Is Cap-and-Trade an Indirect Consumer Tax?
GAO testimony discussing federal options for distributing emissions allowances under a "cap-and-trade" climate change program concluded that, "regardless of the mechanism for distributing allowances, consumers will bear most of the costs of a cap-and-trade system because most regulated entities will pass along their increased costs in the form of increased prices...." The report also explained that "these costs could be largely offset depending on how revenues are used."

The potential distributional effects of a cap-and-trade system were also discussed. GAO explained that "in the absence of compensatory measures by the government, a cap-and-trade program could have a disproportionate impact on low-income households, since they generally spend a higher percentage of their income on energy and energy-intensive goods and services than do higher-income households."

GAO also noted that "price increases could increase government payments-such as Social Security benefits and federal pensions, which are indexed to prices-and reduce personal income tax collections." Moreover, depending on program specifics, "program, a cap-and-trade program could increase the administrative burden on the government relative to a business-as-usual situation. For example, markets for emissions allowances would require oversight, and the distribution of auction revenues could require additional personnel or a new entity to administer payments."

While the impact of a cap-and-trade program on the federal deficit and consumer income are undetermined at this time, GAO's testimony makes clear that the one certain effect of a cap-and-trade program would be to provide government officials with major new mechanism for allocating costs and benefits across the economy. Ideally, any and all such allocation decisions would be made through open, transparent processes.

See GAO testimony