IMF Calls for $1.60/Gal. Hike in Motor Fuel Taxes

The International Monetary Fund (IMF) has just published a 277-page report advocating carbon taxes. Titled Getting Energy Prices Right: From Principle to Practice, the report is described by IMF officials as “an effort to push countries into action well ahead of new treaty negotiations,” according to Climatewire ($).

I have ordered a copy from Amazon.Com, but it won’t arrive until Monday. In the meantime, let’s review some of the arguments put forward by IMF spokespersons in media coverage of the report.

My overall impression is that the report doesn’t offer any new rationales for carbon taxes that I haven’t already rebutted in previous posts (here, here, and here).

For starters, IMF assumes that, despite “many controversies and uncertainties,” the social cost of carbon (SCC) is a knowable quantity, enabling benevolent central planners to ‘get energy prices right’ and, therefore, improve overall economic efficiency. To quote IMF Managing Director Christine Lagarde, setting corrective taxes to make businesses and consumers pay for environmental damage is “not rocket science” and “straightforward in principle.”

In reality, the SCC exists only in the eye of the beholder. It is a guesstimate derived from non-validated climate parameters, made-up damage functions, and (usually) below-market discount rates. Worse, SCC analysis is computer-aided sophistry designed to make uneconomic renewables look like a bargain at any price and make fossil energy look unaffordable no matter how cheap.

For the U.S., ‘getting energy prices right’ reportedly means hiking motor fuel taxes by an additional $1.60/gal. That implies an SCC of nearly $180/metric ton of carbon dioxide (CO2).* Yet the U.S. Interagency Working Group, on whom IMF relied last year for SCC estimates (and probably still does today), proposes a central estimate of $33/ton.

Ms. Lagarde says the costs to be “corrected” include not only local pollution and CO2 but also traffic accidents and congestion. Accidents and congestion are real costs but they have nothing to do with the carbon content of gasoline or motor-fuel emissions. If every car on the road today were replaced with an all-electric vehicle, there would still be accidents and congestion.

The StarPhoenix excerpts the IMF report’s explanation of the basic rationale for carbon taxes:

Underpinning the policy recommendations is the notion that taxation can influence behaviour. In much the same way that taxes on cigarettes discourage their overuse, appropriate taxes can discourage overuse of environmentally harmful energy products.

So to the IMF, fossil fuels are like cigarettes — dirty, addictive, and often lethal. The objective of cigarette taxes (aside from transferring wealth from smokers to politicians) is not to “discourage overuse” but to discourage use, period. Quitting smoking makes people healthier. Abandoning fossil fuels would increase sickness and death. Fossil fuels provide important economic, social, and environmental benefits (see here, here, and here). They cannot be taxed away without damaging consumer welfare and public health.

The StarPhoenix also has an amusing discussion of how IMF experts think politicians who raise gasoline prices in an election year can survive at the polls:

Co-author Ian Parry agreed such proposals have caused a voter backlash whenever suggested, but adds the trick is to make clear to voters other taxes, particularly those on income, will be cut by identical amounts.

“We are not talking about increasing the overall tax burden; we are talking about a smarter more efficient way to use taxation to meet a country’s fiscal objectives,” he said.

Well, there you have it, the pipedream of a revenue-neutral carbon tax. Two big problems here.

First, energy taxes are regressive, imposing a larger percentage burden on low-income households. Does the IMF know or care that millions of Americans and Europeans already cannot pay monthly gasoline and utility bills without skipping meals, falling behind on rental payments, or foregoing medical care?

As a practical matter, therefore, any carbon tax adopted by Congress would include increases in energy-related welfare to alleviate the regressive impacts of the tax. But using carbon tax revenues for welfare automatically precludes cutting other taxes “by identical amounts.”

Besides, the only attraction carbon taxes have for Washington’s big spenders is as a source of new revenue. This is especially the case in an era of half-trillion dollar deficits. As Heritage Foundation economist David Kreutzer quipped, “It is a delusion to believe that $200 billion in new revenues could walk across town [in Washington, D.C.] without getting molested.”

Ms. Lagarde also suggests carbon taxes could displace less efficient carbon-reduction policies:

It is better than relying on patchwork of uncoordinated policies—such as telling some manufacturers to install certain control technologies, requiring others to use certain fuels, or rewarding households for buying certain vehicles.

Maybe — but it would not be nearly as lucrative for regulatory agencies, trial lawyers, green advocacy groups, pork-dispensing politicians, and corporate-welfare lobbyists.

Lagarde views cap-and-trade as a “reasonable alternative to meet the same objective” because it, too, is a carbon-pricing scheme. Note, then, that rather than dismantle existing regulations, the Waxman-Markey cap-and-trade bill would have piled on a host of new regulations including a national renewable energy mandate, CO2 performance standards for new coal power plants, and new energy-efficiency standards for buildings and appliances.

Any realistic assessment of the Washington scene can come to only one conclusion. A carbon tax, if enacted, would not be revenue neutral, and would be layered on top of, not replace, existing regulations, mandates, and subsidies.

* One gallon of gasoline emits 8.91 kilograms (kg) of CO2. One metric ton = 1,000 kg. The algebra is straightforward: 8.91/$1.60 = 1,000/SCC. SCC = $179.57.