Tuesday, August 4, 2009

Impact to Consumer of Cap-and-Trade program may be understated

A recent report from the US government, it would appear on first blush that the impact to the average US household would be minimal. As mentioned in U.S. consumers spared big costs in climate bill, the average household would see their energy costs rise $114. Is this a true cost of the program to consumers? Is that providing a full picture?

According to the US budget, the amount the program would generate on an annual basis is $83 Billion USD (Remarks by the President on the Fiscal Year 2010 Budget). There are 114,300,000 homes in the United States (Current Population Report). The $83 Billion that would be generated are the offsetting allowances the energy industry will purchase. These are costs that would ultimately pass on to the consumer. That would equal $739 per household, quite a bit higher than the $114 suggested by Congress.

But let's take a closer look. The $83 Billion represents the costs of allowances purchased by the industry to cover emissions that could otherwise not be mitigated by reductions or offsetting programs. The industry would have also invested to produce these mitigations, costs they otherwise would not have incurred. From the performance of past market based mechanisms to control emissions, industry has been very effective at reducing emissions. We could be conservative and assume that 50% of the target could be met through mitigations and 50% through the purchase of allowances. The industry then would spend up to another $83 Billion on mitigations (not more, or the market would have bought allowances as that would have been less costly).

So the total possible impact to the industry would be as high as $166 Billion, for a total cost per household of $1448. Don't get me wrong, a market based mechanism like cap-and-trade has proven to be the most effective and efficient method to achieve emission reduction. But a fair assessment of the total costs, which will ultimately effect consumers, needs to be part of the discussion.