A recent NYT article discussed a proposal by economist Ross McKitrick to tie CO2 taxes to global temperature increases. McKitrick’s overall aim is to offer a compromise that, he argues, should satisfy those who think the government needs to take drastic action and those who think carbon emissions pose no serious long-term threat. Although McKitrick’s idea is clever, it has theoretical difficulties and (in my opinion) would certainly not work in practice.
McKitrick’s Proposal to Tie CO2 Taxes to Temperature
The NYT story does a good job summarizing the idea:
[McKitrick] suggests imposing financial penalties on carbon emissions that would be set according to the temperature in the earth’s atmosphere. The penalties could start off small enough to be politically palatable to skeptical voters.
If the skeptics are right and the earth isn’t warming, then the penalties for burning carbon would stay small or maybe even disappear. But if the climate modelers and the Intergovernmental Panel on Climate Change are correct about the atmosphere heating up, then the penalties would quickly, and automatically, rise.…
Specifically, [McKitrick] proposes tying carbon penalties to the temperature of the lowest layer of the atmosphere (called the troposphere, which extends from the surface of the earth to a height of about 10 miles). He suggests using the readings near the equator because climate models forecast pronounced warming there.…
The carbon tax might start off at a rate that would raise the cost of a gallon of gasoline by a nickel — or, if there were political will, perhaps 10 or 15 cents. Those numbers are all too low to satisfy environmentalists worried about climate change.
But if the climate models are correct, Dr. McKitrick calculates, within a decade his formula would cause the tax to at least double and possibly sextuple — with further increases on the way if the atmosphere kept heating. The prospect would give immediate pause to any investors trying to decide today what kind of cars, power plants and other long-range energy projects to finance. To estimate future profits, they would need to study climate.
“The best results will accrue to firms incorporating the most accurate climate forecasts into their decision making, precisely the kind of forward-looking behavior environmentalists want to encourage,” Dr. McKitrick writes. “Consequently, it’s not the case that we have to wait until it is ‘too late’ to respond to global warming. The market will force investors to make the best possible use of information and to press for improvements in climate forecasting in the process.”
McKitrick’s proposal is interesting, and I applaud his attempt to come up with policy suggestions that can (in principle) satisfy the concerns of most of the experts on the issue of climate change. McKitrick is trying to call the bluffs of people on both sides of the controversy, since (if calibrated correctly) his tax will stay low if temperatures do not rise in accordance with the IPCC’s favored models, while the tax will go up if those warning of large spikes turn out to be accurate. Yet despite the superficial solution to the dispute, I think McKitrick’s idea doesn’t really work.
Theoretical Problems With McKitrick’s Proposal
A crucial problem with McKitrick’s approach is the proper calibration of the carbon tax, for a given amount of measured tropospheric warming. If the IPCC consensus is correct, then carbon emissions constitute a “negative externality” (in economics jargon) whereby individual behavior imposes harms on others. To achieve a more efficient use of society’s resources (including the environment), it is optimal (at least in simple models) for the government to impose a tax on each unit of greenhouse gas emissions, to force the emitter to “internalize the externality.”
The difficulty with this, of course, is our uncertainty over the exact quantitative connection between a ton of CO2 emissions and the resulting damage to future generations. This uncertainty spills over into the proper calibration of the “optimal carbon tax.” What McKitrick’s formal academic paper suggests is that policymakers can induce an approximately optimal tax, given this uncertainty, by making the size of the tax dependent on the observed warming.
Now here’s the rub: The initial tax would need to start out quite low, in case the “skeptics” are right. In other words, if the whole point of McKitrick’s proposal is to satisfy both skeptics and fans of the IPCC, then it wouldn’t work to start out with a high carbon tax. If global temperatures stayed flat or fell over the coming decades, that means the skeptics were right, but in that case we would have suffered the imposition of a large and inappropriate tax on behavior far out of proportion to the externalities involved. So this is why the initial McKitrick tax couldn’t be too high.
