through the Electronic Benefit Transfer (EBT) systems that are used by state and local health and human services agencies to deliver SNAP and other benefits. Since 2004, all 50 states, the District of Columbia, Puerto Rico, Guam, and the Virgin Islands have implemented EBT systems through which they put money for federal and state benefits on cards similar to debit cards. All states and territories deliver SNAP benefits through their EBT systems, and some deliver other benefits as well. In FY2007, more than 11 million households representing more than 26 million people received SNAP benefits.

This option has been proposed in both the 110 th and 111 th Congresses. Considerations that could be relevant in using EBT transfers to help low-income consumers face the increased costs of energy include the following:

Ability to Reach Households —A system such as those in proposed legislation would specifically target low-income households and, on their own, would not reach middle- or high-income households. If EBT rebates were distributed to SNAP-eligible individuals (those at or below 130% of poverty) an estimated 39 million individuals representing 18.5 million households would receive the rebate. Administrati on —Because all states use EBT systems to deliver SNAP benefits, the administrative infrastructure for delivering funds through a GHG emission control program would be in place. The specific administrative costs involved with delivery of EBT benefits are not known; however, the costs of SNAP administration could be instructive. The federal government shares administrative costs of SNAP with the states. In FY2007, the total administrative costs for both the federal and state governments was $5.7 billion; varying sources estimate that approximately 16% or 17% of SNAP dollars go toward administrative costs. Of the federal share of funds in FY2007 (nearly $2.8 billion), approximately $162 million went to issue benefits while $1.5 billion was used to certify eligibility. A majority of those who would qualify for EBT payments would already have been determined to be eligible for SNAP (approximately 62% of eligible households received benefits in 2007 ). Thus, an initial intake and eligibility determination would not necessarily have to be performed for all those who would be eligible. Consumer Flexibility —An EBT rebate could give consumers flexibility similar to the EITC. Households could prioritize their needs rather than being restricted to a single use, such as utility payments. SNAP benefits, TANF benefits, and others, are delivered monthly through EBT systems. If rebates were likewise issued monthly, recipients might be better able to confront higher prices as they occurred. Tailoring Benefits for Household Size and Income —If an EBT rebate were to have income guidelines like SNAP, then benefits could be tailored based on family size and income. For example, maximum SNAP benefits vary with family size, increasing incrementally for each additional family member. Benefits are also reduced as family income increases. Accounting for Regional Differences —It would be possible to create a system of EBT rebates that included regional differences when determining benefit levels. This added complexity could increase administrative costs, however. Promoting Energy Efficiency —A rebate through the state EBT systems would not necessarily promote energy efficiency beyond any conservation that might take place as the result of increased prices. This could potentially reduce the effectiveness of a cap-and-trade program.

Legislation in the 111th Congress

This section of the report discusses legislation in the 111 th Congress that proposes to use one or more of the options to assist households that were discussed in the previous section. This section is not meant to track all GHG emissions bills that have been introduced in the current Congress.

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

The American Clean Energy and Security Act ( H.R. 2454 , introduced by Representatives Waxman and Markey), which the House passed on June 26, 2009, has several provisions that would attempt to reimburse households for increased costs associated with a cap-and-trade program established by the bill. The bill would accomplish this by (1) distributing allowances at no cost to various entities, including local distribution companies (LDCs) and states, which would then use the value of the allowances to assist households, and (2) distributing emission allowance auction proceeds directly to households.

Assistance to All Households Through Energy Distributors

H.R. 2454 would allocate allowances to electricity local distribution companies (electricity LDCs) and natural gas local distribution companies (natural gas LDCs) to be used for the benefit of residential and commercial consumers. The bill would also allocate allowances to states to be used for the benefit of heating oil, propane, and kerosene consumers.

A substantial portion of the emission allowances would be used to support energy consumers in the early years of the program. Between 2012 and 2029, electricity LDCs would receive a gradually diminishing portion of allowances, starting with approximately 38% in 2012 and decreasing to 6% by 2029; natural gas LDCs would receive 9% of emission allowances in 2016, decreasing to 2% in 2029; and states would receive 1.9% of allowances in 2012, decreasing to 0.3% by 2029. In 2030, the allocations to support energy consumers would cease.

