IMF Pushes Carbon Tax as Energy Subsidy “Reform”

by Marlo Lewis on April 11, 2013

in Blog, Features

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The International Monetary Fund (IMF) recently published a report urging the world’s governments to “reform” energy subsidies estimated at $1.9 trillion in 2011. Eliminating government policies designed to rig markets in favor of particular energy companies or industries is a worthy goal. Unfortunately, that’s not the agenda the IMF is pushing.

The IMF seeks to shame U.S. policymakers into enacting carbon and coal taxes by redefining the absence of such taxes as energy subsidies. The IMF’s rationale goes like this. Market prices do not reflect the harms (“negative externalities”) fossil fuels do to public health and the environment. Consequently, fossil fuels are under-priced and society consumes too much of them. Policymakers should enact corrective (“Pigou”) taxes to “internalize the externalities” (make polluters pay) and reduce consumption to “efficient” levels.

The IMF estimates that, by not imposing corrective taxes, the U.S. subsidizes fossil fuels to the tune of $502 billion annually, making America the world’s biggest energy subsdizer!

This is blackboard economics (the pretense of perfect information and flawless policy design and implementation) in the service of a partisan agenda.

Carbon taxers disclaim any intent to pick energy-market winners and losers, but that is in fact the core function of a carbon tax. As with cap-and-trade, the policy objective is to handicap fossil energy and, thereby, “finally make renewable energy the profitable kind of energy in America,” as President Obama put it.

Predictably, the IMF says not a word about the policy privileges widely bestowed on renewable energy (renewable electricity mandates, renewable fuel mandates, targeted tax breaks, feed-in tariffs, preferential loans, direct cash grants) or about the negative externalities associated with such subsidies (avian mortality, air and water pollution, food price inflation). 

This week at MasterResource.Org, I offer skeptical commentary on the “IMF’s Carbon Tax Shenanigans.” Here is a summary of key points (including two shrewd comments posted by Heritage Foundation economist David Kreutzer).

If “subsidy” is defined as a direct transfer of wealth from taxpayers or ratepayers to energy companies or industries, U.S. subsidies for renewables are much larger than those for fossil fuels, both in absolute terms and especially on a unit of production basis.

Even if we accept the IMF’s “social cost of carbon” (SCC) estimate ($25 per ton of carbon dioxide emitted) and social cost of coal-related air pollution estimate ($62 billion in 2005), the IMF’s numbers don’t add up. U.S. CO2 emissions in 2011 were 5.5 billion tons. Multiply that by $25 per ton ($137.5 billion), add $62 billion, and we get $199.5 billion. That’s $302.5 billion or about 60% less than the IMF’s $502 billion estimate of total U.S. fossil-fuel subsidies.

The IMF advocates a $1.40/gal gasoline tax. This far exceeds the $0.22/gal tax implied by a $25 per ton SCC. American motorists on average already pay double the alleged SCC in combined federal and state gas taxes.

Gas prices have increased by more than $1.40/gal since the early 2000s, so the market has already granted the IMF’s wish to increase pain at the pump by the amount of the proposed corrective tax.

Traffic accidents and congestion account for 75% of the externalities the IMF proposes to correct via the $1.40/gal gas tax. Accidents and congestion are real costs but they have nothing to do with gasoline. If every car on the road were replaced with an electric vehicle, there would likely be the same number of accidents and levels of congestion.

A $1.40/gal gas tax would do little to curb accidents and congestion but would add about $740 to a low-income household’s annual motor fuel bill. Less affluent Americans would no doubt be grateful for such “efficiency.”

The social cost of carbon is an unknown quantity. Try, for example, to discern carbon’s social cost in the following information: There has been no trend in the strength or frequency of landfalling hurricanes in the world’s five main hurricane basins during the past 50-70 years; there has been no long-term trend in U.S. soil moisture since 1900 or in U.S. flood magnitudes for the past 85 years; global aggregate mortality and mortality rates related to extreme weather have declined by 93% and 98%, respectively, since the 1920s.

