Analyzing Affordability: Supporting Households under New York’s Cap-Trade-and-Invest Policy

New York State is working to implement policies that will decarbonize the state’s economy and meet the full requirements of the Climate Leadership and Community Protection Act (CLCPA). The CLCPA requires the state to reduce statewide greenhouse gas (GHG) emissions by 40 percent by 2030 and 85 percent by 2050 (relative to 1990 levels) and to achieve net-zero GHG emissions economy-wide. Additionally, the state must direct at least 35 to 40 percent of climate investments and benefits to disadvantaged communities, as defined by the Climate Justice Working Group.Since 2023, the state has been designing a cap-trade-and-invest (CTI) program to help meet its emissions reduction requirements. CTI would encourage decarbonization by pricing emissions and increasing the costs of using fossil fuels while also subsidizing (the “invest” side) the adoption of low-carbon technologies, such as heat pumps and electric vehicles. The program would establish an auction for emissions allowances and require emitting entities to purchase allowances based on their emissions.Analyses from the New York State Energy Research and Development Authority (NYSERDA) and Resources for the Future (RFF) offer evidence that a CTI program, alongside other emissions reduction investments and policies the state has adopted or is considering, can significantly reduce GHG and conventional air pollution emissions in New York State, compared with both a business-as-usual scenario and the historical baseline of emissions (NYSERDA and DEC 2024; Krupnick et al. 2024). Additional work by RFF has found that program guardrails like facility-specific caps can further reduce harmful emissions near disadvantaged communities and improve air quality across much of the state without adding significantly to costs (Krupnick et al. 2024; Robertson et al. 2024a, 2024b).Despite the air quality and health improvements that could result from a CTI program (Krupnick et al. 2024; Robertson et al. 2024a, 2024b; NYSERDA and DEC 2024), some state policymakers and business groups, expressing concern about the affordability of the program and the additional costs that New York households could incur, have argued for dampening the program’s ambition on emissions reductions to ensure lower costs (Marcus 2024). This paper analyzes the affordability of CTI for different income groups and communities by exploring how the program may affect the cost of fossil fuels and deliver benefits to households in the form of program subsidies and what we call “dividends”—payments not tied to particular energy-saving behaviors or investments.We investigate how different allowance-funded investment and dividend strategies can affect transportation and residential energy costs (both gross and net) faced by New York households. We analyze two allowance price ceilings (informed by Scenarios A and C in the NYSERDA and DEC 2024 analysis) and potential strategies for distributing revenues and decarbonization incentives. Across these scenarios, we consider how different distributions from the Consumer Climate Action Account (CCAA) could affect average costs for low- and middle-income households. We find the following:A CTI program can financially benefit households across most income groups and geographies in New York State.New Yorkers across income groups could pay less to operate an electrified household than to operate a household that runs on fossil fuels.Compared with a low allowance price (NYSERDA-DEC Scenario C), a high allowance price (NYSERDA-DEC Scenario A) could make many New Yorkers better off by increasing the revenue available for dividends to households.Targeting dividends by geography and income can help cover costs and create more savings for households earning up to $200,000 per year.The electrification observed in our study is largely driven by existing federal and state policies, but investment of CTI revenues can lower costs for households transitioning to heat pumps for heating and cooling and electric vehicles. Investments to reduce structural barriers that prevent certain households from electrifying could encourage further heat pump adoption.A high allowance price (Scenario A) would result in significantly greater reductions in GHG and copollutant emissions (i.e., SO2, NOX, and direct PM2.5) compared with the low allowance price scenario (Scenario C).