In the case of electricity LDCs, allowances would be allocated through a two-part formula: 50% based on each LDC's carbon content of electricity and 50% based on the amount of electricity delivered. Benefits from the allowances would be distributed ratably to each ratepayer class (residential versus commercial), and then "equitably" to each ratepayer within the class.

H.R. 2454 would require certain processes to ensure that electricity LDCs comply with the bill's requirements regarding consumers. State regulatory authorities would be required to either publish regulations or conduct proceedings regarding how electricity LDCs will fulfill the requirements of H.R. 2454 . Electricity LDCs would be required to submit periodic plans (approved by state regulators) to the EPA Administrator describing how they will use the value of the allowances to benefit consumers and to report annually on their use of allowances. The EPA Administrator would audit a sample of electricity suppliers every year to ensure that emission allowances are used "exclusively for the benefit of retail ratepayers."

In the case of natural gas LDCs, beginning in 2016, allowances would initially be distributed based on each company's average annual retail natural gas deliveries. In later years, the distribution formula would also take into account the number of customers for each company. As with electricity LDCs, H.R. 2454 would require natural gas LDCs to deliver benefits to ratepayers based on the amount of natural gas used by each class and then equitably to each consumer within the ratepayer class with the same limitation that any rebate not be based on the amount of natural gas delivered to each ratepayer. Unlike electricity LDCs, natural gas LDCs would be required to use one-third of allowances for energy efficiency programs that benefit natural gas consumers. Similar requirements regarding submission of plans and reports would apply to natural gas LDCs, and the EPA Administrator would audit a sample of companies every year.

In order to reach heating oil, propane, and kerosene consumers, H.R. 2454 would distribute allowances to states based on their share of the carbon content of heating oil, propane, and kerosene sold to consumers within the state. States would be required to use at least half of the allowances for energy efficiency programs targeted to heating oil, propane, and kerosene consumers; the remainder would be used to provide rebates or other direct financial assistance to consumers (to the extent practicable, through existing energy efficiency and consumer energy assistance programs). States would be required to submit reports to the EPA Administrator about the use of allowances and cost effectiveness of energy efficiency measures; the reports would also include independent third-party evaluations of the energy efficiency and consumer assistance programs.

Small Electricity LDCs

Small electricity LDCs—defined as those that deliver less than four million megawatt hours of electricity to retail consumers—would receive a declining percentage (0.5% in 2012) of emission allowances (in addition to the allotment to LDCs generally) at no cost. H.R. 2454 would require small LDCs to use the allowance value, in part, for assistance programs for their low-income customers (those with incomes at or below 200% of poverty). The EPA Administrator would be required to establish eligibility criteria and guidelines for this consumer assistance program and small LDCs would be required to report on the assistance provided.

Rebates to All Households

H.R. 2454 would also establish a Climate Change Consumer Refund Account in the United States Treasury. The account would be funded through the sale of allowances beginning in 2021, with additional allowances auctioned beginning in 2026. Proceeds from the account would be distributed as tax refunds "on a per capita basis to each household in the United States." Citizens and lawful permanent residents would be eligible for the tax refunds.

Low-Income Energy Refund Program

H.R. 2454 would establish a new low-income benefit program, the Energy Refund Program, that would reimburse eligible households for the estimated loss in purchasing power to families caused by increases in energy prices resulting from the bill. The proposed new program (the proposed Title XXII of the Social Security Act) would be administered at the federal level by the Department of Health and Human Services (HHS) and at the state level by agencies that administer other assistance programs, such as cash welfare and SNAP.

Eligibility

The Energy Refund Program would make households with gross incomes at or below 150% of poverty eligible for the maximum benefit (see below for a description of the benefit). The benefit would be phased out for households with incomes over 150% of poverty. The CBO estimates that program would serve 34.4 million households in 2012, rising to 35.5 million in 2019. This is about double the number of households CBO estimates would be served in the SNAP program (16.5 million estimated SNAP households in FY2012).

Households that already receive certain need-tested benefits would be automatically eligible for the benefit. These households include those that already receive:

nutrition assistance through SNAP, the Food Distribution program on Indian Reservations, or the programs of nutrition assistance that operate in lieu of SNAP in Puerto Rico and American Samoa; a benefit or service from TANF that also receive a SNAP benefit; a subsidy based on income for prescription drugs under the Medicare Part D program; or Supplemental Security Income (SSI).

