Bishop Hill The T3 tax redux
Jul 3, 2013 Climate: McKitrick Climate: WG3 Economics The Global Warming Policy Foundation has issued a paper in which Ross McKitrick sets out his idea of a carbon tax calibrated to temperatures in the tropical troposphere. The press release is as follows.
London, 3 July: A new paper, published today by the Global Warming Policy Foundation, proposes a radical new climate policy approach that offers to be the most cost-effective means of curbing CO2 emissions, while automatically adjusting the stringency of the policy to the severity of the problem.
The paper 'An Evidence-Based Approach To Pricing CO2 Emissions' written by Professor Ross McKitrick (University of Guelph, Canada) proposes to link the level of a tax on CO2 emissions to temperatures in the tropical troposphere, and to create a 30-year futures market for tax-exemption certificates. Investors would then have long term certainty about the carbon price, and the future tax rates would incorporate all known evidence of the likely path of global warming.
If started at a low level and used to pay for income tax reductions, McKitrick's carbon tax will be economically beneficial even if enacted unilaterally.
"If the climate models are correct, the carbon tax will rise significantly as CO2 levels rise; but if the temperatures remain stagnant or low, then the tax and its economic cost will remain low too," said Professor McKitrick. “Either way we get the right outcome, and the market will reward industries and investors who make the most objective use of available science in forming long term plans.”
"The temperature-based procedure that McKitrick outlines in his paper would provide a strong incentive for more thorough and objective analysis of possible future developments in the climate system. It thus offers a blueprint for an evidence-based low-cost emissions policy that would also promote the cause of better understanding," Professor David Henderson writes in the foreword to the GWPF paper.
Full paper is available here
Reader Comments (48)
The globe is cooling, folks; for how long even kim doesn't know.
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It seems almost cruel, doesn't it, proposing that any carbon-taxes be in some way actually related to a physically measurable and verifiable reality, not a model.
Still, if I ever had the money to do so, it might be fun to spread-bet on future temperatures AND atmospheric CO2 concentrations. Then we would soon see the true value of the Bern-model carbon-cycle. I don't think it would be wearing the maillot jaune.
I want my money back if it gets colder.
It's whistled away in the windmills, Alan, alas.
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Why in the world does he want another tax? That's simply taking more money from those who create wealth and giving it to our parasitic oppressors.
Why would they want to reduce carbon dioxide emissions? I thought they saw the whole thing as a crock.
Bonkers. Why not a salt tax or a window tax?
Navy Bob, I'm not at all sure that he does want a tax. I think it is just an economist's proposal for a system which, given the policy-maker's stated aims (ho ho), would be more sensible than existing ones.
In reality it would represent the Trojan-horse of reality, which would then dump in the CO2-alarmists' bath.
I am experiencing deja vu. Hasn't Professor McKitrick been proposing this for a few years?
Winter is coming.
If temperatures are below the liar's forecasts, I want a refund on my electricity AND gas bills. The reason the criminal oil companies are getting away with their cartel price rises is that no one is keeping them in check because of ... global warming.
***
The Met Office - top class weather forecasting since the medieval warm period.
I'm not receptive to the idea that if you MUST have a tax, this is the best kind. I don't want a tax on economic activity at the root. It exports jobs and prosperity. There is no chance at all of the whole world doing it, either.
As a right-winger I feel the need to add that giving politicians an excuse to tax is like giving dope to an addict.
I fail to understand the economists’ love for carbon tax.
The only human activity that creates real wealth is industry. No significant industry is possible without use of energy. Since the abolishment of slavery industry needs dispatchable high density energy sources. In the next half century the major energy sources will be carbon based. I do not see nuclear energy getting the upper hand in this time frame. The West is currently losing important industries at an alarming rate; this trend must be turned around. Installing any kind of carbon tax will put the West at a further disadvantage, making it increasingly difficult to hold on to industry, let alone to start new industries.
A second issue is: what will this tax be used for? Like all current taxes, it will be administered by the bloated governments in the West, none of which have any vision for the future. It will only be used for creating new government departments, that use up wealth, creating nothing useful in return. Carbon tax is just another mechanism to run Western civilization into the ground. We should steer away from this idea at all cost.
"Evidence- based", eh?
That'll never catch on.
I've no doubt that if such a scheme were instigated then 'adjustments' to the actual temperature data would ensure the windfall tax the politicians required.
Timmy, has proposed a carbon tax.
