The Senate Finance Committee held a hearing on the tax aspects of a cap-and-trade program to control carbon emissions.

The committee wanted to find out how the program, which the Senate will consider in June, might affect the economy and how the Tax Code would treat allowances allocated to emitters of greenhouse gases.

"In fact, a cap-and-trade program is essentially a tax in many ways," said ranking member Charles Grassley (pictured), R-Iowa. "Most economists agree that it would impose significant costs on the economy that will ultimately be paid by every American."

Peter Orszag, director of the Congressional Budget Office, compared the cap-and-trade system to proposals for a carbon tax. "Within the relatively efficient category of approaches that rely on the power of markets, a tax on emissions is generally more efficient than a cap-and-trade system," he said in his prepared testimony. He believes a tax provides greater flexibility over time and allows firms to achieve reductions when they are least expensive.

Robert Greenstein, executive director of the Center on Budget and Policy Priorities, testified about adding a "climate rebate" to the Earned Income Tax Credit to prevent the higher energy costs imposed by a cap-and-trade system from harming low-income taxpayers and a "climate change tax credit" for middle-income taxpayers.

"A combination of an increase in the Earned Income Tax Credit and a rebate delivered through state electronic benefit transfer systems would reach the vast majority of low-income households, and would do so without creating the need for a new bureaucracy or large administrative costs," he said in his prepared testimony.

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