Politics & Policy

No, IMF, the Absence of a Carbon Tax Is Not the Same Thing as a ‘Subsidy’

With great fanfare, the International Monetary Fund recently released a report claiming that global energy subsidies — almost entirely for fossil fuels — will total $5.3 trillion in 2015. (“$10 million a minute!” as summarized in overenthusiastic media outlets.) The report redefines the concept of a “subsidy” to generate attention-grabbing headlines. But anyone taking the IMF approach seriously must understand how dangerously it redefines the appropriate relationship between government bureaucrats and a free market.

The IMF’s acrobatic redefinition works as follows: Define a subsidy to include not just any money spent by government to reduce the cost of energy, but also the absence of any tax that “should” be imposed to account for the externalities (the side effects experienced by society), such as environmental damage caused by energy consumption. So the IMF believes, for instance, that there should be a tax on carbon dioxide emissions that forces fossil fuel users to pay for the future costs of climate change. The fact that governments have not imposed such taxes means they are “subsidizing” fossil fuels instead.

Where to begin? Generally, we assume that the market price is the closest available approximation to an efficient price for a good or service. When we can make a confident case that society wants more (or less) of something than is supplied at the market price, we contemplate a subsidy to increase its consumption (or tax to decrease it). But the market price remains the reference price, and a high burden of proof is required to override it.

The IMF implies that this is not correct. Rather, it believes its complex models produce a better measure of efficient price than the market does; so much so that its price deserves to be considered the baseline reference. If under current government policy the market price is different than its price, it will blame that policy for distorting its own vision of how the market should work.

Note what else this approach implies: First, government non-action is no longer an acceptable default. Government cannot choose to avoid an issue merely for lack of uncertainty or for any other reason; a decision not to legislate is as consequential as a decision to legislate. The efficiency of a free market receives no presumption in its favor, and government intervention requires no heightened burden of proof.

Second, there is no reason to limit this mode of thinking to energy policy. The bureaucrats could build an economic model claiming to identify externalities in any market and insist that theirs is the one, true price. From this perspective, market prices are artificial and inefficient, while administrative reports know what prices should be. Any elected official who dares to deviate from a report’s conclusions simply by choosing not to take new government action on behalf of the bureaucratic agenda shall be branded a distorter of markets.

If not for the serious risk of asserting such a role for the government in the market (one might easily cite historical examples), the IMF’s attempt would be amusing, given the quality of its performance.

How exactly does one calculate the value of a tax-not-imposed? The problem is most apparent if one compares the level of purported subsidies with the IMF’s estimate from just two years earlier: It has more than doubled. The IMF report reassures readers that the sudden discovery of more than $2 trillion in new subsidies in just two years is not a shortcoming but rather evidence of the organization’s improved methodology. Another explanation might be that the exercise depends on guesswork, with all of the incentives pushing toward ever-higher guesses. Either way, it does not inspire confidence that the IMF knows how to calculate prices. The specifics of the methodology strongly underscore the degree of guesswork. Take, for instance, the “subsidy” represented by the absence of a carbon tax. The IMF uses the Obama administration’s 2013 estimate of how much climate-related damage is created by each additional ton of carbon dioxide emissions — the so-called Social Cost of Carbon. That analysis, which itself was revised upward (surprise!) by more than 50 percent since 2010, provides suggested values ranging from $12 to $58 per ton.

Which actually raises an interesting question: What about all the positive benefits to society from energy consumption? Are there long-term economic gains for a society whose children are raised in homes with electric heat and light? The IMF tallies as many negative externalities as it can (even traffic congestion) but omits a positive column altogether. It finds that developing countries are “subsidizing” most heavily — Asia’s developing countries to the plainly implausible tune of about 15 percent of GDP — because those countries’ rapid economic growth relies heavily on the cheap power provided by coal.

Is the subsistence farmer sitting in the dark truly the “efficient” economic outcome?

Might there be a rational reason that such countries prefer not to impose onerous and arbitrary taxes on the energy consumption critical to lifting their populations out of poverty? The closest the IMF comes to acknowledging this side of the ledger is a needlessly confusing chart buried on page 26 of the report; the chart shows that without “subsidies,” developing Asia’s electricity and gasoline consumption would decline by about 25 percent. Is the subsistence farmer sitting in the dark truly the “efficient” economic outcome?

It is unreasonable to accept analysis of this quality as the basis for a legitimate estimate of price. It is sheer hubris to claim that the estimate is so irrefutable that any government allowing a market price to persist is providing a subsidy. It’s the same sort of hubris that bureaucrats attempting to override market prices have exhibited throughout history, but it’s hubris nonetheless.

Even accepting the economic models at face value, their outputs are critically dependent on political inputs. The value of the “subsidy” as it relates to climate change is determined overwhelmingly by the chosen discount rate — that is, how society weighs future costs relative to present costs. The value as it relates to air pollution requires an estimated dollar value for a human life. The bureaucrats insist it is their prerogative to make these determinations, as well.

There are important debates we must have about whether a country ought to impose taxes on air pollution or combat climate change. Clearly explained estimates of negative externalities can make an important contribution. Confusing redefinitions of the basic terms of public policy, made by an international organizations defining itself as the supreme arbiter of efficient prices, do not.

— Oren Cass is a senior fellow at the Manhattan Institute.

Oren Cass — Oren Cass is a senior fellow at the Manhattan Institute and the author of the forthcoming book The Once and Future Worker.

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