But now if the initial tax starts out quite low, it would need to jump substantially in light of any rise in global temperatures, insofar as this rise gave us more confidence in the IPCC projections. This feature would be necessary to make McKitrick’s proposal appealing to those who right now are certain that human activities are pushing the world towards catastrophe. If the tax rose only modestly in proportion to modest temperature increases from this point forward, then the most alarmist climate scientists would understandably reject McKitrick’s proposal as insane. Economist Alex Tabarrok explained the point in this way after he favorably discussed McKitrick’s proposal on his blog:
As predicted most of the objections (in the comments) are from climate change proponents. In essence, they argue that the problem is so serious that we must act before the evidence is in. Aside from the obvious epistemic problems with such a position do note that a) this is a way of getting agreement where otherwise there might be none b) the tax can be non-linear so it rises (in Bayesian fashion) with the strength of the evidence, i.e. the tax need not always lag.
The problem here is that–according to everybody–the earth’s temperature bounces around a lot due to natural variability. So the more “non-linear” we design the tax–for example making it double with a further increase of 0.1C, but making it quintuple yet again with an additional increase of 0.1C–the greater the economic damage would occur if the skeptics are right and yet there happened to be a brief spike in temperatures due to natural causes. It’s true, in this scenario the high tax would wither away once temperatures naturally moved back down, but the damage would already have been done.
On the other hand, suppose the IPCC consensus is correct, and the initial McKitrick tax is far below the true “social cost of carbon.” If the underlying anthropogenic warming trend happened to be masked for an additional five years because of natural factors, then the McKitrick tax would stay far too low and allow devastating further emissions as the window of action closed.
In summary, the debate over taxing carbon emissions is so complex that it is difficult to see how we could design a McKitrick-style tax even in principle that would satisfy both sides. The natural variability of global temperatures would allow for the possibility of significant (and unnecessary) damages–either from hindered economic growth or from climate change–under any proposal that both sides could agree on. But that of course means the value of agreeing to such a proposal is greatly reduced in the present, as we contemplate various scenarios going forward.
Practical Problems With McKitrick’s Proposal
Even if we could come up with a sensible compromise that made sense theoretically, in practice McKitrick’s idea still strikes me as dubious. For example, suppose Congress enacts the McKitrick tax, and within five years tropospheric temperatures rise such that the tax draws in $100 billion annually. At that point, does anyone seriously believe that a sudden and unexpected (by the NASA scientists etc.) drop in temperatures would cause Congress to lower the tax and slash spending accordingly?
I think that once Congress got its foot in the door with a new tax such as this, it would never go away, just like the vast majority of tariffs for “infant industries” survive well into “adulthood” for the protected industries. If and when the temperature measurements called for a tax cut, we can easily imagine senators and policy wonks arguing that it would devastate the solar power industry to roll back the McKitrick tax, or that it would be shortsighted to cut the tax since scientists XYZ argue that the temperature drop is due to smog from China.
Conclusion
Ross McKitrick’s proposal to tie CO2 taxes to observed temperature trends is an interesting attempt to break out of the modelling log-jam, but ultimately I don’t think it will work. Even putting aside the serious theoretical difficulties in properly calibrating the tax, we could never trust the politicians to keep their word once they had enacted it.
This argument applies to any carbon tax, even a “revenue neutral” carbon tax, should such a concept ever come to fruition.
What is it with so many people that everything must be a tax? We put catalytic converters on autos back int eh1970’s and the air has been clean ever since. Why can’t we put converters on other machines or homes or oil fired power stations? Why do people think in terms of taxes all the time? Think outside the box.
I believe there are a couple of other issues, although I generally like the McKitrick idea, albeit for “political” reasons (aka put up or shut up) than for theoretical ones. First, the idea that the tax should be tied directly to temperatures assumes there is a direct, linear and constant damage imposed per degree increase. That’s obviously not the case. But we really don’t know what the dose response algorithm is. Second assuming arguendo that increased temperature imposes ‘damages’ on future generations, the calculus to make THAT estimate must take into account future populations; so how to account for the mixed revenue desires/signals of “one child” policy countries–there seems to be some conflict there. And finally, how do we get comfort in the agency that takes the temperature? We obviously cannot have UEA in charge of measureing the temperature that our tax bills will be dependent on.
