More on the Social Costs of Carbon Mitigation

by Marlo Lewis on January 24, 2014

in Features

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As discussed yesterday on this site, a new report by economist Roger Bezdek demonstrates that carbon energy has immense social benefits, and, consequently, carbon pricing schemes can have devastating social costs.

Today’s post takes a closer look at Bezdek’s discussion of the health risks of policies, such as carbon taxes, cap-and-trade, renewable energy quota, and carbon capture and storage (CCS) mandates, that raise household energy costs.

Although fuel poverty is typically discussed as a European problem, millions of Americans also face harsh tradeoffs between paying their utility bills and purchasing other necessities. The relevant concept here is energy burden, defined as the “percentage of gross annual household income that is used to pay annual residential energy bills” for electricity, heating, motor fuel, and cooking fuel. More simply, energy burden is the “ratio of energy expenditures to household income.”

For low-income households, small increases in energy bills translate into large increases in energy burden:

For example, consider the case where one household has an energy bill of $1,000 and an income of $10,000 and a second household has an energy bill of $1,200 and an income of $24,000. While the first household has a lower energy bill ($1,000 for the first household compared to $1,200 for the second), the first household has a much higher energy burden (10 percent of income for the first household compared to five percent of income for the second).

In other words, carbon taxes or their regulatory equivalent are regressive, because energy expenditures consume a larger portion of the budgets of low-income households than high-income households. The regressivity of high energy costs is greater than you might suspect. According to Bezdek:

  • Families earning more than $50,000 per year spent only 4% of their income to pay energy-related expenses.
  • Families earning between $10,000 and $25,000 per year (29% of the U.S. population) spent 13% of income on energy.
  • Those earning less than $10,000 per year (13% of population) spent 29% of income on energy costs.

These percentages are higher still when energy expenditures are compared to after-tax income. For the 8.7 million Americans earning $10,000 a year and less, energy costs consume more than 69% of after tax income:

Estimated U.S. Household Expenditures as a Percentage of Income, 2010 Bedzek Jan. 2014

Even without carbon taxes, cap-and-trade, or national renewable energy quota, the energy burden of all U.S. households has increased significantly over the last decade, especially for low-income households:

  • For households earning less than $10,000 per year, the percent of after-tax income consumed by energy costs increased from 36% to 69%.
  • For households earning between $10,000 and $30,000 per year, the percent of after-tax income consumed by energy costs increased from 14% to 22%.
  • For households earning between $30,000 and $50,000 per year, the percent of after-tax income consumed by energy costs increased from 10% percent to 16%.
  • For households earning more than $50,000 per year, the percent of after-tax income consumed by energy costs increased from 5% to 8%.

In a speech in December last year, President Obama decried what he described as the “rising inequality” in our economy. He was especially concerned about impediments to upward mobility that prevent low-income kids from becoming middle- and upper-income adults. He did not mention energy.

But, if Bezdek is correct, in 2010 “the poorest households were paying, in percentage terms, nearly nine times as much for energy as the most affluent households.” That sure looks like a handicap in the race of life.

Energy Costs as a Percentage of Annual After-Tax Income 2001-2010

You might then think the President would make it a priority not to add to the ongoing increase in household energy burdens. However, he favored a cap-and-trade program which he acknowledged would cause electricity rates to “necessarily skyrocket,” and his administration is waging a war on coal that can only increase household energy costs.

On average, U.S.  households earning less than $50,000 a year spend more on energy than on food, medicine, clothing, insurance, or healthcare.

U.S. Household Expenditures Energy, Healthcare, Food, Clothing, Insurance

High energy costs already impose real sacrifices on low-income households. Impacts include reduced expenditures for food, medicine, and education, reduced savings, and late credit card payments.

Tradeoffs Imposed by High Energy Prices

Anti-carbon tax and regulatory policies that would make energy even more costly directly imperil the health and welfare of low-income households. The chart below shows the health risks created by today’s high energy costs.

Potential Health Impacts of Increased Energy Costs on Low Income Persons

Bezdek reviews several other health or safety risks resulting from high energy prices including:

  • Adverse impacts on GDP, income, and employment, which can increase illness and mortality rates.
  • Inadequate heating or cooling of homes during cold winters or summer heat waves.
  • Substitution of risky alternatives for central heating when households can’t pay their utility bills.
  • Financial stress contributing to poor credit ratings, missed mortgage payments, evictions, and household instability.

I’ll have more to say about this valuable study in a future post.




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