How Do the Costs of Climate Policy Affect Households? The Distribution of Impacts by Age, Income, and Region

This paper explores the near-term effects on household expenditures of legislative cap-and-trade proposals that restrict greenhouse gas emissions. We evaluate optimistic and pessimistic assumptions about the uses of allowance value, compared to relatively predictable results from a cap-and-dividend approach. We find the allocation of emissions allowances is significantly more important to distributional outcomes than the initial costs or regional variation of costs. Older households—age 65 and older—incur relatively less cost than other age groups due to automatic inflation indexing of Social Security. Lowincome households spend a larger fraction of earnings on energy than wealthier households; however, the distribution of allowance value and indexing of government programs offset this spending. High-income households fare well because of allowance value that ultimately flows to capital owners. The largest burden as a percentage of income falls on middle-income households, which receive neither low-income rebates nor value through ownership of capital stock.