I believe that’s how it needed to be presented to even make print. However the idea of refunds as it continues to get cooler over the next decade+ needs to be addressed.
Klem-Well, first of all, there is no getting around the fact that combustion of carbon based fuels will produce CO2-Combustion just means that the Carbon is bonding with Oxygen, and, well, I hope everyone knows what C and O stand for.
No catalytic converter or similar would be able to stop the fundamental product of that chemical reaction.
Robert, thanks for this article. McKitrick’s idea is always giving me that irritating headache I get when I know a well intentioned idea is going to go horribly wrong, but I can’t figure out exactly why I’m so sure.
I actually have another objection to add to McKitrick’s idea. The argument that firms would try to predict climate to better prepare their investment strategy is ill posed if climate is not predictable. I know the incentives would start to go towards whoever did it best, but if it is flat out not possible, that essentially adds a layer of asinine uncertainty to the economy, a giant chance profit-loss machine out of the weather. Gambling is not, I think, something we want to mandate.
The last point is, perhaps, the most salient: With all that money pouring in, there would be far too many incentives to game the system to keep it producing more and more revenue for government entities.
Moreover, as we have seen with Cap and Trade negotiations, the process is immediately subverted into picking regulatory winners and losers rather than resulting in a functional market.
Rather than rationalizing theoretical externalities, the McKitrick Tax would simply turn into another avenue for rent seeking.
Let’s call it the “temperature tax.” Yet another problem with the temperature tax is the fundamental one: the temperature can go up quite a lot without any help from us — and has done so since the Little Ice Age. We could also tax earthquakes, tsunamis, hurricanes, and polar bears (though that would be a negative tax). Get the point? There is no subsitute for good science.
The scheme is not perfect! So what’s new? And what are the alternatives? Direct regulation of carbon emitting activity? Cap & trade?
Regarding the practical objection, how about returning 100% of the monies collected to taxpayers? In other words, keep it out of the hands of the politicians in the first place.
Regarding the theoretical objections, sure there would be uncertainty, but we don’t know the size of the externality and temperature seems as good a proxy as any. Anybody got a better idea how to measure the externality and properly internalize it?
The real practical objection is that the 160 odd countries of the world are unlikely to adopt this scheme, even if it is theoretically about as good as can be devised. More likely, we will discover that adaptation, which can be done 1 country at a time, will be the principal means of dealing with climate change. That, at least, might attract political support and avoid the many difficulties of collective action.
Ed,
Not really. If there is no temp rise, there is no tax (only the tax structure). As for revenue neutral carbon taxes (for example, a carbon tax that replaces income tax), the tax becomes a generalized consumption tax disguised as a carbon tax.
To the other responders,
To reduce the uncertainty from one year to the next, you would need a secondary market to buy and sell tax credits. In other words, Goldman Sachs would buy $10 per ton C tax credits one year when temps are low, but sell it to another company when temperatures are increasing (to make a profit). The company would be glad to buy it at $20/t C (for example) if they think temps may rise the tax to $30/t C in the future. In other words, to pay for certainty (for the next 10 years as an example), an investor would have to pay additional money to reduce risk on a project. The end result is higher capital costs for all types of projects. However, investors can hedge their bets (placing bets on both sides) so that in the case that temps are flat over 10 years, they would end up financially even (i.e., they may have paid more to get a project approved, but they would have also made money onthe trading side of their business).
In other words, it’s called hedging. If prices never changed, they would be no need for markets for natural gas, corn, etc. Take nat gas for example, prices ranged from 3$ to 15$ per mmbtu since 2000. Because of the volatility, people lock in long term rates or use a hedging strategy. Not sure why the carbon market would be any different.
I think the issue is time-scale. Power plants are evaluated financially over 40 years of production. Chemical plants are typically evaluated over 20 years of production (sometimes 15 or 10 yr to be more conservative). Hard to tell temps (and thus carbon prices) beyond 5 or 10 years, in my opinion. This will likely encourage investment of coal-fired power plants that are front-load designed to use wood chips, or sequester carbon (even if the plants don’t do these things immediately, they would be designed to where this equipment could be added cheaply at a later date). Again, all at the cost of increasing overall capital cost. Maybe this is a small price to pay to avoid draconian measures implemented by Congress. Also, one could argue this happening already today without a carbon tax (but with a threat of one). Plus, it’s happening today (biofuels, wind power, etc.) because of government subsidies.
