How not to merge a carbon tax with a cap-and-trade system

For me, a fatal weakness in any proposal for a carbon tax to address the threat of human-induced climate change is that nobody knows where it should be set to get the desired effect. Almost certainly, because of all the unknowns about how people and the economy will respond to the tax, we’ll set it too low to reduce carbon-dioxide emissions to where they need to me. Alternatively, we’ll do needless economic damage with a tax that’s set too high.

I think that’s a conclusive argument for cap-and-trade credit systems for carbon emissions, despite the significant practical problems the Europeans, in particular, have had in setting one up and the inherent challenges anyone would run into. With a cap-and-trade system, you can take your best estimate of what your emissions “should” be, issue (or auction) credits for that amount, and then let the price float to wherever the free market figures it ought to be.

I’ve wrestled with the question here, here, and here, and I’m definitely open to more evidence.

McKitrickRoss McKitrick, an environmental economist at the University of Guelph in Ontario, makes an effort in the Financial Post to remedy this weakness in the carbon-tax idea. He proposes a carbon tax that’s directly tied to observable warming in the atmosphere, called a “T3 tax.” The greater the warming, the greater the tax, on the theory that the greater the warming, the greater the pressure that needs to be applied to make it stop. He estimates the tax on a tonne of carbon at $4.70 today, but that it would rise to $200 a tonne by the year 2100 if the worst-reasonable-case warming scenarios come true.

Global-warming activists would like this. But so would skeptics, because they believe the models are exaggerating the warming forecasts. …Some solar scientists even expect pronounced cooling to begin in a decade. If they are right, the T3 tax will fall below zero within two decades, turning into a subsidy for carbon emissions.

At this point the global-warming alarmists would leap up to slam the proposal. But not so fast, Mr. Gore: The tax would only become a carbon subsidy if all the climate models are wrong, if greenhouse gases are not warming the atmosphere, and if the sun actually controls the climate.

You might have sensed by now that McKitrick is a climate-change skeptic, and you’d be right. He’s the co-ordinator of a response to the Intergovernmental Panel on Climate Change’s latest report called the “Independent Summary for Policymakers” (PDF), prepared for the Fraser Institute, whose contributors are almost a who’s-who of PhD-wielding skeptics around the world.

(Funnily enough, his book Taken by Storm, expressing his climate-change skepticism, was a finalist for the Donner Prize for the best public-policy book published in Canada in 2002, the same prize climate-change … um, “believer” Mark Jaccard’s Sustainable Fossil Fuels won in 2005.)

This definitely does not disqualify McKitrick from making useful suggestions. In fact, the general concept of what he’s suggesting is very appealing: if the overwhelming bulk of the world’s scientists are wrong, which can happen and has happened, policies that respond to that wrongness by doing no harm sure would be good. A $50-a-tonne carbon tax will be pretty damaging for no good reason if it turns out emitting carbon isn’t harmful; a tax that adapts to actual conditions and phases itself out automatically if there’s no real problem would be excellent.

But ultimately, I’m concerned that McKitrick’s suggestion, despite all its detail, isn’t made in good faith.

Superficially, McKitrick’s proposal to tie the carbon-tax rate to observed warming is his idea’s best characteristic. Immediate feedback, adjusting to on-the-ground (or in-the-air) realities, and so on. The trouble is the extremely long lag that the overwhelming bulk of the world’s scientists believe exists between the emission of greenhouse gases and their effect (which is cumulative) on the amount of heat they cause the earth’s atmosphere to retain.

If we stopped all human greenhouse-gas emissions right now, the IPCC figures the earth would warm by another 1.1 degrees over the next century or so. That’s a timescale McKitrick’s proposed monitor-and-adjust carbon-tax system can’t cope with. Worst of all, because the T3 tax only responds to damage that’s already happened, it has little preventive effect.

In fairness, he does have a partial response to that in his FP piece:

Under the T3 tax, investors planning major industrial projects will need to forecast the tax rate many years ahead, thereby taking into account the most likely path of global warming a decade or more in advance.

And best of all, the T3 tax will encourage private-sector climate forecasting. Firms will need good estimates of future tax rates, which will force them to look deeply, and objectively, into the question of whether existing climate forecasts have an alarmist bias. The financial incentives will lead to independent reassessments of global climate modelling, without regard to what politicians, the IPCC or climatology professors want to hear.

Yyyyyyee-esssss, but that also encourages gaming the system, encourages blowing out extra carbon now while it’s cheaper to do so (creating a whole new tragedy-of-the-commons problem), and puts individual consumers, on whom any reasonable response to climate-change concerns primarily depends, at a distinct disadvantage in planning ahead.

5 responses to “How not to merge a carbon tax with a cap-and-trade system

  1. Yes, I wrote on this today.

    It seems to me that the lag time is an issue. An emitter can, for example, cut emissions by x amount and still see ones tax bill go up if the price per unit of GWG goes up such that you are paying more for fewer emission units. Also, the price to cut emissions presumbably rises over time (you get the low hanging fruit first, so could there become an incentive to simply pay the higher tax bill and abandon efforts to “go greener”? McKitrick posted a response to this at CLimate Audit, which I am still working through.

  2. As rude as McKitrick’s response was (No. 61 in the list here), I admit I don’t quite understand what you’re saying here, either.

    Is the premise of the question that at some point, the cost of further emissions reductions will be more than the cost of paying the tax? If that’s what you mean, I think the answer is that as long as the climate keeps warming, the tax keeps going up. If that situation arose, it’d be temporary, right up until the atmosphere stopped warming and the system reached an equilibrium.

  3. He also responded at 69.

    But yes, the cost to an emitter is tax + abatement measures. Because of the time lag, your emission cuts do not necessarily result in paying less tax, so you might cut by x amount and still pay more for less tons of GWGs. Is it possible (I am wondering) that,because of this, the rational decision under some scenarios might be to stop paying abatement costs.

    Given that decades of warming are already “in the pipe”, the tax will be going up for decades, so “temporary” might be a long time.

  4. Pingback: Another concern about McKitrick’s ‘T3 tax’ « The EcoLibertarian

  5. Pingback: Carnival of the Green No. 82 « The EcoLibertarian

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