Last night, voting in the dead of night, offering little opportunity for bipartisan discussion and despite the public opposing the plan by nearly a 2:1 margin, the Republican party passed their bill which raises taxes on the middle class and will add $1.5 trillion to the deficit through the US Senate, paving the way for the bill to become law.

Despite initial confusion, the version of the bill passed in the Senate looks like it does keep the $7,500 EV credit intact.  Originally we weren’t sure whether the version passed did maintain the credit, given that the 479-page bill was revealed just hours before the vote, and it’s full of illegible scribbles in the margins.  But the House version of the bill eliminates the credit, and either version could prevail as the differences are worked out between the two (call your representative if you have thoughts on that).

What the bill certainly does keep intact, though, is the US’ portion of the massive ~$5 trillion yearly global subsidy which fossil fuels benefit from in the form of unpriced externalities.  There’s a solution to this, and this solution has even been proposed by many high-profile Republicans.

The costs of pollution

When people do things that affect other people, and those effects are direct and deleterious, we typically make a law against them, because it’s not fair for people to be able to hurt other people. When those effects are indirect and deleterious, we often still make laws or rules against them (like imagine your HOA requiring you to keep your lawn looking nice because if you don’t then property values go down for your whole street). And when those effects are indirect, deleterious, and unaccounted for, we call them “unpriced externalities.”

In economics, an “unpriced externality” is any cost which is not paid by the producer or consumer of a good, but instead incurred by the general population.  This is a form of subsidy – it’s not a direct cash payment from the government to an industry, but it is a way that industries can avoid costs, which is just as good as a cash payment anyway because either way they are saving money.

Pollution has costs attached to it, and those costs are not being paid by polluters – they are benefitting from “unpriced externalities” and the rest of us are paying the cost. These are real costs, not future costs, not theoretical costs, but actual costs being paid right now.  The most obvious are health costs.  These are economic costs because they require higher direct costs for medical care to treat conditions which would not exist were it not for pollution, but there are also non-economic costs in terms of quality of life.  I’m sure most of us would rather sign a check with our pocketbook than with our lungs.

In addition to that, there are indirect economic costs associated with poor health from pollution, including loss of productivity for workers who must take time off due to health problems or whose capacity for work is diminished as a result.  And, of course, there is death.

The Lancet recently estimated that 9 million people die each year around the world due to pollution – 6.5 million of these deaths are attributable to air pollution.  This number represents 16%, one-sixth, of all global deaths – three times more than AIDS, tuberculosis, and malaria combined, or fifteen times more than war and all forms of violence.  The World Health Organization (WHO) also estimates that about 6.5 million die worldwide per year from air pollution.

The total global costs associated with this pollution tally up to $4.6 trillion per year according to the Lancet study.  IMF policy heads released a study with their own estimates of these costs recently, pegging total global dirty energy subsidies at $5.3 trillion per year.

The US, which produces about 15% of the world’s emissions, is therefore responsible for about $750 billion of those global costs every year – though the IMF study estimates the US’ share at $600 billion, so let’s use that number.  About a third of the US’ emissions come from transportation, with transportation recently overtaking electricity generation as the highest-emitting economic sector, and more than half of that third comes from light-duty personal vehicles.

So just gasoline for personal vehicles alone (not counting trucks, airplanes, ships, etc.) is being subsidized to the tune of ~$100 billion per year in the US.  Last year, with 159,000 EVs sold countrywide, the EV tax credit cost the US about $1.2 billion dollars.  If you’re looking for a cost to cut, perhaps the one which is ~100 times larger should be looked at first.

Subsidies compared: gas vs. electric

Tesla CEO Elon Musk, whose company has benefitted more than any other from the EV tax credit, has asked for a long time that all subsidies be ended for dirty and clean energy alike, including his own companies.  He figures that if they did end, his products would actually be more competitive rather than less competitive.

A Tesla Model S does benefit from $7,500 in subsidy on the purchase price (assuming the buyer has enough tax liability to claim it), but competing gas cars benefit from a subsidy of $3.80 per gallon of gasoline burned according to one study, such that an average car gets to ignore costs of ~$1,700 per year.

Or, consider a competing car, a new Mercedes S-Class, and assume it gets 20 miles per gallon and will drive 150,000 miles over the course of its useful lifetime.  At $3.80 per gallon, that Mercedes will benefit from $28,500 worth of subsidy over its lifetime – far more than the Model S will.  This is not direct cash back for the Mercedes, but then again, neither is the federal EV tax credit.

But even though gas gets the greater benefit of those unpriced externalities, driving electric is still cheaper everywhere in the US (and here’s another study which says the same for other regions as well).

Solutions

The solution is to add an upfront price to pollution, so that it costs the same amount to pollute as it does to clean up that pollution.

Imagine if your city had an itemized yearly cost for municipal trash pickup, roughly equivalent to the cost of running the trucks, paying workers, operating dumps and recycling centers, etc.  Now imagine if you decided that you didn’t want to pay this cost and would just start throwing your trash in the middle of the street and let everyone else clean it up for you.  Would this be outrageous?  Would your neighbors get mad?  Would you get mad if your neighbors did it?

