MIT study: income growth far exceeds household investment costs under climate legislation, and the poor come out ahead

Last week, MIT’s Joint Program on the Science and Policy of Global Change released a study estimating the economic impact on households from enacting comprehensive climate and energy legislation, such as the American Power Act (APA) proposed by Senators John Kerry and Joe Lieberman mid-May. The study includes estimates of what it terms household “costs.” Since we expect benefits from limiting pollution (why else would we want to limit emissions?), throughout this blog I will instead refer to these as “investment costs,” since that is indeed what they are.

Nationally, the authors find the following:

• On average, households would need to invest $347 per year (less than a dollar a day) through 2050 for climate protection (see graph further below for a breakdown of investment cost by household income). (Parenthetically, last year, opponents of legislation mistakenly reported household costs from a study by the same authors as the average market value of pollution allowances per household. Despite being personally corrected by the authors, they nevertheless continued to use the same number).
• Consistent with both non-partisan and industry-sponsored analyses, increases in household income would be far greater than investment costs, making climate mitigation more than affordable. Household income would on average be over $4,600 higher per year than today’s levels, between now and 2050 (see graph further below for a breakdown of income gains by household earnings).
• Consistent with analyses by the Congressional Budget Office (CBO), low income households would see a net gain (depicted as negative values in graph further below).

These findings are especially encouraging given critical factors left out of the analysis: 1) environmental benefits are not estimated; “net” gains refer only to household costs (due to higher energy prices) minus rebates from the proceeds of pollution allowances; 2) as the authors are careful to point out, energy efficiency provisions in the legislation are not modeled, which would further bring down costs; 3) job creation from clean energy production is not estimated, which would boost household income as people are put back to work from a depressed economy; and 4) cost-reducing break-through innovations, which would likely come just when costs increase as the cap tightens, are not (and cannot be) modeled.

The report focused on distributional impacts of two general allocation formulas (how allowance value is redistributed back to households from the proceeds of pollution allowances) contained in various climate legislation bills under consideration in the House and Senate. One formula, representative of bills such as Waxman-Markey (which passed the House last June) and Kerry-Lieberman (introduced mid-May in the Senate), varies the distribution of allowance value across states. This scheme helps equalize impacts across states by making adjustments for different levels of energy consumption and carbon emissions. The other formula, representative of the Cantwell-Collins proposal (Senate), redistributes allowances on a flat per-capita basis equally across all states; it produces a slightly less balanced distribution of costs across regions, but as the regional allocations phase out over time, the two schemes converge.

Overall, both allocation schemes are progressive, with lower income households paying a smaller share of their income (indeed, negative for the lowest income brackets) than wealthier households. And by 2050, average household incomes increase by approximately 45%, or .93% per year.[i],[ii]Taking the mid-point for every income bracket (except for households earning $150,000 or more, for which I assumed a starting income of $150,000), I grew household income by .93% per year through 2050 ( growth rates by income bracket are not yet available from the authors, however it is unlikely that they would differ by much). The figure below shows these calculations (negative values are a negative cost, i.e. net gain):

** NPV refers to the net present value, which puts future dollar amounts into one common unit of measurement, 2006$. NPV is calculated using a 4% discount rate.

Results are similar for the per-capita rebate (and therefore not presented by the authors), which is only slightly less progressive.

Regionally, results are somewhat mixed. In the early years, though not perfectly, the regional allocation formula significantly moderates regional disparities: “by redistributing more of the allowance value to poorer households and to central and southern regions of the U.S., [allowance value is shifted] away from wealthier households and the coasts. In fact the bills redistribute to such a degree that they tend to result in net benefits for the poorest and for some regions of the country, such as the South Central states, Texas, and Florida, who would generally be expected to bear the highest costs.” The per capita formula has slightly different impacts: it tends to be more neutral by income class and produces a slightly less balanced outcome by region (see p. 38 and 39 of the report for discussion).

Nevertheless, differences between regions are very modest. Some areas with lower emissions gain slightly in the earlier years, while others with higher emissions marginally lose. The spread between the two is +.2% to -.25% in 2015 and 2020 (see Figures 11 and 12 of the report—here a negative value denotes a loss). Impacts become negative for all regions in later years, but still only range between roughly -1.5% to -1.85% by 2050 (keep in mind that these costs are still much smaller than increases in household income, as demonstrated in the graph above).

One notable exception is Alaska, which bears a significantly higher burden than any other region, due to it having by far the highest energy intensity among all regions and to being a large energy producing state with a small population. By 2030, Alaska is worse off by approximately -2.6%, and by 2050 -5.3%. However, it’s important to keep in mind that Alaska is also by far expected to suffer the worse consequences of climate change.  Indeed, temperatures today have increased twice as much in Alaska as the global average , with evacuation plans already being developed in response to sea level rise, infrastructure beginning to fall apart (e.g. buildings sinking and roads cracking as the frozen ground beneath melts), and loss of critical hunting grounds for polar bears as sea ice melts. Alaska also receives a disproportionate amount of Federal tax revenue, $1.87 for every $1.00 paid in Federal income taxes (click here and here). As a result, Federally-funded programs that lower states’ mitigation costs, or help them adapt to negative climate impacts, will disproportionately help poorer states.

All told, MIT’s study confirms what we have already learned from numerous other studies: comprehensive climate legislation is not only affordable, it is a good investment in our future.

[i] Communications with the author.

[ii] Under the no-policy case, income increases slightly faster, at .98% per year.