August 22, 2018

Monetizing the Health Co-Benefits of a Carbon Tax

Stringent climate change mitigation policy is often criticized for placing burdensome costs on society for uncertain climate benefits in the future However, a true cost-benefit analysis of climate related policies should consider the other benefits that come from actions aimed at reducing greenhouse gas emissions.

As my last blog post demonstrated, deeper reductions in CO2 emissions result in greater public health co-benefits by simultaneously decreasing sulfur dioxide (SO2), nitrogen oxides (NOx), and primary fine particulates (PM2.5) emissions. The good news is that efforts to monetize these co-benefits demonstrate that the welfare gains of enacting stringent climate policy outweigh their compliance costs.

Marc Halfstead and Lawrence Goulder’s book Confronting the Climate Challenge; U.S. Policy Options offers a thorough analysis of the co-benefits for a range of U.S. climate policy options, including the climate and non-climate benefits that these policies can provide. One of the policy scenarios that the authors evaluated is carbon tax of $20 per ton increasing at 4% annually, which is quite similar in price to the carbon tax recently proposed in the Market Choice Act. In addition to detailing the impacts that this carbon tax will have on emissions, GDP, and welfare, they also determined the monetary value of the co-benefits that the tax will provide.

There are two separate co-benefits that the authors monetize; energy security, which relates to the avoided dependence on imported oil and local pollution benefits that reflects the avoided health costs connected with the reduction of local air pollutants. The overall value of the co-benefits from reductions in NOx, PM2.5, and SO2 are $700 billion, $3,300 billion, and $4,400 respectively. These monetary benefits of air quality improvements alone significantly outweigh the welfare costs of the of the tax. Perhaps even more striking is that:

even if the climate benefits of reduced CO2 were zero, a carbon tax would still produce significant net benefits through reductions in these three local air pollutants. Further this understates the net benefits because [they] have not included health benefits from reductions in CO, PM10, and VOC’s.

This is an especially important point considering the counter arguments to a carbon tax often throw into question the science behind climate change and discredit the direct impacts a carbon tax might have.  When accounting for both climate and non-climate benefits, the excess benefits over welfare costs of the carbon tax amount to more than $10 trillion in present value, which represents a 1.3% increase in the present value of wealth from the reference case.

Simply looking at the economic balance sheet of a moderate carbon price significantly improves the argument for a such a tax. If moral justifications for such a policy were not enough to convince lawmakers to pass legislation, then the economic gains of the non-climate benefits alone should be more than enough to spur them to action.