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In a landmark speech last week that deserved more attention than it received from the mainstream media, former U.S. vice president and Nobel Prize laureate Al Gore challenged the United States to produce 100% of its electricity from carbon-free renewable energy within 10 years. To help low-income and working families cope with the cost of the transition, Gore suggested cutting payroll taxes and making up the difference with CO2 taxes. Peter Orszag, director of the Congressional Budget Office (CBO), floated a similar idea earlier this month in a Washington Post op-ed. Citing recent CBO research, Orszag suggested that a direct payment system could offset increased energy costs and actually make lower-income households “financially better off because the rebate would be larger than the average increase in their spending on energy-intensive goods.”
CGD senior fellow David Wheeler takes these ideas an important step further in a fascinating new working paper: Why Warner-Lieberman Failed and How to Get America's Working Families behind the Next Cap-and-Trade Bill. Many observers have attributed the Senate’s recent failure to pass the Warner-Lieberman cap-and-trade bill to global warming denial and disinformation campaigns by fossil energy companies. But, as Wheeler points out, public concern over global warming is now so widespread that other explanations are needed. Why didn't more senators support the country's first cap-and-trade bill?

To find out, Wheeler uses econometric analysis to investigate alternative explanations. These include measures of conservatism (based on prior voting records), state fossil fuel dependency, party affiliation, gender, campaign contributions from energy companies, and an index of state-level climate threats. The most powerful explanatory variable: state median income. Specifically, senators representing states with lower average incomes were much more likely to vote against the bill than senators representing states with higher average incomes. Wheeler posits that this is because of serious worry in the lower-income states about the impact of higher energy prices, since poor families spend much more of their income on energy than do more affluent households.
The solution, he suggests, is to address these concerns and win the support of working families by including in the next cap-and-trade bill a provision for equal per capita payments of part of the proceeds of carbon permit auctions. He calculates that an annual payment of $500 per person, or $2,000 for a family of four, would be sufficient. Wheeler writes in his conclusion that the results from his model suggest that:

More senators from states with below-median incomes will support Warner-Lieberman, regardless of their conservatism or their states’ fossil-fuel dependency, if direct payments from emissions permit auctions make below-median households better off. Assuming that permits are fully auctioned, break-even for below-median families appears to require direct payments of 30% of total auction revenues. This could be doubled to ensure support, however, while still leaving a vast sum ($60 billion/year for an annual $150 billion auction) to compensate displaced US workers (particularly coal miners and processors) and promote investment in clean technology. The direct payment system could be vested in a trust fund that is separate from standard government accounts, and distribution could be delegated to the Internal Revenue Service. This would be no more difficult than the administration’s current $600 distribution to individuals for macroeconomic stimulus.
The direct-payment system would not have much effect on the overall distribution of income, but it would have a powerful effect on the margin where household energy expenditures are determined. Simply allocating a large share of the permit auction proceeds on an equal basis to all Americans will actually turn a large profit for poorer Americans, even after the impact of Warner-Lieberman on energy and fuel costs is taken into account. This will make many below-median Americans absolutely better off and – a critical factor for perceptions of fairness – better off relative to more affluent Americans as well. My econometric and simulation results for income strongly suggest that these payments will shift the votes of many senators whose conservatism and states’ fossil dependency would otherwise keep them from supporting Warner Lieberman. Given the urgency of the climate problem, Congress should consider such a direct payment system as soon as possible.

To maximize popular appeal, he proposes that the per capita auction revenue payments be "represented by share certificates that would be issued to individuals on request, or held in trust by a public corporation chartered to manage the funds." In an appendix Wheeler provides an illustrative example of such a "Certified Atmospheric Share (CASH) certificate, to be payable from United States Carbon Account Proceeds (USCAP). CASH certificates would be tradable, so families that wish to sell their future income streams to, for example, generate funds for insulation, high-mileage cars, or other energy efficiency measures, would have the opportunity to do so. Certified Atmospheric Share (CASH) certificate

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.