I've a proposal, why not get rid of big government and then we can have low taxes = a prosperous economy. Yes, of course we have to pay for energy and fuel in account bills but it is the government levy, or take which is killing us, oh and the extra pain - paying extra, extra - for worse than useless energy boondoggles.
Are we mad, and is it not time to take back power from the executive and hand it to a properly representative sans political parties - legislature.
So, we give the contract for temperature assessment to the CRU.
And who pays them artificially to increase the numbers?
The same people as at present, the carbon traders and the fossil fuel companies.
Of course, the theory is predicated on returning CO2 tax to taxpayers through a reduction in income tax. Without this important bit, you're all correct that it would be yet another way to stick their hands in our pockets. It has the advantage of not making CO2 mitigation (unnecessary though I believe it is) a pure fundraising exercise for governments - after all, why would they bother if they're not getting anything out of it?
What the science has found (but isn't saying at the moment) is that CO2 concentration has NO impact on global temperature at all.
It seems that CO2 increases radiation uptake very slightly, but that the atmospheric thermostats are so powerful that this effect is lost in the noise.
The only driver of CO2 appears to be temperature. When it gets hotter CO2 (mainly from plants) goes up.
Taxing humans for producing it would be pointless...
It would be far better to tax land values and tax mineral extraction rights (could be done by auctioning %age extraction, so fracker will share x% of production, which the state would then sell).
How about a tax on BS?
Dodgy Geezer
I think the main "input side" of the atmospheric CO2 concentration is the oceans, when they heat up they release CO2.
Taxation and ideology should not even be mentioned in the same breath.
The government needs an amount of money to fund its expenditure. The taxation which provides this funding should be spread across the population on an ability to pay basis and that is it.
Slightly off topic; why do we tax industry at all? If they do not pay tax how will they spend the saved money:
Pay shareholders more (taxed)
Pay the managers more (taxed at a high rate)
Pay their employees more haha (all taxed)
Invest in improving the company (more jobs and more tax)
How about a tax on BS?
Jul 3, 2013 at 4:05 PM chippy
Good idea except it would give the govt more money than it could find things to waste it on.
Jul 3, 2013 at 4:09 PM | Dung
You forgot one:
Ship it offshore (never see it again)
Somewhat naive of McK to think that the anti-capitalists, troughers, third rate careerists, knee-jerk artists and the terminally confused that populate all institutions of power wil give this idea a second thought.
What Albert said.
I would add that government bureaucrats treat taxpayers as some kind of infinite, inexhaustible resource to be exploited at will, in much the same way that environmentalists decry industry's tendency to treat natural resources as inexhaustible and infinite to be exploited at will for their own gain.
W^3
Billy Liar
Why ship it to a country where it will be taxed?
I have just been to the presentation at the House of Lords by Ross McKitrick which was interesting.
Some commentators above should note that his proposal is for a revenue neutral tax, i.e. that the revenues received from a CO2 tax should be equal to cuts in other taxes and that there should be no hypothecation of carbon tax revenues to mitigation, abatement, adaptation or compensation.
I think the arguments in his paper are flawed because:
1. He says that a temperature-indexed tax is a "state-contingent externality pricing mechanism" but it is not - temperature is not an externality, the supposed externality is the social cost, or benefit, of a higher atmospheric temperature and unless the tax varies with the social cost, it is not an externality pricing mechanism. Of course the human history of the Holocene supports the view that output and employment are higher in warm periods and lower in cold ones, so it seems likely that there is in fact a positive externality arising from global warming not a negative one.
2. Dr. McKitrick's argument appears to be predicated on the view that the temperature of the tropical troposphere only rises or falls with CO2, not other variables. In his presentation, he supported this point with IPCC "hot spot" charts based on GCMs. Since the tropical troposphere temperature has presumably fluctuated in the past as a result of causes other than man made CO2 and since the GCMs have been widely shown to be incapable of modelling the past climate correctly (e.g. Bob Tisdale's work), this premise seems flawed.
However, it is possible that Dr. McKitrick's proposal is somewhat tongue in cheek and Nigel Lawson made the good point that such a tax might provide a way for politicians to get themselves off the hook - they could impose a temperature indexed CO2 tax instead of the raft of current CO2 taxes, quantity based pricing mechanisms, subsidies and regulations saying that it is a "better" way to control emissions and the deleterious effect on output, employment & welfare of the new tax could be less than that of the current policies.
It was a good meeting with what seemed to be a predominantly sceptical audience but also Bryony Worthington was there and asked a question - whether the proposed tax should include in its index Arctic troposphere temperatures, not just tropical ones.
I can think of four objections to the proposal, each of which could completely undermine it.
