Energy Center

Cap and trade costs can be offset

May 17, 2009

 

 

Electricity would see the highest increase, and Indiana generates most of its electricity from coal, so the cost increase would be substantial, as much as 40 percent.

The good news is that today Indiana has one of the lowest electricity costs in the country at around 6.5 cents per kilowatt hour compared to the national average of 9.7 cents. So even with substantial cost increases, our electricity price still would be below the national average, but not nearly so much lower as now.

Any climate change legislation, whether cap and trade or carbon tax, would increase costs of all fossil energy products, which is the only way to provide incentives for all of us to consume less fossil energy.

This price increase is, in fact, regressive because poor people spend a larger fraction of their incomes on energy than do the richer segments of society. For that reason, many believe that it is important to couple cap and trade with a carbon rebate.

By one analysis, a carbon rebate to every taxpayer plus Social Security recipient of about $420 would offset the increased cost and leave lower and middle income taxpayers whole or even slightly better off while still providing an incentive to shift our consumption patterns away from fossil fuels. Maybe the size of the rebate should vary by state depending on the estimated magnitude of the energy cost increases. The point is that it is clearly possible to have a revenue neutral climate policy that increases fossil energy prices – giving us all an incentive to consume less – while at the same time giving us a carbon rebate to spend as we choose.

Reducing greenhouse gasses and reducing the threat of global warming does not have to mean income sacrifice. It does require higher energy prices, which provide us the incentives we need to consume less fossil fuels.

 

Tyner is a Purdue University professor who has worked in energy economics.

 

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  • Wally Tyner for the Journal and Courier
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