How the Global Warming Bill Will Affect Your Wallet

How much will the Waxman-Markey bill cost the average American?


In the coming weeks, Congress will likely consider a massive global-warming bill to create a new cap-and-trade program to regulate greenhouse gas emissions. President Obama praised the bill, dubbed "Waxman-Markey" for its co-sponsors, as a vital step to "create millions of new jobs all across America."

But Obama and supporters of the bill are now facing a litany of charges that the bill is not a good deal for American consumers. Critics on both sides of the political aisle complain that the bill does both too little and too much. Environmentalists say it's too industry-friendly and doesn't do enough in making major inroads against climate change. In May, Greenpeace and a number of other environmental groups such as Friends of the Earth and Public Citizen sent a letter to Congress that said they cannot support the bill on grounds that it gives too many favors to polluters and "does not do what the science says is necessary to avoid the worst effects of global warming and to rescue the climate." Meanwhile, the Heritage Foundation, a conservative think tank, argues that the bill goes too far in regulating energy prices and would cost an American family an average of $1,500 a year in energy bills. That estimate, however, varies from what the nonpartisan Congressional Budget Office has predicted for similar cap-and-trade plans. Here are a few things to know about Waxman-Markey:

[See 5 Future Technologies That Will Slash Home Energy Bills.]

What's in the bill? Cap and trade sets a limit on the amount of greenhouse gases that a factory, business, utility, or other energy producer is allowed to emit. Waxman-Markey would set a cap that's intended to reduce greenhouse gas emissions by 15 percent by 2020. The trade part gives greenhouse-gas emitters—which include some factories and energy producers—opportunities to buy a certain number of permits that allow them go over the cap. The government sells these permits in an auction, which creates a market for carbon permits. Since the price for emitting carbon dioxide would be set by all the individuals and organizations competing in the auction, the idea is that cap and trade is a more "free-market" method of controlling pollution than the government simply taxing or regulating it. The market for carbon permits is estimated to grow to $60 billion by 2012 if the bill is enacted.

Impact on consumers. No one knows exactly how much the Waxman-Markey bill will cost Americans. Douglas Elmendorf, the director of the Congressional Budget Office, testified before the Senate Committee on Finance that cap-and-trade program costs for energy producers would be "passed along to consumers of energy and energy-intensive products," (which would be in the form of higher prices). The CBO estimates that a 15 percent reduction in carbon emissions by 2020 through a cap-and-trade plan would cost the average American household $1,600 a year, with low-income households carrying a heavier burden. Lower-income households tend to spend more of their income on energy than higher-income households, because it is difficult to cut back on necessities like heating. The costs of the Waxman-Markey would differ from the CBO's estimate in a few ways. The costs could be greater because the billaims to reduce not just carbon but other greenhouse gases such as methane. The costs could also be lower: When the federal government auctions off the permits, it gets revenue back that is likely to be spent.

What will it save me? Some of the money raised from auctions will go to the consumer. For example, to try to reduce the impact of the bill on those with low incomes, Waxman-Markey would create a new tax credit that will give some money back. The CBO estimates that in 2012, this tax credit would amount to $161 for a single person or $359 for a five-person household. That year, only single people with incomes of less than $23,000 or families with at least two children making less than $42,000 would be eligible for the tax credit.

Free allowances. Here's what's upsetting Greenpeace and some other environmental groups: Instead of auctioning off of all the permits to pollute, Waxman-Markey would give many away free, thus decreasing the amount of revenue that could be returned to Americans. The CBO calculates that from 2010 to 2019, Waxman-Markey will give the government $693 billion to spend in the form of free allowances. Most of these allowances go to states, natural gas distributors, and federal agencies. But these freebies might not be so bad for consumers, as they could ease the burden on energy utilities, thus decreasing the $1,600 CBO estimate of how much Americans would spend in annual energy costs. Robert Stavins of Harvard University calculated that 53 percent of the total allowances are being spent on consumers for purposes like home heating.