First, McKitrick claims is that it is a low cost, but also low impact (on carbon emissions) policy. Stern's cost-benefit analysis assumed that policy would be low cost, but high impact. Current policy is high cost and near zero impact. Implementing this carbon tax requires binning the Climate Change Act emissions reductions targets.
Second, an optimal policy must fully reflect the true carbon content of each energy source. Wind power, for instance, can reduce the efficiencies of other power supplies, such as gas. LNG from Qatar has, ceteris paribus, a higher carbon content than locally produced gas. EU bio fuel requires a huge amount of fossil fuel to produce.
Third, a low carbon tax could actually increase usage of low cost, high emission coal. In China they are copying South Africa in developing coal-to-liquids (ctl). For China it gives a certain cost of fuel at around $60 per barrel, against the recent oil price of $80-$120 a barrel. Even though ctl might have a number of times more carbon emissions than oil, a low carbon tax could still make it economic to invest in ctl, and will certainly make coal-fired power stations more economic than nuclear or any renewables in the UK.
Fourth, for a non-global policy, futures prices give a long-term incentive to invest in non-tax areas, giving a huge economic cost for taxing countries. The only way I can see to counter this is to have tariffs based on carbon content. But, apart from a knowledge problem, economists generally agree tariffs are hugely distortionary and reduce general welfare.
I have for some years advocated a free-market approach to fund-raising for climate mitigation, which is loosely based on the idea of a futures market. What you do is to create a market in negotiable bonds that pay differential rates depending on climate change outcomes. For example, one bond might pay out at a handsome rate of interest on the day sea level rise passes one metre, but be voided in 2100. If you think that sea levels will rise dramatically in the coming century, the bond is worth a lot of money. If you don't believe, it is worth nothing. If you assign some probability, it has an intermediate value.
Similarly, you can issue bonds that operate the other way - for example, paying out in 2100 at a handsome rate of interest, but being voided if the sea level rises past one metre. I dub the former 'up-bonds' and the latter 'down-bonds', based on what they say will happen to temperatures, and what their value will do if temperatures rise. You can of course place bets on different levels (2 metres, 6 metres, 50 centimetres etc.) or different climate outcomes (hurricane numbers, global mean temperature anomaly, global sea ice extent, etc.).
So to start with, different people will value them differently, and will therefore be willing to buy and sell them to one another until the perceived risks balance. The market price at which they do so will reflect our collective belief in climate change. Not just what we say in public, but what we truly believe, weighed individually against all our other priorities, objectives, and beliefs. This therefore tells us how much the free market says we should spend on it.
So then you charge your carbon taxes in up-bonds. You pay renewable energy subsidies in up-bonds. You buy insurance against future disasters in up-bonds. You raise money for R&D in renewables to be paid in down-bonds. You compensate energy-intensive industries for the costs of switching to renewables in down-bonds. The market distributes these charges precisely and individually to those who most want what they deliver, in proportion to how they value it. You can't cheat it. You can't over-value or under-value it. And nobody can argue with it.
For those who believe in the coming apocalypse, the up-bonds have a high value - they cannot argue that the polluters are not being charged heavily. If they manage to shift the charges, it can only be to someone even deeper in disbelief.
For those who believe it's all a load of nonsense, the up-bonds have no value at all - they cannot therefore argue that they're being made to pay a cent for something they don't want. The economic burdens of going Green won't fall on them - quite the reverse - and they can therefore do so with a happy grin.
As time passes, and more information becomes available from climate observations, the price will rise and fall, as people invest more on a rising product, or bail out when the perceived risk gets too high. And thus the eventual price of all the changes will be distributed to those who were most wrong, in proportion to their beliefs and how they prioritised it. The costs will fall precisely on those who most deserve it, in precise proportion to their guilt. It is the ultimate in fairness and justice - you decide your own sentence automatically by your own actions.
I wouldn't want to claim that it is perfect. I can see a few problems, like the possibility of cash-strapped governments investing heavily (and badly) in such markets on our behalf. (It's called the 'principal agent' problem.) But they're doing that anyway, and at least this way we'd get some of it back. The problems are mostly not with the proposal itself, but with the fact that it interacts in a non-free market environment. But if you really, truly want to get free-market types on board, a proposal like this stands a far better chance with them than yet more taxes and regulations and coercion.
In the few climate-activist forums I've floated the idea, when they were talking about how they could tailor their message to appeal better to free-market types, absolutely no interest was shown in adopting it. They spent all of their time instead arguing why the free-market ideology was wrong. So just as regulatory authoritarian solutions will never appeal to free-market people, I suspect free-market solutions are never going to appeal to regulatory authoritarians. C'est la vie.
