The fourth section outlines how active GHG emission reduction legislation in the 111 th Congress would address these concerns. By limiting the number of GHG emissions that can be generated in a given year, a cap-and-trade system would attach a new cost to activities that generate emissions, primarily fossil fuel combustion. In either case, households are expected to ultimately bear the brunt of the costs of the cap-and-trade program. Emission Allowance Value Distribution

An emissions cap would be partitioned into emission allowances. The emission allowances would become a valuable new commodity, potentially accounting, in aggregate, for tens or hundreds of billions of dollars. The value of the allowances would be derived from their scarcity (i.e., the quantity limit imposed by the cap). In designing a cap-and-trade program, policymakers must decide how and to whom to distribute the emission allowance value. This would be due to the ability of covered entities (e.g., power plants, petroleum producers/importers, large industrial facilities) to pass on the costs incurred from complying with the program. Potentially Regressive Effects of Cap-and-Trade

Without some form of allowance value redistribution, lower-income households would likely bear a disproportionate share of the costs related to an emissions cap, because those households generally spend a higher percentage of their income on energy-related goods and services than do higher-income households. On average, lower-income households already pay a larger share of their income toward the costs of their residential energy and for gasoline. These households are also less likely to have the financial resources to improve the energy efficiency of their dwelling units or to purchase energy efficient appliances or cars, which could help reduce high energy costs. Arguments for Alleviating Regressive Impacts

Given the disproportionate impacts that a cap-and-trade system could have on lower-income households, some have argued that allowance value should be used to alleviate the burden those households would likely face. Direct Assistance to Households: Considerations

If Congress enacts a cap-and-trade program and determines to use some portion of emission allowance value to directly assist households, policymakers would face several questions when seeking to implement this objective. A primary consideration is which households or persons should receive allowance value: should value be distributed evenly to all households, or should particular household groups receive a higher proportion? Moreover, should policymakers seek to account for different costs that households in different regions may experience? Mechanisms for Returning Funds to Households

Policymakers have a variety of options available for distributing allowance value to households. In evaluating these options, there are a number of considerations that might be relevant to policymakers in choosing and implementing a distribution system. Among considerations are the ability of a system to reach large numbers of households, the existence of an administrative infrastructure and the costs of distributing funds, and the ease of tailoring benefits to different consumer incomes and regions of the country. 2454, the American Clean Energy and Security Act of 2009

The American Clean Energy and Security Act ( H.R.
By limiting the amount of greenhouse gas (GHG) emissions that can be generated in a given year, a cap-and-trade program would attach a new cost to activities that generate emissions, primarily fossil fuel combustion. To the extent they are able, the capped entities (e.g., power plants, petroleum producers/importers, large industrial facilities) would likely pass on the costs of complying with a cap-and-trade program to household and business consumers. Thus, a cap-and-trade system is intended (and expected) to increase the price of coal, oil, natural gas, and the products they help create, including electricity.
Congress can affect the distribution of the costs imposed by an emissions cap through emission allowance allocation. In a cap-and-trade system, one emission allowance typically represents the authority to emit one metric ton of GHG emissions. Emission allowances would become a valuable new commodity, potentially accounting, in aggregate, for tens or hundreds of billions of dollars. Therefore, when designing a cap-and-trade program, one of the more controversial and challenging questions for policymakers is how, to whom, and for what purpose to distribute the emission allowance value—the actual revenue or potential revenue (i.e., the value of the allowance as an asset) represented by the allowances.
Without redistribution of allowance value, cap-imposed costs would ultimately be borne by energy consumers, both businesses and households. In particular, lower-income households would likely bear a disproportionate share of the costs related to an emissions cap, because those households generally spend a higher percentage of their income on energy-related goods and services than do higher-income households. Moreover, lower-income households already pay (on average) a larger share of their income toward the costs of their residential energy and for gasoline. These households are also less likely to have the financial resources to improve the energy efficiency of their dwelling units or to purchase energy efficient appliances or cars, which could help reduce high energy costs. For these and other reasons (including federal precedents), some have argued that allowance value should be used to alleviate the burden households, especially lower-income households, would likely face.
Congress would face several questions when seeking to implement this objective. A primary consideration would be which households or persons should receive allowance value: should value be distributed evenly to all households, or should particular household groups receive a higher proportion? Moreover, should policymakers seek to account for different costs that households in different regions may experience?
Policymakers have a variety of mechanisms they could use to distribute emission allowance value to provide assistance to households. In evaluating these options, there are a number of considerations that might be relevant to policymakers in choosing and implementing a distribution system. Among considerations are the ability of a system to reach large numbers of households, the existence of an administrative infrastructure and the costs of distributing funds, and the ease of tailoring benefits to different consumer incomes and regions of the country. This report examines and compares several mechanisms with these considerations in mind.
In addition, this report outlines how GHG emission reduction legislation in the 111th Congress, including H.R. 2454, the American Clean Energy and Security Act of 2009, and S. 1733, the Clean Energy Jobs and American Power Act, would address the potential cap-imposed impacts to households.