The Incidence of U.S. Climate Policy : Alternative Uses of Revenues from a Cap-and-Trade Auction

This paper evaluates the costs to households of a carbon dioxide (CO2) cap-and-trade program. We find important variation in the distribution of costs of the policy across 11 regions of the country and income deciles. The introduction of a price on CO2 is regressive, but this may be outweighed by the distribution value of CO2 emissions allowances. We evaluate five alternatives: three are progressive (expansion of the Earned Income Tax Credit and cap-and-dividend approaches), while the others are neutral (reduction in payroll tax) or amplify the regressivity (reduction in income tax). Regional differences are most substantial for low-income households