Hey guys,
Here’s a question that I have never seen answered. Is the tax credit for bio-ethanol or bio-diesel (now defunct, but surely to be resurrected again) given to the blenders refundable or not? In other words, does the government actually send out checks to the blenders (who uses it to pay for the inflated price of the bio-fuel), or does the tax credit only reduce the corporate income tax for the blender? I have a feeling that it is refundable, but I have never seen it stated that way in print (maybe the industry is too embarrassed to clarify the matter to the general public).
Hello Bob and others,
I’d like to respond to some of the points made here. The main concern I have in reading your posting is that you seem to have some ideal alternative in mind, in which perfect information for all time now and in the future is available to decision-makers, and there is no difficulty overcoming the obstacles to forming a coalition to implement it. So if you are going to criticize my proposal in comparison to an ideal alternative, I hope that in a follow-up post you will tell us what the ideal is. So far all the alternatives I have seen being seriously discussed are much worse, except for the strategy of doing nothing. However, my tax idea strikes me as a near approximation to doing nothing since the tax rate would start low and gradually taper off from there. That’s my expectation: others would expect the tax to start low and rise.
Your first objection is that we can’t say for sure what the present value of the marginal damages of a tonne of CO2 is. So? All we can ever do is work with estimates. Without some working estimate of the marginal damages you have no rationale for any emissions policy, whether price or cap-based. At least with my proposal, the direction of change over time has a higher chance of being correct than other instruments that do not build in learning mechanisms (i.e. everything else). Bear in mind that if you require perfect information then there is no possibility of setting any policy correctly.
In other words you are criticising my policy because in order to implement it requires picking an initial dollar value, and the choice is inherently uncertain. But that applies to any policy option. Given the uncertainty, my proposal lowers the expected costs of making a mistaken commitment, compared to any alternatives I know of.
To implement any policy, either an emissions tax, tradable permits (worse) or command regulations (worst), involves picking an explicit or implicit dollar value of the marginal damages. One of the worst aspects of regulations like the ethanol mandate and appliance efficiency rules is that they appear not to place a price on emissions control, when in fact they do. It just happens to be buried in the costs of regulation, and often comes out to thousands of times higher per tonne of actual abatement achieved than we would think is a reasonable emissions tax level.
That also brings up the objection posted by Klem: why a tax? Well, in part because it makes the cost visible rather than burying it in the form of regulatory compliance. As a practical matter, the comparison to catalytic converters (or smokestack scrubbers) is irrelevant. No such devices exist or are likely to exist that can sequester stationary and mobile CO2 sources. But the numerous regulatory requirements being proposed in the name of climate change will end up being far costlier than an emissions tax, and the costs will be buried so people won’t be able to direct their objections anywhere. Finally, the tax instrument makes most sense when the marginal damages curve is flat, as is the case with CO2.
You are also concerned about price volatility since the “Earth’s temperature” bounces around a lot. I have always suggested that the tax be smoothed out using a simple moving average, between 12 and 36 months, so that the change in the tax is primarily driven by a sustained trend not by weather variability. By applying a simple smoother it is not hard to ensure that the tax variations remain reasonable, especially in comparison to the cap and trade case where a vertical supply curve and a nearly-vertical demand curve interact. (That’s why Europe’s ETS system has such explosive price variability and always will, as will a cap and trade system implemented in any industrialized economy.) Having some variability is not a problem–we cope with energy price fluctuations all the time. In this case a certain amount of variabiltiy has a theoretical justification (marginal warming, if it is damaging at all, is more damaging at times when there has already been a spike in natural warming).
Your third objection is to suppose, what if the IPCC is correct, but natural forces mask warming for a while, then we delay the correct policy response. Once again you are imagining an alternative world in which we have perfect information. If the IPCC is correct, and we know them to be correct, then people will anticipate the future tax increase and plan accordingly. If the IPCC is correct but we do not know them to be correct (or believe them to be incorrect), then no one is in a position to make the right choice. At least under my proposal, policy will eventually update as new information becomes available. Every other policy proposal is impervious to new information. We have a choice between policies that assimilate new information as it becomes available, versus policies that never assimilated new information. We do not have the option of policies that assimilate information before it becomes available.
