Democratic cap and trade plans have credits to offset electricity rate increases

In her new book, Going Rogue , Sarah Palin says President Barack Obama's support for a cap-and-trade plan is "misguided."

"The president has already admitted that the policy he seeks will cause our electricity bills to 'skyrocket.' Sadly, those hit hardest will be those who are already struggling to make ends meet. So much for the campaign promise not to raise taxes on anyone making less than $250,000 a year."

Before we examine her claim, here's a quick summary of cap and trade for those who aren't familiar with it: To slow climate change, the government would set a cap on carbon dioxide and other greenhouse gas emissions. To comply, companies such as electric utilities must either upgrade to cleaner technologies or buy credits — also known as allowances — to continue polluting. Companies can buy and sell the credits as necessary to conduct their business.

We were familiar with Barack Obama's original quote from his campaign for president. It came from a videotaped interview he did with the San Francisco Chronicle editorial board very early in the campaign in January 2008.

"Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket," Obama told the Chronicle . "Coal-powered plants, you know, natural gas, you name it, whatever the plants were, whatever the industry was, they would have to retrofit their operations. That will cost money. They will pass that money on to consumers."

(Separately, we rated Palin's statement on this comment True .)

Ordinarily, higher electricty rates would hit hardest those "already struggling to make ends meet," because it's awfully hard in this day and age to do without a basic level of electricity. But the actual legislation being considered in Congress now takes that into account, and includes measures intended to lower electricity rates for consumers.

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Reps. Henry Waxman and Edward Markey, Democrats from California and Massachusetts, respectively, wrote the bill that passed the House in June. Their goal is to lower carbon pollution by 17 percent by 2020 and 83 percent by 2050. Under their plan, most pollution permits initially would be given to companies for free. But eventually, they would have to buy those permits from the government.

Under the bill, 30 to 40 percent of the revenues raised would go back to electric utilities to be passed on to consumers to offset higher rates they would have to pay. The money would be passed to consumers through rebates or expanded efficiency programs, and an additional 15 percent of the revenue would go directly to low-income consumers.

So how much would rates go up for consumers? It's hard to say. There has been much debate about the costs, and it's been difficult to come up with a reliable number because the bills have been changing as they move through the House and the Senate. Republicans have cited numbers as high as $3,000 per year, a claim that when it was combined with a falsehood on health care, earned our Pants on Fire rating. Recent estimates by the Congressional Budget Office and the Environmental Protection Agency are much lower — between $80 and $340 a year, depending on income.

But we do know that the bill seeks to offset those higher costs through rebates for low-income consumers. In fact, the poorest people might see a net benefit from cap and trade, according to an analysis by the Congressional Budget Office, the nonpartisan, independent arm of Congress. It analyzed the effect on rates by household income in 2020 and found that the lowest 20 percent of households would see a net benefit of $40 per year. The next 20 percent of households would see an added cost of $40 per year. The middle 20 percent would pay $235 a year more; the second-highest 20 percent would pay $340 a year more, and the top 20 percent would pay $245 a year more. (The top tier does a little better because of credits for businesses.)

The House bill is not the final version of cap and trade; the Senate still needs to consider its own bill. Palin is correct in that lower-income households would feel the impact of higher utility costs, but the House bill contains significant offsets to help people of modest means. Thanks to its offsets, the plan is not entirely regressive because the lowest one-fifth of households would see a net benefit. So we rate Palin's statement Half True.