The IMF proposes a $65 per ton coal tax and claims to derive the price from a National Research Council (NRC) report, Hidden Costs of Energy, which estimates that coal power plant air pollution caused $62 billion in public health damage in 2005. The main pollutants of concern are sulfur dioxide (SO2), a precursor of fine particle (PM2.5) pollution, and direct PM2.5 emissions. The NRC relied chiefly on an American Cancer Society (ACS) study, Pope et al. (2002), to estimate the mortality effects of PM2.5. 

Even assuming the reliability of the ACS study, recent and forthcoming EPA regulations should virtually eliminate health risks related to coal power plants during the next decade. One EPA regulation alone, the Mercury and Air Toxics Standards (MATS) Rule, is projected to decrease power plant SO2 and PM2.5 emissions to 68% and 44% below 2005 levels, respectively, by 2017 (see Table 5A-6). 

Kreutzer, using Energy Information Administration (EIA) estimates of the U.S. average coal price ($41 per ton) and coal fuel-price elasticity of substitution (0.11), calculates that the IMF’s proposed $65 per ton coal tax would reduce power plant SO2 and PM2.5 emissions by 17.4% — much less than the MATS Rule’s reductions. Hence, Kreutzer concludes, if the IMF accurately estimates the externality to be corrected, “the EPA is already over controlling these emissions even without a tax on coal.”  

The social cost of coal, however, is as elusive as the social cost of carbon. Most PM2.5 pollution from power plants is in the form of ammonium sulfate and ammonium nitrate. As air quality analyst Joel Schwartz documents, clinical studies of volunteers, elderly asthmatics, and animals find that neither substance is harmful even at levels many times greater than are ever found in the air Americans breathe.

The ACS study underpinning the NRC’s $62 billion social cost of coal estimate attempts to find statistical associations between PM2.5 levels and mortality data in different U.S. cities. Toxicologist Julie Goodman cites six other epidemiological studies “that find no association between PM2.5 and mortality.” The NRC report does not consider any of those studies. The IMF probably does not even know what the NRC did not take into account.

Anne Smith of NERA Economic Consulting cautions that even if PM2.5 and mortality are associated, the uncertainties in epidemoliogical studies make quantifying the health benefits of PM2.5 reductions impossible. If so, determining an “efficient” corrective tax is also impossible.

Carbon taxes are very “efficient” at destroying jobs, wealth, and consumer welfare. Kreutzer and Heritage Foundation colleague Nicholas Loris compared two scenarios in the EIA’s Annual Energy Outlook 2012, one assuming a carbon tax that starts at $25 per ton and increases by 5% annually, the other assuming no tax or regulatory policies to curb CO2 emissions. Using the no-climate-policy scenario as a baseline, Kreutzer and Loris calculate that the aforesaid carbon tax reduces household income by $1,900 per year through 2016 and leads to aggregate job losses of more than 1 million jobs by 2016 alone.

Because people use a portion of their income to enhance their health and safety, taxes that reduce income and employment also have social costsNumerous studies find that poverty and unemployment increase the risk of sickness and death.

Cato Institute scholar Indur Goklany documents how fossil fuels, by dramatically increasing the productivity of food production, distribution, and storage, “saved humanity from nature and nature from humanity.” Fossil fuels have been and remain the chief energy source of a “cycle of progress” in which economic growth, technological change, human capital formation, and freer trade co-evolve and mutually reinforce each other.

Given the continuing importance of fossil fuels to human flourishing and the mortality risks of poverty and unemployment, the social cost of carbon taxes is potentially large. The IMF and other carbon tax advocates conveniently ignore this side of the policy ledger.

Carbon and coal taxes are regressive, placing a larger percentage burden on poor households, which spend a larger share of their income on energy and other necessities. The IMF recommends that governments use “targeted social programs,” i.e. welfare, to offset the effects of higher energy prices. Those who view global warming alarm as a pretext for redistributing wealth and transforming America into a European-style welfare state may be on to something.

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