The objection that a drop in temperature would require a drop in spending but policymakers won’t do so, is irrelevant. There is no merit in an alternative emissions regulation that exempts policymakers from relaxing the policy even as future information deems it appropriate to do so, simply because we expect they will have come to depend on the revenues/rents/kickbacks etc associated with the policy.
Tom: Gavin Schmidt at the NYT blog objected that none of the temperature series are valid enough to serve as a basis for this policy. That’s just the kind of admission I like to smoke out. If we don’t have good enough temperature data to base policy on, then we better hurry up and improve the temperature data until it is policy-grade before we talk about imposing policy.
Andrew, if climate is fundamentally unpredictable then I’d rather have a policy that forced everyone to admit it rather than pretending climate forecasting is a solved problem and we’re in a position to make long term commitments accordingly.
Noblesse: we’re not talking about taxing temperature. We’re talking about taxing emissions, using observed temperature to inform the direction of changes in the tax rate. Even if any of the secondary issues like ice coverage are related to temperature it still makes more sense to use temperature as the state variable.
I believe that Ross has more than answered the critics of his idea, and that it is the best approach I have seen to dealing with the policy uncertainties of climate science.
But I don’t believe that it could ever be implemented anywhere in the world, particularly in the U.S. or China.
That’s because I don’t believe the politicians and interest groups can understand the concept, and won’t find it in their interest to implement the McKitrick plan.
In the U.S., the problem is the word “tax.” This has become a political dirty word — three, not even four, letters — that neither political party and none of the policymakers can adopt. If there were a way to call it something else, that might work, but opponents would immediately bring out the “T” word.
For China, the problem is that the McKitrick tax (there’s that word again) is self-correcting. That flows against everything I know about the way the Chinese government thinks about policy issues. If they can’t control and manipulate it, they aren’t interested.
Great try, Ross, and let’s keep pushing the idea. But it won’t be an easy sell, by any means.
Ken Maize
Ross (if I may),
Obviously it’s hard to be precise in a blog post, but I think you are misunderstanding my problems. When you ask me for a rival policy that responds to new information and is superior to yours, I can glibly reply: Sure, let’s have a carbon tax calibrated to the best-estimate of the social cost of carbon. And then as we get new information (including new temperature readings), we update the SCC using Bayes Law and adjust the tax accordingly. That is literally the theoretically best policy, given our uncertainty.
Now why don’t we do that? It’s because we all can’t *agree* on what the SCC actually is. There are people who think it’s really high, like Joe Romm, and that we should be taxing the heck out of emissions right now. Then there are people like Richard Lindzen, who thinks the IPCC estimate of climate sensitivity is too high, and (I presume) the “optimal carbon tax” should be a lot lower than what most other experts would say.
So what I was doing in my post wasn’t so much saying, “Whoa, McKitrick’s plan backfires because the IPCC might be right!” Rather, what I was saying is that I don’t believe there is actually a wide overlap where both sides in the debate could agree to a McKitrick tax.
For example, to get Rob Bradley to sign off on the tax, the initial rate has to be low. So in principle, if tropospheric temperatures stayed flat for the next two years (or even fell), then we would have a very low carbon tax for 2 years in a row.
Knowing that possibility, someone like Joe Romm would insist that this low initial tax rate would have to go up by a factor of 20 or something at the first blip in global temperature. If we didn’t concede that to him, then Romm would never sign on to the policy, because there would be (in his mind) an unacceptably high probability of catastrophe.
Do you see where I’m going with this? Because of the natural variability in temperatures, I don’t see how you actually could get honest people who have wildly different estimates of the SCC to agree to a McKitrick-style tax. Thus, I don’t think you are necessarily “smoking the other side out” if they balk at your proposal, since you’re asking *them* to sacrifice their view on the front end.
