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 costs. Numerous 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.

Do biofuel mandates and subsidies inflate food prices? Do they increase world hunger ? There was a rip-roaring debate on the food security impacts of biofuel policies in 2007-2008, when sharp spikes in wheat, corn, and rice prices imperiled an estimated 100 million people in developing countries. Food price riots broke out in Bangladesh, Burkina Faso, Cameroon, Ivory Coast, Egypt, Indonesia, Mexico, Mozambique, Senegal, Somalia, and Yemen.

Experts attributed the rapid rise in food prices to several factors including high petroleum prices, drought in Australia, a weak U.S. dollar, commodity speculation, and rising demand for grain-fed meat by China’s rapidly expanding middle class. But some also laid part of the blame on biofuel policies, which artificially increase global demand for corn and soy while diverting those crops and farmland from food to fuel production. A July 2008 World Bank report argued that biofuel policies accounted for as much as two-thirds of the 2007-2008 price spike. A July 2010 World Bank report, on the other hand, concluded that rising petroleum prices were the dominant factor. “Biofuels played some role too, but much less than previously thought,” the report stated.

Where does the debate stand today? Recent reports by the National Research Council (NRC), the New England Complex Systems Institute (CSI), the UN Committee on World Food Security (CWFS), and Iowa State University (ISU) all acknowledge that biofuel policies put upward pressure on food and feed prices. The NRC and ISU studies argue that U.S. biofuel policies have only modest impacts on grain prices whereas the CSI and CWFS studies indicate that biofuel policies contributed significantly to the 2008 global food crisis and/or pose significant risks to global food security today.

Links to these reports and key excerpts follow.

National Research Council, Renewable Fuel Standard: Potential Economic and Environmental Effects of U.S. Biofuel Policy (2011):

Food-based biofuel is one of many factors that contributed to upward price pressure on agricultural commodities, food, and livestock feed since 2007; other factors affecting those prices included growing population overseas, crop failures in other countries, high oil prices, decline in the value of the U.S. dollar, and speculative activity in the marketplace.

To date, the agricultural commodities most affected by U.S. biofuels production are corn and soybean. The increased competition for these commodities created by an expanding biofuels market has contributed to upward pressure on their prices, but the increase has had a small effect on consumers’ food retail prices, except livestock products, because corn and soybean typically undergo some processing before reaching consumers’ food basket. The difference between the price of an unprocessed commodity and the retail price of processed food is typically large. The committee estimated that an increase of 20-40 percent in agricultural commodity prices would result in an increase in the retail price of most processed grocery food products (for example, breakfast cereal and bread) containing those commodities of only 1 to 2 percent.

New England Complex Systems Institute, Food Crises: A quantitative model of food prices including speculators and ethanol conversion (September 2011):

We further systematically consider other proposed factors affecting food prices. We provide quantitative evidence excluding all of them from playing a major role in recent price changes except corn to ethanol conversion. We show that, aside from the high price peaks, the underlying trends of increasing food prices match the increases in the rate of ethanol conversion.

Only a small fraction of the production of corn before 2000, corn ethanol consumed a remarkable 40% of US corn crops in 2011, promoted by US government subsidies based upon the objective of energy independence, and advocacy by industry groups. Corn serves a wide variety of purposes in the food supply system and therefore has impact across the food market. Corn prices also a ect the price of other crops due to substitutability at the consumer end and competition for land at the production end.

Regulation of markets and government subsidies to promote corn to ethanol conversion have distorted the existing economic allocation by diverting food to energy use. This raised equilibrium prices, increased energy supply by a small fraction (US corn ethanol accounted for less than 1% of US energy consumption in 2009 and reduced grain for food by a much larger one (US corn used for ethanol production is 4.3% of the total world grain production, even after allowing for the feed byproduct.

A parsimonious explanation that accounts for food price change dynamics over the past seven years can be based upon only two factors: speculation and corn to ethanol conversion. We can attribute the sharp peaks in 2007/2008 and 2010/2011 to speculation, and the underlying upward trend to biofuels. The impact of changes in all other factors is small enough to be neglected in comparison to these effects.

UN Committee on World Food Security Security, A Report by the High Level Panel of Experts on Food Security and Nutrition, Price volatility and food security (July 2011):

Biofuel support policies in the United States and the European Union have created a demand shock that is widely considered to be one of the major causes of the international food price rise of 2007/08.

By generating a new demand for food commodities that can outbid poor countries and food-insecure populations, industrial biofuels highlight the tension between a potentially unlimited demand (in this case for energy) and the constraints of a world with finite resources. Several proposals linked to changes in existing mandates could reduce the likelihood of biofuel production contributing to price spikes.

Given the major roles played by biofuels in diverting food to energy use, the CFS should demand of governments the abolition of targets on biofuels and the removal of subsidies and tariffs on biofuel production and processing.

