“Nifty notion!” you say (having overcome the gag reflex induced by the thought of the federal government writing huge checks to gentlepowerpeople like Jim Rogers). “But won’t the scheme cost billions of dollars? What about fiscal austerity? Haven’t you heard about the global financial crisis? Where in hell will the money come from?”
The answer to the financing riddle can be found in the work of tobacco policy analysts, who have developed the crucial insight that smoking (like coal plant emissions) not only inflames arteries and darkens lungs, but also plays pickpocket with Uncle Sam. That’s because smoking kills income earners, and income earners pay taxes. In addition, people who are disabled by smoking (or coal plant emissions) create fiscal burdens on federal programs such as Medicare, Medicaid, and the Veterans Administration.
Notice that we’re not talking here about the full range of coal’s infamous “externalities,” i.e. the numerous sorts of damages that mining and burning coal inflict on human health and the natural environment. We’re only interested, for purposes of this analysis, in estimating those impacts that are specifically fiscal. The idea is to show that a Cash for Clunkers program would be revenue neutral or even revenue positive, paying for itself through increased federal taxes and reduced federal expenditures.
Even a quick survey shows that there are at least 20 major types of externalities caused by coal mining and combustion, including climate change, heavy metals, flooding, fine particulates, acid deposition, thermal pollution, smog, ozone, radioactive releases, methane, land subsidence, stream destruction, acid runoff, and the zombie stares of coal barons, among others. Unfortunately, for most of these the specific information we need on fiscal impact is hard to nail down. Global warming, for example, is surely the worst of the coal-related externalities, and the general magnitude of the problem is suggested by a 2008 NRDC study estimating that climate-related losses to the U.S. economy could be running at $271 billion annually by 2025. Still, it’s not easy to translate that looming disaster into current fiscal impact. Another serious externality is mercury, with one 2005 study estimating 316,588 to 637,233 babies born each year with umbilical cord blood mercury levels greater than 5.8 micrograms per liter, an amount associated with loss of IQ. Power plants are the leading cause of the problem, but again, how do you measure the fiscal impact of small amounts of brain damage spread across an entire generation of children?
Of all the externalities associated with coal, the most carefully studied and monetized is the elevated mortality and morbidity caused by ultra-fine particulates. According to a 2009 study of deaths due to coal emissions, led by Jonathan Levy of Harvard’s School of Public Health, the ultra-fine particulates from 414 of the highest-emitting coal plants cause about 30,000 deaths each year. While the Harvard study did not specify the reduced lifespan associated with each death, that number has been estimated elsewhere to be 14 years.
Remember, for purposes of justifying the expense of a Cash for Clunkers program, we’re not actually interested in the full value of those deaths (a 2009 National Research Council study suggested $58 billion), but rather in the more limited question of impact to the federal treasury. Such a figure can be derived using a methodology developed by groups such as the Campaign for Tobacco-Free Kids [PDF], the Centers for Disease Control, and the American Academy of Actuaries. To arrive at the lost federal tax revenue attributable to coal’s health effects, we multiply the following: deaths (30,000), reduced life per death (14 years), U.S. per capita GDP ($46,400), the average all-inclusive federal tax rate (30 percent), and the estimated remaining life of each coal plant (30 years). This yields $175 billion in lost federal revenues.
In addition to increased mortality, particulate emissions also result in increased morbidity. According to a 2009 National Research Council study, that increased morbidity produces $3.72 billion annually in health costs. Assuming (in keeping with tobacco studies) that two-thirds of those costs are ultimately borne by federal programs, the impact of this morbidity on the federal budget is $74 billion over the same 30-year period.
So even though the science and economics needed to estimate the price tag for all 20 or more coal-related externalities remains incomplete, the federal fiscal impacts of fine particulates alone ($175 billion plus $74 billion, or $249 billion) provide a sufficient basis for a substantial federal financial incentive aimed at accelerating the retirement of aging plants. Of course, as more sophisticated data on the fiscal impacts of other externalities arrive, the size of the credit that can be justified from a revenue-neutral standpoint can be increased, no doubt substantially.
How do we do it?
How might a Cash for Clunkers incentive be structured? In terms of dovetailing an incentive into the mix of policy vehicles, it is perhaps easier to use tax credits than outright payments. By using a tax credit, we can match coal plant retirement credits on a dollar-for-dollar basis to the production tax credits provided for renewable facilities under the American Recovery and Reinvestment Act of 2009 and the Emergency Economic Stabilization Act of 2008. That will ensure that credits from retiring old coal plants aren’t simply used to finance new coal plants, but instead are used to finance a clean energy transition.
In terms of the amount of money that would make a difference, a 2010 study [PDF] of the economics of retiring the Navajo Generating Station in Arizona provides some hints. According to the study, the gap between the cost of providing power from a mixture of conservation and renewable sources was 2.3 cents per kWh more than the cost of continuing to operate the plant. Of course, that differential will narrow considerably when a plant like Navajo faces a $500 million scrubber mandate. This makes a Credits for Clunkers program a good complement to a scrubber-oriented program like the proposed Clean Air Transport Rule. Together, the two can deal a one-two punch to a plant like Navajo, and the resulting revenues from the clunker credit will help solve the workforce transition issues involved in closing any large coal plant.
If we apply the economics of the Navajo Generating Station to the coal fleet as a whole, the basic conclusion is that a fiscally affordable Credits for Coal Clunkers program will dramatically increase the current estimate that about a sixth of the coal fleet will be retired within the next five to 10 years. That makes the program a win-win that will aid the climate while addressing the full spectrum of coal-related externalities. Since the program would be designed to be revenue neutral, there would be no need either to raise taxes or to increase federal indebtedness. From a political perspective, eliminating the need for tax increases defuses the ideological resistance that has bedeviled both cap-and-trade and carbon tax proposals. And since a Credits for Clunkers program would specifically aid the regions, power companies, and industries most heavily attached to coal, both regional and sectoral objections would be nullified.
If this all sounds too easy, maybe we should wonder whether we’ve been looking at the problem of coal through the wrong lens. Rather than focusing on how difficult it is to retire hundreds of entrenched coal plants, perhaps we should be looking at the transition away from coal from a historical perspective — as nothing more than the sort of infrastructure modernization that industrial countries experience on a regular basis. In that sense, retiring old coal plants over a 20-year period is not much different in nature than the decisions to build a transcontinental railway system, an interstate highway system, a space program, a network of federally subsidized hydroelectric projects, or an archipelago of jet-capable airports. In all those cases, the public as a whole stood to benefit from better infrastructure, and the broad gain in public welfare provided the basis for the fiscal involvement of the federal government. Looking at the problem in this way, we can see that a federal subsidy in the form of tax credits to retire old coal plants is well justified economically and is an appropriate federal role.
Perhaps most importantly, a Credits for Clunkers approach cuts the Gordian knots that have stymied the clean energy transition: first, the differential impacts of the transition on regions, power companies, and industrial sectors; second, the anti-tax ideologies that have made the politics of both cap-and-trade and carbon fees seemingly intractable at the federal level.
For all these reasons, a Credits for Coal Clunkers program is well worth exploring.