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. 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. 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. 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. 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. 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. 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. 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.