Maybe that’s a good way to frame my point: We could just as well propose a Murphy temperature tax, in which we start out with a $100 / ton tax on carbon. But then for every 1% the tropospheric temperature falls behind the IPCC suite of models’ forecasts (given the observed emissions and updating the forecasts all along), we knock down the Murphy tax accordingly. So we can “smoke out” the skeptics and see if they actually think the IPCC models are overpredicting temperature rises, or if (on the contrary) the people criticizing Waxman-Markey etc. are really just philosophically opposed to government intervention.
Does that help clarify my point?
Bob Murphy says: “For example, to get Rob Bradley to sign off on the tax, the initial rate has to be low.”
My position is a penny per ton is too high, and a hundred dollars per ton is too low (not enough to do anything substantial in the global scheme of things).
What am I really saying? I reject pricing carbon qualitatively. Period. Don’t start low (remember the federal income tax at 1%?) but don’t start. Don’t qualitatively introduce a new revenue source for government.
Yep, sorry Rob for misrepresenting your position. I was actually just searching about for a foil for Joe Romm, and your name naturally came to mind…
@Robert_Bradley_Jr.:
“What am I really saying? I reject pricing carbon qualitatively. Period. Don’t start low (remember the federal income tax at 1%?) but don’t start. Don’t qualitatively introduce a new revenue source for government.”
With all due respect, this reasoning is confused. The issue of
a) whether the price of fossil fuels accurately reflects the (unjust) costs it throws onto others
is *completely separate* from the issue of
b) whether a new source of government revenue should be introduced.
For example, you could price in the social cost of carbon with a tax, but rebate it directly to all people, something that ultra leftist pro-tax revenue James Hansen prefers. That would price carbon but not give government more revenue.
If you consistently have trouble distinguishing these issues, maybe you could ease off on the entire energy issue until you can master it. Just a friendly suggestion.
I cannot envision a “revenue neutral” tax of any kind in the US. One thing our “congresscritters” cannot resist is temptation. (There are other things they apparently can’t resist as well.)
I shudder to think of any mechanism which relies on the “global temperature record” as a trigger for action. The “malleability” of even the historical temperature record, as demonstrated with “blink comparators” at WUWT on several occasions, suggests a measure which has been and can be “gamed” (GISSed? UEAed?).
Don’t begin vast programs with half-vast ideas.
If you rebate the tax, people are just going to spend it on the taxed commodity’s (energy) higher price. What’s the point?
Of course, really what a “revenue neutral” scheme means is redistribution of wealth.
Dr. McKittrick, I wholeheartedly agree we need a better temperature series (along with damage function and dose response factors etc) before implementing policy. There are no policy grade temperature series—that may suggest hurrying up to improve same before policies are iplemented. Better yet, hold off any policy implementations until a qulaity temp series is produced; there are other minimal requirements as well. That doesn’t distract from the theoretical aspect of your concept, but as we know theory and practicality are separate things. Given the wide range and magnitude of negative effects, I opt for “do nothing” and note that the countries like the U.S. (often accused of “do nothing” policy) are actually making more progress in reducing emissions and intensity than places with stringent reduction programs/rules like E.U. Beware government failure in any quest to “fix” a market failure.
An interesting thought – my “concerns” regarding this plan are addressed in the other comments, namely the incentive for the taxing authorities to game the system to maintain tax revenues. Clearly (as McKitirick states) the real objective is to “smoke out” the flaws in recording and verifiying temperature changes as the condition of tax levels -leading back to the incentive for taxing authorities to game the system.
My primary objection is that by proposing any form of financial penalty (or incentive) tied to emissions of any sort, is in effect an admission that these man-made emissions “cause” climate change – which of course is absurd.
As there is no evidence that increased CO2 emissions have any significant impact on temperatures, let alone climate, there is therefore no tax, emission scheme or “market fix” that works – because there is no work to be done.