As of right now, this is what’s happening with pollution.  Polluters are allowed to spew their trash into common areas and are rarely held accountable for the damage done or the costs of cleanup, and those costs end up being paid by everyone else.  It violates a simple rule we all learn even before kindergarten: if you make a mess, you should clean it up.  So let’s solve this by making polluters clean it up, or at least pay to clean it up.

This solution has been proposed by many, including just about every economist.  Notably, a coalition of conservative luminaries recently proposed the conservative case for pricing pollution in both a policy proposal and several op-eds.

This group included George Shultz and Jim Baker, former Secretaries of State under Reagan and Bush Sr.; Hank Paulson, former Secretary of the Treasury under Bush Jr. and ex-CEO of Goldman Sachs; and conservative economist Greg Mankiw (related: see George Shultz talk about his solar-powered Nissan Leaf in a short video from 2012, including this entertaining quote – “I’m driving on sunshine…take that, Ahmadinejad“).

Adding an upfront price to pollution would reduce the distortive effect which unpriced externalities have on the market, and make the free market able to work better at balancing supply, demand, and real costs of production and consumption of goods.  We need accurate price signals for the market to work properly.

This would increase the cost of consumer goods, but it would also result in lower comparative costs for goods which are cleaner, and higher costs for goods which are dirtier, and thus there would be an economic incentive to be cleaner. Those costs are already being paid by consumers, but right now they are being obfuscated, paid on the backend in the form of higher medical bills and early death largely at expense of the national and global poor, which seems like a greater burden than having to pay an extra 50 cents for your hamburger.

These costs will affect consumers and quite probably will affect poorer consumers more than richer ones (even though higher income brackets tend to produce higher emissions).  There are various proposals for mitigating these consumer costs, including returning part or all of the revenue collected as a dividend, or offering targeted assistance or rebates to low-income people who might be affected.  If all of the revenue was returned as a dividend, this proposal would even be “revenue-neutral,” which is to say it would not add a penny to the deficit (unlike the Republicans’ plan which manages to put $1.5 trillion on the nation’s credit card even while hiking taxes on middle-income Americans).

There are also various proposals for how to set the price of pollution. Many proposals start with a lower price now, and then have a plan for the price to increase over time (such as $40/ton now, increasing by $10/ton per year), so that businesses and consumers can transition slowly to cleaner goods, and can have time to implement strategies to clean up their operations.

Some proposals base the price on the current cost of damage being done, some take into account future damages to the climate, and unfortunately very few seem to account for the more-than-a-century worth of free ride that the richest companies in the world have gotten (5 of the world’s 10 largest companies by revenue derive most of their revenues from fossil fuels, with two more being auto manufacturers which greatly benefit from ignored costs of pollution).

But many of these proposals are rigid and don’t respond to technological changes, and rely on estimates of the cost of pollution which do vary depending on what you take into account.  A simpler solution would be to peg the cost of pollution to the cost of cleanup – whatever it costs to return the atmosphere back to the state it was in before the pollution got there, that’s how much it should cost to put the pollution there in the first place.

In 2011, the best direct carbon capture technology available cost $600/ton, and there hasn’t been a ton of development since then.  This means that it costs about $6 to remove the carbon produced by burning one gallon of gasoline from the atmosphere.  That’s steep, but, again, it really is fair to expect that people should clean up after themselves.

The reason that price is high is because there’s little economic incentive to develop technologies for direct carbon capture since we don’t currently have a price on pollution.  There are researchers and small companies doing interesting things, like this company which turns carbon dioxide into stone, but without that economic incentive, it’s hard to convince anyone with control over a balance sheet that they should get into the game.  A few other companies think the cost of direct capture could be lowered to $100 or even $50 per ton, but since polluters can currently pollute with little consequence, there’s not a lot of economic reason to bother.

Pegging the price of pollution to the price of cleanup would change that – not only would it incentivize companies to get in the game so they can derive revenue from the cleanup effort, it would also incentivize current polluters to develop capture or mitigation technologies so that they can reduce costs and reduce disruption of their business.  It also gets rid of the messy and contentious business of estimating damages.  If you make a mess, clean up the mess you made.  Simple enough.

So let’s do that.  As long as we’re on a quest to end subsidies, why stop at ending the small subsidy to EVs, and end the gigantic subsidy to dirty energy as well.  The concept has bipartisan support, the support of nearly every economic and environmental professional, and will benefit everyone who happens to live in the environment, breathe air, drink water, benefit from functioning ecosystems, etc. – which is to say, all of us.  It’s time that polluters take responsibility for their mess, and pay to clean it up.

The EV tax credit can still go either way as the differences are worked out between the House and Senate bill. If you have strong feelings on this, you can call the US capitol switchboard at (202) 224-3121 and they will be able to connect you to your representatives’ offices, where you can tell them how you feel about this tax plan.  And feel free to suggest they start pricing pollution, as detailed above.