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Economic Impact of the CLEAR Act

The Carbon Limits and Energy for America's Renewal (CLEAR) Act would benefit the majority of households in every state, yet interstate differences in jobs and family income may be of concern to policy makers.

By James Boyce, Matthew Riddle | Political Economy Research Institute | 2010

CREDIT: Josef Stuefer (CC).


This study examines the economic impacts of the Carbon Limits and Energy for America's Renewal (CLEAR) Act, focusing on household incomes and job creation across the states.

The CLEAR Act would put a cap on the use of fossil fuels so as to reduce emissions of carbon dioxide, the most important greenhouse gas. Any policy that limits the use of fossil fuels will raise their price, impacting real family incomes. But the net impact on family incomes depends on who gets the money that is paid by consumers as a result of higher fuel prices.

The CLEAR Act recycles 75 percent of this money to the public in the form of equal monthly dividends, and devotes the remaining 25 percent to clean energy investments. Dividends will insulate household incomes from the impact of higher fossil fuel prices. Expenditures from the Clean Energy Reinvestment Trust (CERT) Fund will create jobs in energy efficiency and renewable energy.

Dividends are the same for all, so the net impact on family incomes (dividends minus the impact of carbon prices) will vary among households depending on the amount of fossil fuels they consume directly and indirectly. Families who consume more will have lower net benefits; families who consume less will have higher net benefits. But regardless of their consumption level, all will have an incentive to limit their use of fossil fuels in response to the market price signals resulting from the cap.

Because high-income households generally consume more fossil fuels than low-income and middle-income households, they will tend to pay more as a result of higher fuel prices than they receive as dividends. These income-related differences in net impacts also apply at the level of interstate comparisons: all else equal, states with lower per capita incomes will receive higher net benefits from the CLEAR Act dividends than states with higher per capita incomes.

But states also differ in other ways that will affect net impacts, such as the carbon intensity of their electricity supplies. At any given income, families in states that get most of their electricity from coal-fired plants will face bigger price increases than families in states that get most of their electricity from less carbon-intensive sources. This effect is offset to some extent, however, insofar as more coal-intensive states tend to have lower average incomes.

We find that interstate differences in impacts on household incomes are small: much smaller than differences across the income spectrum, and vastly smaller than the differences in other federal programs, such as defense spending. As a result, the CLEAR Act delivers positive net benefits to the median household—and to the majority of households—in each and every state.

Nevertheless, interstate differences may be of concern to policy makers. If so, there are two ways to address these concerns: (i) by adjusting dividends in the initial years of the policy, by providing state-specific dividends that equalize net impacts on the median household in each state; or (ii) by allocating investments under the CERT Fund so as to offset these interstate differences.

Interstate differences could be eliminated altogether by modifying the Act so as to provide state-specific dividends, calibrated to equalize net impacts on median households across the states. To avoid creating perverse long-term incentives for states to rely on dirty energy, these dividends could converge towards the national average over time. Under this approach, initially 66 percent of total carbon revenue would go to a base dividend received by residents in every state, and 9 percent to dividend supplements that vary based on the impact of higher fossil fuel prices on median households.

Interstate differences alternatively could be addressed in the allocation of the CERT Fund, by directing more investment to states with higher unemployment and/or greater potential economic dislocations from the shift away from fossil fuels. We estimate that the CERT Fund will create roughly 360,000 jobs nationwide. This estimate only counts jobs created by public expenditure; it does not count net job creation from shifting private expenditure away from fossil fuels and towards more labor intensive spending on energy efficiency and renewable energy. An advantage of this approach is that it focuses attention on the production side of the economy, where interstate differences are likely to be more significant, rather than on the consumption side, where interstate differences are relatively small.

External Link: The Economic Impact of the CLEAR Act [PDF]

Read More: Economy, Energy, Environment, Jobs, United States, Americas

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