Additionally, the Secretary of Health and Human Services (HHS) would be charged to promulgate regulations to determine whether information used for determining eligibility under state Medicaid or Children's Health Insurance Program (CHIP) can be used to automatically determine eligibility for the Energy Refund Program.

The bill would make eligible for benefits all those in the United States lawfully, whether citizens or noncitizens. (Many need-tested programs restrict benefits for noncitizens. See CRS Report RL31114, Noncitizen Eligibility for Major Federal Public Assistance Programs: Policies and Legislation , by [author name scrubbed].)

Benefits

The maximum benefit for the Energy Refund Program would be the estimated loss in purchasing power caused by the American Clean Energy and Security Act of 2009 for families with gross incomes of 150% of the poverty threshold. The benefit would vary by household size. Separate benefit amounts would be computed for households of sizes one through four, with households of five or more receiving a benefit based on the average loss of purchasing power for all households of five or more persons. The loss in purchasing power for the next fiscal year would be estimated by the Energy Information Administration and published annually (by August 31) in the Federal Register and the benefit adjusted annually. The benefit would be paid monthly, with the monthly benefit being 1/12 th of the estimated annual loss in purchasing power. However, the bill provides that if the monthly benefit would be too small to pay efficiently on a monthly basis, the benefit would be paid quarterly.

Table 4 shows the CBO's estimate of the maximum benefit amount for the Energy Refund Program for selected years, 2012 to 2019. The annual benefit amount is relatively small. For example, in 2012 a household of four would receive a little less than $400 per year from the program. This contrasts with SNAP, where the benefit for a family of four is expected to exceed $400 per month . However, the years in the budget window 2012-2019 would be very early in the implementation of the cap-and-trade system. In these years, most allowances would be given away rather than auctioned and the reduction requirements are relatively less stringent compared to other years: thus, the costs of the system are relatively low. Costs—and the compensating benefits—may be higher in real terms later in the program.

Figure 3 shows the estimated structure of the benefit, using the 2012 estimate of the benefit for a family of four. It shows that eligibility for the benefit ends relatively quickly above 150% of poverty—reaching $0 at about 159% of poverty. The very rapid reduction in the benefit is, in part, because of its small size in the early years. A larger benefit would produce a more graduated phase-out. If, for example, the real value of the benefit would triple to $1,182 per year, eligibility for the benefit would end at 176% of the poverty threshold.

Disregard of Energy Refund Benefit for Other Low-Income Assistance Programs

H.R. 2454 would require that all federal and federal-state income-based assistance programs disregard energy refund benefits for the purpose of determining either eligibility or benefit amounts. That is, the energy refund benefit would not result in loss of eligibility or reduced benefits in programs such as Medicaid, the Children's Health Insurance Program (CHIP), SNAP, school lunch, or benefits and services funded under the Temporary Assistance for Needy Families (TANF) block grant.

Delivery of Benefits

The bill would require the Secretary of HHS to promulgate regulations to allow states to co-administer the Energy Refund Program with the SNAP program. SNAP benefits are provided through Electronic Benefit Transfers (EBT) cards. EBT is an electronic system used to make purchases, much like a bank automated teller machine (ATM) card. The EBT card authorizes the transfer of funds representing a recipient's benefit from a federal account to a retailer account to pay for purchases. In the SNAP program, EBT is used in all 50 States, the District of Columbia, Puerto Rico, and the Virgin Islands.

The bill also would allow for alternative delivery of the benefit through direct deposit to an eligible household's bank account or other mechanisms approved by the Secretary of HHS.

Administration

Though Energy Refund Program benefits would be determined by federal law and funded by the federal government, the program would be administered by the states. Theoretically, states would have the ability to opt-in or opt-out of the program. This is largely patterned after the SNAP program. Unlike SNAP, however, the program as passed by the House does not provide funding for state administrative costs.

States would have to meet certain requirements in their administration of the Energy Refund Program. They would be required to use public employees for all tentative and final eligibility determinations and use bilingual personnel in those portions of the state where a substantial number of people in low-income households speak a language other than English. States would also be required to screen Energy Refund Program applicants to determine whether they are eligible for three other low-income assistance programs: SNAP, the Children's Health Insurance Program (CHIP), and TANF.

