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JERROLD OPPENHEIM 57 MIDDLE STREET GLOUCESTER, MASSACHUSETTS 01930-5736 USA +1 (978) 283-0897 Fax +1 (978) 283-0957 JerroldOpp@DemocracyAndR www.DemocracyAndR Regulating carbon progressively January 18, 2008 It is important that any cap-and-trade system for carbon emissions be structured to have a progressive impact, i.e., have a lesser burden on (or even a net benefit to) low-income households than others. A basic assumption is that the proceeds of any such system are 100% returned to consumers. In summary, as the chart below illustrates, I would propose to structure the return to customers such that none is returned to the top quintile of earners, the middle 60% receive about what the system costs them so they break even, and the bottom quintile receives more than the system costs them. This proposal would make the system net neutral for those in the middle because their incomes have been nearly stagnant for two decades and they are therefore neither economically nor politically ready for a sharp increase in taxation. Alternatively, the return could be structured to give this group a small net benefit. The relative economic difficulty of the bottom 80% is shown by these data compiled by the Center on Budget and Policy Priorities (CBPP) from US Census data: Here is an illustrative example of how the distribution of costs and benefits might work: Thus, depending on the price of carbon (this illustration approximates CBO’s mid-point), there may be sufficient revenue to return 3.5 times the cost of carbon to the poorest 20% while returning the cost of carbon to others (provided there is no benefit to the top 20%). Alternatively, this revenue would cover twice the cost to the poorest 20% and provide revenue for other purposes, such as research and development of sustainable technologies and mediation of worker dislocation. Many other alternatives of progressive distribution are possible. The result of the first option – benefit to bottom 20%, no benefit to top 20%, b