ANALYSIS OF THE KERRY-LIEBERMAN CAP-AND-TRADE BILL

The “American Power Act” proposed by Sen. John Kerry and Sen. Joseph Lieberman
would establish a broad-based U.S. cap-and-trade system. Using an input-output model
we estimate the distributional cost of the cap-and-trade portions of the bill to households
by income, age group, U.S. region and family type, as well as the value of various
industry subsidies granted by the bill. In a typical year (2020), households would face a
gross annual burden of $125.9 billion per year or $1,042 per household, with costs
disproportionately borne by low-income households. On a net basis, the large quantity of
allowances distributed freely to companies leads households in the top income quintile to
benefit financially, redistributing to these households roughly $12.3 billion per year from
the bottom 80 percent of earners. Overall, we estimate the bill would reduce U.S.
employment by roughly 522,000 jobs in 2015, rising to over 5.1 million jobs by 2050.
Finally, we explore two theoretical issues: (1) we offer microeconomic evidence that
shareholders rather than households are most likely to benefit from the bill’s free
allowances to electricity and natural gas utilities; and (2) we show how the bill’s
exclusion of petroleum refiners from quarterly auctions is likely to increase rather than
decrease allowance price volatility, directly contradicting the intent of the legislation.