THE BLOG
08/09/2009 05:12 am ET | Updated May 25, 2011

Waxman-Markey's "Postage Stamp" Costs Transfer Wealth from the Poor to the Rich

The Democrats used a nice talking point during the House's Waxman-Markey climate bill debate. They said that the bill will only cost a "postage stamp per day." The basis for the talking point was a Congressional Budget Office (CBO) report estimating an annual cost of "$175 per household in 2020" or "48 cents a day." This was parroted by Al Gore, Joe Romm and Climate Progress, and Think Progress. Paul Krugman's June 22 NYT blog cites the CBO study at just 18 cents a day per person.

But there are problems with the "postage stamp" approach. Dr. James Boyce of the University of Massachusetts, Amherst, notes that the CBO arrived at the "postage stamp" cost by first assuming all costs are recycled to consumers, and then subtracting only the portion of costs that are explicitly directed elsewhere: the purchase of international offsets, the production cost of domestic offsets, true economic costs (e.g. of energy efficiency), and overseas spending on adaptation and mitigation. The CBO estimated the bill's "net impact" not the "cost to households" from higher fuel prices.

CBO assumed that when companies receive free allowances through Waxman Markey's giveaway, consumers would benefit from lower prices for goods and services, even though that did not happen in Europe. They also assumed that the value of the free allowances will be passed along to the shareholders (who live in households?) of the companies receiving the free allowances. The CBO understood that most shareholders are in the wealthiest income quintile. This leads to the next problem with allocation in Waxman-Markey, and you won't hear this in the Democratic talking points: the Waxman-Markey bill actually transfers wealth from the poor to the rich.

Let's contrast the CBO's estimates of consumer net impact across the 5 income quintiles (5 is the wealthiest) in the Waxman-Markey allocation (first set of numbers below) with a Cap and Dividend policy (second set - an equal per capita rebate to consumers of $605), as calculated by Professor Boyce. Comparing the two (third set), Boyce draws the following conclusion:

"Compared to a cap-and-dividend policy, the allocation of allowance value under Waxman-Markey takes $140 per household per year from the poorest fifth of American households, $95/year from the next fifth, $165/year from the middle fifth, and $130/year from the second-richest fifth, and transfers this money ($530/year in total) to households in the richest fifth of the population."

Waxman-Markey

Quintile | Dollars paid back | Share of payback

1 | $465 | 15.4% |
2 | $510 | 16.9% |
3 | $440 | 14.6% |
4 | $475 | 15.6% |
5 | $1135 | 37.5% |

Cap-and-Dividend
Quintile | Dollars paid back | Share of payback

1 | $605 | 20% |
2 | $605 | 20% |
3 | $605 | 20% |
4 | $605 | 20% |
5 | $605 | 20% |

Quintile | Difference (WM - C&D)
1 | - $140
2 | - $95
3 | - $165
4 | -$130
5 | +$530

Four out of five Americans would do better with a dividend.

The Democratic leadership painted themselves into a corner by deciding to give away permits (which are like money) to get votes. This is a typical Congressional strategy. But in this case, the short term strategy which got Waxman Markey the 219 votes it needed could hurt the Dems in 2010 or 2012 if prices go up. Fuel and electricity costs are highly visible, but under Waxman-Markey, the benefits to consumers will be mostly invisible. People will see the costs of the transition every time they fill up their gas tank and they hear the news report the latest gas prices. The CBO assumes that 65% of benefits of free allocation to local utility companies in Waxman-Markey go to the industrial and commercial customers, not to residents. Presumably savings filter back to people in prices of goods and services and in stock prices, but these signals are mixed in with other factors. In the end, people will be thinking about the gross costs, not net costs.

A better strategy would be to acknowledge that there will be costs, but to offer rebates and dividends that compensate consumers at all levels. Instead of gambling that the costs of addressing climate change will be low, proponents would level with the American people, "Yes, we know addressing climate change may have some costs. That is why we are giving you a rebate, and making sure the corporations don't profit off this important transition. It is only fair that if there are any profits to be had, they are recycled back to you, the people of America, who are funding this transition to clean energy and efficient transportation for our grandchildren and future generations." How would opponents respond?

Consumer compensation could be bi-partisan, with Rep. Chris Van Hollen (D-MD) joining with Republicans such as Governor Arnold Schwarzenegger and Senator Bob Corker (R-TN), who like the dividend because it doesn't swallow revenues into the black hole of general fund deficits or go for more pork barrel spending.

There's still time. The Senate has just started to debate their version of the bill. The Senate version could give the permits directly to the people (the voters) through Cap and Dividend, Carbon Share, or a tax rebate similar to the payroll tax swap. A Senate consumer compensation strategy would be an improvement over the House's "postage stamp" strategy.