Expansion of the EITC

The EITC is a refundable tax credit that supplements the earnings of low-income workers. The credit is considered refundable because it benefits even those filers who have no federal income tax liability; these filers receive a check from the federal Treasury.

The EITC began as a temporary program in 1975, and was made permanent in 1978 and expanded several times since then. In 2006, the total value of the EITC was $44.4 billion, making it the largest low-income program providing cash, greater than SSI (FY2006 outlays of $36.2 billion) and far greater than TANF cash welfare (FY2006 expenditures of $9.9 billion).

The EITC was first restricted only to tax filers with children. It was not until 1993 when Congress amended the tax code to provide an EITC to childless tax filers. The EITC for tax filers without qualifying children is far smaller than the credit for those with children. It is also available only to those age 25 to 64. Under current law for 2012, the credit for childless filers is 7.65% of earnings up to the maximum amount. In contrast, the credit rate for filers with one child is 36% and the rate for filers with two or more children is 40%. The estimated maximum credit under current law for childless filers in 2012 is $466. All estimates of the credit amount are based on inflation assumptions from the Congressional Budget Office (CBO) as published in March of 2009.

H.R. 2454 would expand the Earned Income Tax Credit (EITC) for certain tax filers without qualifying children whom the Secretary of the Treasury determines have "experienced a reduction in purchasing power" as a result of the American Clean Energy and Security Act (benefits for tax filers with children would not change). Loss of purchasing power would be calculated in the same way as under the Energy Refund Program. The expansion of the EITC proposed in H.R. 2454 would be effective in 2012.

H.R. 2454 would increase the maximum amount of the credit that filers without qualifying children would receive. It would raise the EITC credit rate for childless filers to 15.3%, increasing the estimated maximum credit to $932 for 2012. The EITC is phased out for income over a certain threshold. Under current law, the EITC for childless filers begins to phase out at an estimated income level of $7,620. H.R. 2454 would raise the income threshold at which the EITC is estimated to begin to phase out to $11,640. After 2012, this phase-out threshold would be indexed to inflation.

Figure 4 graphically shows the impact of the proposed EITC changes for childless tax filers who would lose purchasing power due to H.R. 2454 . The bill would increase the maximum credit rate and the income at which the credit begins to phase out. The effect of these two changes would result in expanded eligibility, so that such filers with income below an estimated $17,700 would qualify.

The EITC for tax filers without qualifying children is available only as an end-of-year refund. H.R. 2454 would not alter this provision. (The EITC for tax filers with qualifying children is available on an advance-payable basis, added to paychecks. However, advance payment of the EITC is rarely used.)

The refundable portion of the EITC is considered an outlay from the federal government. (For filers where the EITC reduces, but does not eliminate, federal tax liability, that portion of the EITC is considered a revenue loss.) The CBO estimates that the EITC expansion in H.R. 2454 would increase outlays by $4.4 billion over the five-year period FY2010-FY2014 and by $15.7 billion over the ten-year period FY2010-FY2019.

S. 1733, the Clean Energy Jobs and American Power Act

The Clean Energy Jobs and American Power Act ( S. 1733 ), sponsored by Senators Kerry and Boxer, was introduced on September 30, 2009. The bill is similar to H.R. 2454 in that it would distribute allowances to electricity LDCs and natural gas LDCs to assist consumers. However, unlike H.R. 2454 , the bill as introduced in the Senate does not yet specify the amount of allowances that would be available to LDCs. Also like H.R. 2454 , the Clean Energy Jobs and American Power Act would allocate allowances to states to be used to assist consumers who use heating oil and propane (unlike the House-passed bill, S. 1733 does not mention kerosene users). The percentage of allowances that would be allocated to the states to assist heating oil and propane consumers is not specified in the bill.

S. 1733 would also create a Consumer Rebate Fund in the Treasury to be funded through the auction of allowances, though the bill does not specify the amount of auction proceeds that would be used to fund the account. Beginning in 2026, the bill provides that the President use the funds in the Consumer Rebate account "in accordance with Federal statutory authority to provide relief to consumers and others affected by" the bill's enactment. Similarly, S. 1733 would establish an Energy Refund Program, funded through the auction of allowances, with the proceeds used to "offset energy cost impacts on low- and moderate-income households."

Appendix. Table of Considerations