Bruce A. Babcock, Center for Agricultural and Rural Development, Iowa State University, The Impact of U.S. Biofuel Policies on Agricultural Price Levels and Volatility (June 2011):

It is indisputable that biofuels contribute to higher agricultural commodity prices because the biofuel industry represents a large and growing share of demand for maize, vegetable oil and sugarcane. But biofuel production levels are not driven solely by government subsidies. Biofuels are the only large-scale substitute for liquid transportation fuels, so when crude oil prices rise, so too does the demand for biofuels. Furthermore, high agricultural commodity prices are not caused solely by expanded biofuel demand.

. . . a large expansion in US ethanol production would have occurred even if the subsidies and mandates had not been in place. The reason is that the return on investment in ethanol would have been so high that investors still would have brought their capital to the industry. As shown, the model indicates that in 2009, ethanol production would have been about 1.2 billion gallons lower without subsidies. The largest difference in production would have been in the 2008 marketing year when subsidies increased ethanol production by more than 2.3 billion gallons.

Market-based expansion of ethanol contributed about 50 percent to the difference in maize prices between 2004 and 2009. The direct conclusion of these results is that ethanol subsidies have had little impact on crop prices and that market-based expansion of ethanol had a large impact on maize prices, a modest impact on wheat prices and practically no impact on soybean and rice prices over this time period.

Overall, these results indicate that the effects of both ethanol subsidies and market-driven expansion of ethanol on US food prices have been small.

I may comment further on these reports in a future post. In the meantime, I will simply observe that if Babcock is correct, and U.S. biofuel policies have only a small influence on food prices because “a large expansion in US ethanol production would have occurred even if the subsidies and mandates had not been in place,” then U.S. taxpayers get little or no energy-security bang for billions of biofuel bucks.

As former OMB analyst Ken Glozer, author of Corn Ethanol: Who Pays, Who Benefits? explains in an op-ed based on his book:

The costs of ethanol policies are enormous, estimated at more than $500 billion to American consumers and taxpayers from 2008 to 2017. The taxpayer costs include subsidies to corn growers and for ethanol production.

The EIA forecast shows that current federal ethanol policy produces a minuscule additional amount of ethanol over what would be produced using a competitive market policy in the foreseeable future. In 2010, a mere 600 million gallons of additional ethanol were produced, roughly 5 percent of the 13 billion total gallons produced. In 2015, federal policies will increase production by just 1.4 billion gallons. The latter is less than 1 percent of U.S. gasoline consumption, and the cost per barrel of petroleum import reduction is an astounding $2,171.

From Glozer’s book:

Earlier this week, House Oversight and Government Reform Committee Chairman Darrell Issa (R-Calif.) sent letters to three Obama administration officials regarding the veracity of their testimonies at an October 12 subcommittee hearing on the administration’s fuel economy policies.*

Issa’s letters — to National Highway Traffic Safety Administration (NHTSA) Administrator David Strickland, EPA Assistant Administrator for Air and Radiation Gina McCarthy, and EPA Director of Transportation and Air Quality Margo Oge – are identical in content.

The gist of the letters is that each administration witness denied under oath that EPA and California’s greenhouse gas emission standards are “related to” fuel economy standards, whereas in fact, according to Issa, ”regulating greenhouse gases and regulating fuel economy is a distinction without a difference.”

This matters for three inter-related reasons: (1) EPA is currently regulating fuel economy by setting motor vehicle greenhouse gas emission standards even though the Clean Air Act provides no authority for fuel economy regulation; (2) EPA in June 2009 granted California a waiver to establish motor vehicle greenhouse gas emission standards despite the Energy Policy Conservation Act’s (EPCA’s) express prohibition (U.S.C. 49 § 32919) of state laws or regulations “related to” fuel economy; and (3) the California waiver, by threatening to create a market-balkanizing “regulatory patchwork,” enabled the Obama administration to extort the auto industry’s support for EPA’s new career as greenhouse gas/fuel economy regulator in return for California and other states’ agreement to deem compliance with EPA’s greenhouse gas/fuel economy standards as compliance with their own.

As I will demonstrate below, greenhouse gas emission standards are highly “related to” fuel economy standards, and the administration witnesses cannot possibly be ignorant of the relationship. Do their denials of plain fact rise to the level of perjury?

In his letters to the Obama officials, Issa excerpts pertinent exchanges between them and Members of the Subcommittee:

Chairman Jordan: I guess maybe here’s the question — I’m not a legal scholar on this — but it seems that when you read the statute [EPCA], it talks about a regulation related to fuel economy standards, and greenhouse gases are certainly related to fuel economy standards, is that right?

Administrator McCarthy: They are closely aligned but they are different, Mr. Chairman.

