IMF’s Carbon Tax Shenanigans: Part II

By Marlo Lewis -- April 10, 2013

The major premise of the International Monetary Fund’s carbon tax proposal is the concept of social cost. According to the IMF, fossil-fuel consumers do not pay for all the harm they do to public health and the environment. Hence, the IMF reasons, fossil energy is under-priced, society consumes too much of it, and corrective (“Pigouvian”) taxes are needed to achieve “efficient” energy markets.

The IMF acknowledges that social cost of carbon (SCC) “estimates in the literature have varied considerably, ranging from $12 per ton (Nordhaus, 2011) to $85 per ton (Stern, 2006).” The IMF’s “estimates assume damages from global warming of $25 per ton of CO2 emissions, following the United States Interagency Working Group on Social Cost of Carbon (2010), an extensive and widely reviewed study.”

Actually, the Interagency Working Group recommends that agencies use four SCC estimates to calculate the per-ton benefits of CO2 reductions: $5, $21, $35, and $65. It’s unclear how the IMF split the difference and got $25.

Climate Science: Unknown Social Cost of Carbon

Be that as it may, SCC estimates are based on multi-layered assumptions about such issues as climate sensitivity, the impacts of warming on weather patterns and sea-level rise, the impacts of the latter on economic activity, and the impacts of changes in global temperature, weather, sea level-rise, and economic activity on public health and welfare.

As the range of estimates attests, the SCC is very much in the eye of the beholder. It 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.
• The U.S. is currently enjoying “the longest streak ever recorded without an intense [category 3 – 5] hurricane landfall.”
• There has been no trend in the strength or frequency of tropical cyclones in the main Atlantic hurricane development region during the past 370 years.
• There has been no trend in hurricane-related damages since 1900 once economic losses are adjusted for changes in population, wealth, and the consumer price index.
• There has been no trend since 1950 in the frequency of strong (F3-F5) tornadoes in the U.S.
• There has been no trend since 1900 in U.S. soil moisture as measured by the Palmer Drought Severity Index.
• There has been no trend in U.S. flood magnitudes over the past 85 years.
• The greater-than-present warmth of the Holocene Optimum, Roman Warm Period, and Medieval Warm Period contributed to improvements in human health and welfare.
• As U.S. urban air temperatures increased over the past three decades, heat-related mortality and air pollution levels declined.
• Since the 1920s, global deaths and death rates related to extreme weather declined by 93% and 98%, respectively.
• Long-term sea-level rise is not accelerating, and at current rates of ice mass loss, Greenland will contribute about 3 inches to global sea levels by the end of the 21st century.

Overkill: IMF’s PM2.5 Coal Tax  

To set the level of corrective taxes, the IMF also advises policymakers to factor in the public health costs of air pollution, particularly sulfur dioxide (SO2) emissions, a precursor for fine particle (PM2.5) pollution. Here the IMF claims to follow the National Research Council. The NRC’s report, Hidden Costs of Energy, estimates that aggregate damages from coal power plant criteria air pollutant emissions (SO2, PM2.5, PM10, NOx) were $62 billion in 2005 (p. 149).

The IMF proposes a $65 per ton tax on coal, claiming the NRC estimated local pollution damages from an average coal plant in 2005 at $65 per short ton (p. 45). That figure does not appear in the NRC report, but let’s assume the IMF got the conversion right. A more important point is that the NRC chiefly relies on an American Cancer Society (ACS) study, Pope et al. (2002), to estimate the mortality effects of PM2.5.

Even if one accepts the epidemiology underpinning the IMF’s proposal, the $65 per ton externality estimate will soon be obsolete. The EPA’s Mercury and Air Toxics Standards (MATS) Rule, also known as the Utility MACT Rule, will decrease power plant SO2 emissions to 68% and direct PM2.5 emissions to 44% below 2005 levels by 2017 (EPA, Regulatory Impact Analysis for the Final MATS Standards, Table 5A-6).

So, assuming the validity of the ACS study and the externality calculation based upon it, within four years the negative externality from coal power plants should be half the size of what it was in 2005. The Pigouvian tax on coal should correspondingly be scaled back — from $65 per ton to about $30 per ton.

But wait — there’s more! As Anne Smith of NERA Economic Consulting documents, some 20 major rules the EPA has promulgated in recent years are projected to achieve substantial PM2.5 reductions as “co-benefits” of other emission reductions (Figure 1, p. 8). More social cost goes poof!

In addition, the EPA recently revised the primary (health) and secondary (welfare) National Ambient Air Quality Standards (NAAQS) for PM2.5. A primary NAAQS specifies how low air pollution concentrations must be to “protect public health” with an “adequate margin of safety.” The EPA lowered the primary annual standard from 15 to 12 micrograms per cubic meter.

States will have three years to adopt EPA-approved implementation plans to attain the NAAQS, and five years after that to come into attainment. So, again, assuming the validity of the epidemiology on which the IMF implicitly relies, within a decade, the “hidden cost” of air pollution from U.S. coal power plants should be darn close to zero.