In further response to Klem’s question:
Established cultures have established mechanisms for providing societal services. For many “industrialized” societies (i.e., societies that produce large quantities of greenhouse gases per capita) that mechanism is taxation. Governments in “industrialized,” market-driven economies are good at establishing and collecting taxes. Krem, you surely agree with that premise. The purpose of the “tax on carbon” (actually on fuels and processes that release greenhouse gases in proportion to their greenhouse effect) is to price “carbon” high enough to reduce its use. This forced reduction will be accomplished most cost effectively, through market mechanisms, across all applications of technology that will reduce the targeted emissions. Coal will become very expensive, petroleum products will be somewhat more expensive, even natural gas will cost a bit more. Every player in the economy will be less inclined to use these commodities. The utility will be less inclined to build another coal-fired power plant, the consumer will be inclined to avoid buying yet another gasoline guzzler and the homeowner will be inclined to install double-layered windows.
The unfortunate reality is that the United States, Australia, South Africa and Japan, to name a few of the worst offenders, produce shockingly high levels of GHGs per capita, per year. While China produces GHGs at a fraction of the same rate, it is accelerating dramatically. The industrializing countries that still produce below average GHGs per capita per year include Brazil and India. Even with its post-Kyoto efforts, Europe is not far below Japan in GHG out put per capita. For that reason, tax incentives will likely be needed if the most profligate GHG-emitter countries are to reign in their current use of carbon-based fuels.
In the U.S., tax policy has already been used as a carrot to promote investment in certain technologies – wind, solar, geothermal and “green building.” The investment tax credit has been used successfully in this country to stimulate economic growth in general and to stimulate energy investments in particular in past decades. It is an important factor once again either in traditional form or in its grant form.
However, to the extent that individual states, regional groups of states or the federal government target a few select approaches, particularly if applied to a limited region, alternative energy investments will be sub-optimal, more costly than necessary and relatively inefficient. Thus an investment tax credit to support investment in alternative, renewable, energy systems will encourage their development where they can be most efficiently brought into the energy system. This will lead to wind farms built where the wind is strong and most steady and solar facilities built where insolation is greatest.
If government is to interfere with the market, as I feel it must in this case, let it use the tools it wields best. If it is to offer grants and investment tax credits to promote “good” energy investment, let it tax “bad” energy consumption. To reduce the “waste” of energy, our energy costs, apparently, need to go up. In such case, the net increase in revenues can be used, for example, to reduce the sales tax on other staple products or to improve public education.
A “carbon” tax, with the expectation that any new tax revenue will be put to some useful purpose, is far preferable to a volatile carbon-caps-and-credits market which benefits the “geniuses” of Wall Street and their kin. The latter prospect makes me ill.
We can’t put an value on the damage that GHG’s cause today because it isn’t clear that GHG’s are causing net damage or how much damage they will cause in the near future. The REAL damage GHG emissions are causing today is that they are reducing our margin of safety before “unacceptable” climate change occurs. A carbon tax should increase as our margin of safety decreases. Suppose our political leaders decided that a total temperature rise of 2.5 degC would be unacceptable. We’ve used up 20% of our safety margin (+0.5 degC), so we have a tax rate of $X per ton. By the time we get to +1.0 degC, the tax has gradually increased to $2X per ton; +1.5, $4X; and +2.0, $8X. The $8X tax rate would be chosen so that the use of carbon fuels for electricity production and most transportation purposes would be economically unattractive compared to whatever alternatives are available – a sensible situation when climate change is on the brink of becoming unacceptable.
It would be better if we could convert our safety margin into a number of years remaining until climate change reaches a level deemed “unacceptable”. If warming has averaged 0.10 deg/decade for the past 30 years (satellite data), so we would have a 200 year safety margin and a $1X carbon tax. 150 year margin, $2X tax; 100 year margin; $4X tax etc. Unfortunately, I’m not sure if the satellite temperature record has enough reliability and stability to calculate a safety margin in years.
Sea level rise is a measure of climate change that we can measure extremely accurately with satellites. Sea level responds to both warming (thermal expansion) and lose of ice caps. We’ve had a long term rise in sea level of about 0.20 m/century for several centuries, so we might decide this rate of increase won’t be taxed, only incremental increases above it. We could “define” a rise of 1.2 m/century as unacceptable, and adjust our carbon tax are we approached this “unacceptable”rate.
Obviously, the definition of unacceptable GW is a difficult political decision, but once it is made, the appropriate economic incentives for reaching our goal might be relatively clear.