*  *  *

Vice Chair Buerkle: I just have a quick question for the three of you. It’s a yes or no question, if you wouldn’t mind. Are the greenhouse gas rules — either EPA’s or the California rules — are they they related to fuel economy? Mr. Strickland, yes or no?

Administrator Strickland: No, they regulate greenhouse gas emissions.

Administrator McCarthy: They regulate greenhouse gas emissions.

Ms. Oge: They regulate greenhouse gas emissions.

Vice Chair Buerkle: So they’re not related to fuel economy, under oath.

Administrator Strickland: No. They’re greenhouse gas emission regulations.

Administrator McCarthy: We do not regulate fuel economy standards.

Vice Chair Buerkle: And all three of you agree with that?

Ms. Oge: Yes.

Administrator Strickland: Yes.

When asked if EPA and California’s standards are “related to” fuel economy standards, the administration witnesses offer a tautology: Greenhouse gas emission standards regulate greenhouse gas emissions. It is as if John Smith were asked whether he is related to Joe Smith and replied, “I am not my brother, I am me.”

Motor vehicle greenhouse gas emission standards implicitly – and inescapably – regulate fuel economy. EPA and NHTSA confirm this – albeit not in so many words – in their joint May 2010 greenhouse gas/fuel economy Tailpipe Rule.

As the agencies acknowledge (Tailpipe Rule, pp. 25424, 25327), no commercially proven technologies exist to filter out or capture carbon dioxide (CO2) emissions from fossil fuel-powered vehicles. Consequently, the only way to decrease grams of CO2 per mile is to decrease fuel consumption per mile, i.e., increase fuel economy. Carbon dioxide constitutes 94.9% of vehicular greenhouse gas emissions, and “there is a single pool of technologies . . . that reduce fuel consumption and thereby reduce CO2 emissions as well.”

That EPA and CARB are regulating fuel economy is also evident from the administration’s current plan to increase average fuel economy to 54.5 miles per gallon by 2025. The plan derives from EPA, NHTSA, and the California Air Resources Board’s (CARB’s) Interim Joint Technical Assessment Report, which proposed a range of fuel economy targets from 47 mpg to 62 mpg. The mpg targets are determined by – are simple reciprocals of – CO2 reduction scenarios:

Four scenarios of future stringency are analyzed for model years 2020 and 2025, starting with a 250 grams/mile estimated fleet-wide level in MY 2016 and lowering CO2 scenario targets at the rate of 3% per year, 4% per year, 5% per year, and 6% per year [p. viii].

The 54.5 mpg target represents a negotiated compromise between the 4% per year (51 mpg) and 5% per year (56 mpg) CO2 reduction scenarios (p. ix).

That the California greenhouse gas motor vehicle emissions law, AB 1493, is highly “related to” fuel economy is obvious from CARB’s 2004 Staff Report presenting the agency’s “initial statement of reasons” for its regulatory program.  The Staff Report’s recommended options for reducing greenhouse gas emissions (Table 5.2-3) are identical in substance, and often in detail, to fuel saving options presented in the National Research Council’s (NRC’s) 2002 fuel economy report (Tables 3-1, 3-2). A few options in the CARB list are not included in the NRC list. In each case, however, the CARB option is a fuel-saving technology, not an emission-control technology.

In addition, the text of AB 1493 clearly implies that CARB is to regulate fuel economy. AB 1493 requires CARB to achieve “maximum feasible” greenhouse gas reductions that are also “cost-effective,” defined as “Economical to an owner or operator of a vehicle, taking into account the full life-cycle costs of the vehicle.”  CARB rightly interprets this to mean that the reduction in “operating expenses” over the average life of the vehicle (assumed to be 16 years) must exceed the “expected increases in vehicle cost [purchase price] resulting from the technology improvements needed to meet the standards in the proposed regulation” (Staff Report, p. 148). Virtually all of the “operating expenses” to be reduced are expenditures for fuel. The CARB program cannot be “cost-effective” unless CARB regulates fuel economy.

Strickland, McCarthy, and Oge could not acknowledge what they must know to be true because otherwise they would have to admit:

1. EPA is regulating fuel economy, which is outside the scope of its delegated authority; and
2. CARB is regulating fuel economy, which is prohibited by EPCA.

Since EPA contends that its greenhouse gas/fuel economy motor vehicle standards compel the agency to regulate greenhouse gas emissions from large stationary sources, the administration witnesses also could not acknowledge the obvious without admitting that EPA’s entire greenhouse gas regulatory agenda rests on shaky legal grounds.

* I testified at the Subcommittee’s October 12 hearing on the first, private-sector witness panel, which also included Jeremy Anwyl (Edmunds.Com), Roland Hwang (Natural Resources Defense Council), and Scott Grenerth (Independent Trucker). The three Obama officials testified on the second, public-sector witness panel.