Unknown Social Cost of Coal

There are more fundamental reasons to challenge the IMF’s coal tax proposal. As air quality analyst Joel Schwartz points out, most PM2.5 pollution from power plants is in the form of ammonium sulfate and ammonium nitrate. “But neither of these substances is harmful, even at levels tens of times greater than are ever found in the air Americans breathe.” Schwartz bases this assessment on numerous clinical studies of volunteers, elderly asthmatics, and laboratory animals (see footnotes 10-16 of his report). Similarly, toxicologists Laura Green and Sarah Armstrong summarize their survey of the literature as follows:

Toxicologic data on typical forms of pollution-derived PM strongly suggest that current ambient concentrations in the U.S. are too small to cause significant disease or death. We review here the results of inhalation studies using concentrated ambient particles, diesel engine exhaust particulate matter, and sulfate and nitrate salts, and find no evidence that moderate concentrations are lethal. The expectation that lives will be saved by reducing ambient PM2.5 in the U.S. is not supported by the weight of scientific evidence, although other bases for regulating PM may be justifiable.

As mentioned, the NRC’s social cost of coal estimate relies on the ACS PM2.5 study. All such epidemiological studies attempt to discern causal connections in statistical associations between PM2.5 exposures and mortality in different cities or population groups. Toxicologist Julie Goodman cites six 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.

Epidemiologists investigating PM2.5 health effects attempt to identify and control for confounding variables that may also affect health and life expectancy, such as pre-existing medical conditions, personal habits, obesity, and exposure to other pollutants. Not all confounders are so obvious.

People with the get-up-and-go to leave their native city or state in search of employment opportunity tend to be healthier than average. Rust Belt cities have higher-than-average mortality rates and PM2.5 levels — and higher rates of out-migration. Schwartz finds that when migration rates into and out of cities were added to the statistical model relating PM2.5 and premature death in Pope et al. (1995), an earlier iteration of the ACS study, “the apparent effect of PM2.5 declined by two-thirds and became statistically insignificant.” Pope et al. (2002) lists several potential confounders the researchers adjusted for, but differential migration is not one of them.

Anne Smith 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, pricing the externality is also impossible.

Unexamined Social Cost of Carbon Taxes

Carbon taxes are very “efficient” at destroying jobs, wealth, and consumer welfare. Heritage Foundation economists David Kreutzer and Nicholas Loris compared household income, utility bills, gasoline prices, and job creation in two policy scenarios (“side cases”) in the EIA’s Annual Energy Outlook 2012. In the carbon tax side case, Congress enacts a carbon tax that starts at $25 per ton and increases by 5% annually after inflation. In the no-greenhouse-gas-concern side case, energy investors face no risk of carbon taxes or greenhouse gas regulation. Comparing the two cases reveals that the carbon tax described above would:

• Cut the income of a family of four by $1,900 per year in 2016 and lead to average losses of $1,400 per year through 2035;
• Raise the family-of-four energy bill by more than $500 per year (not counting the cost of gasoline);
• Cause gasoline prices to increase by up to $0.50 gallon, or by 10 percent on an average gallon price; and
• Lead to an aggregate loss of more than 1 million jobs by 2016 alone.

Carbon tax proponents might protest that money isn’t everything — public health is more important, for gosh sakes! This criticism ignores the connection between livelihoods, living standards, and life expectancy. Globally, poverty is by far the number one cause of preventable illness and premature mortality. Poor countries require affordable energy to grow out of poverty. That is why China, India, and other developing countries insist on being exempt from the Kyoto Protocol’s binding emission limitations. A tax that prolongs energy squalor in developing countries has a serious externality problem. 

In industrial countries, too, high energy costs can adversely affect health by decreasing wealth- and job-creation. Studies of people living in Denmark, Russia, Sweden, the U.S., Japan and other ‘developed’ countries show that poverty and unemployment increase the risk of sickness and death.

A recent report by Cato Institute scholar Indur Goklany examines the history of human well-being from 1 A.D. to the present day. Goklany finds that fossil fuels “saved humanity from nature and nature from humanity.” By dramatically increasing the productivity of food production, distribution, and storage, fossil fuels emancipated mankind from the age-old Malthusian trap of overpopulation and famine. Those same productivity gains also helped to spare 2.3 billion hectares of habitat (an area the size of the U.S., Canada, and India combined) that would otherwise have to be converted to cropland to maintain today’s level of food production.

Fossil fuels, Goklany shows, are 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. Since the cycle of progress is the very context of modern life, it is a collective good. And since the overwhelming lion’s share of its energy still comes from coal, gas, and oil, the cycle of progress is, to no small degree, a positive “externality” of fossil fuels.

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

Europeanizing America?

A final observation on carbon taxes as a political agenda seems in order. Poor households spend a larger share of their income on energy. Consequently, carbon taxes place a larger percentage burden on poor households than on middle- and upper-income households. Carbon taxes are regressive.

The IMF says not to worry because governments can offset the regressive impact of high energy prices with “targeted social programs,” i.e. welfare. 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.

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

Click here to read Part I of this post.