This proposal by McKitrick is (as someone has already said) not new. Somewhere between one and two years ago a US politician seeking election asked him for his views and he came up with this plan(I am sure this is in HSI?).
Nullius
Don't give me your new ideas about taxing me on Carbon, I am not interested in paying tax related to a non existent problem.
Dung,
I'm not taxing you. Read the proposal more carefully.
McKitrick's idea comes off the rails simply due to the concept that this new tax, would replace existing taxes.
Creation of a market for climate mitigation bonds with a wholly imaginary value is similar to the constructs that have recently led to bank failures. The Dutch - unfortunately - started all this in the 17th century with their tulip market that led to a tulip mania and crashed.
It is all very well to say that people who assign no value to such bonds do not have to pay, but if a significant part of the population believes in such things (people believe in the craziest things) and when it becomes clear that the bonds have no value at all, there will be hell to pay again.
To my mind, not a good idea.
"...and when it becomes clear that the bonds have no value at all, there will be hell to pay again."
On what basis? And how would that be any different from them discovering that they already *have* paid for climate mitigation measures that have no value at all?
It wouldn't be as if they hadn't been warned...
The aim of the proposal is not to say there won't be hell to pay, but to make sure only those responsible for the waste of resources actually have to pay it.
The banks will be involved in such bonds because they smell a new market like the emission trading system. They will have the bonds on their balance, suddenly the bonds prove to have zero value and the bank keels over. Then the taxpayer has to rescue them. Or do you think that is not possible?
It's not possible, because the money is not being created out of nothing, and so cannot disappear. It is a transfer from one set of people to another. No money disappears, it just changes ownership.
Most futures markets require that you put sufficient assets into trust as security, to cover the obligation. If the climate goes one way, you get it all back. If it goes the other way, you pay it all out to the bond owners.
But then, if I understand you correctly, the bond money is not used for "climate mitigation", such as windmill construction (that will later prove to create more CO2 emissions) or other similar harebrained schemes. It now looks to me like buying security to go to heaven after death...
Used to reduce income tax?
Ha Ha, Hahaha.
“When a new source of taxation is found it never means, in practice, that the old source is abandoned. It merely means that the politicians have two ways of milking the taxpayer where they had one before.” Henry Louis Mencken
"But then, if I understand you correctly, the bond money is not used for "climate mitigation", such as windmill construction"
It can be. The point of the scheme is to decide who pays for them.
Say some green wants to build windmills, but doesn't want to pay for them. He puts some valuable asset (house, business, pension) into trust, and sells you some down-bonds. The money you pay for them goes to the green who buys windmills.
It looks exactly like a loan - he borrows money from you, secured against some asset, and has to pay interest into the fund to keep it topped up. The money he 'borrows' is used to buy the windmills.
The green believes that because the climate is going to get hotter, the down bonds will never pay out and are effectively worthless. At the end of the term (or whenever he decides to sell the obligation on to somebody else) he gets his assets back from trust, and you have paid the full costs of the windmills. As far as he's concerned, the people who don't believe in climate change will end up paying for the damage they do.
But when the climate doesn't get hotter by the due date, the bonds come due and you claim the assets, which are worth what you originally paid plus a lot of interest. It's as if you made a loan and now it is being paid back. The green pays the full cost of the windmills he insisted be built.
Say the government demand £x/ton of CO2 tax. You offer to pay in up bonds. You put some money aside into trust, and pay the government in bonds secured on it that they can redeem when the climate passes some predicted threshold. When it does, they (or whoever they have sold the bonds on to) collect the money. Since that's exactly what they're claiming will happen, they can't argue you haven't paid. When it doesn't, you get your money back. You can either pay in the interest yourself, or combine it with an ordinary investment scheme where the returns go into topping the fund up.
And any time you need the assets back, you can sell on either bonds or the corresponding obligations (or buy your own bonds back) for whatever the market price is, which will follow the market's collective belief in climate change. That way you can speculate on shorter-term changes as well.
It's a standard type of financial mechanism that markets use for managing all sorts of assets. Think about insurance policies, for instance. It already works fine in other arenas.
Nullius
You have been on this blog in the past talking BS about shale and now you have found something new as a vehicle for more BS.
In response to your comments on my post; I read McKitrick's proposal over a year ago and I do not buy it. Taxation has nothing to do with ideology, it is simply a way of funding expenditure. Creating taxes based on anything other than ability to pay just creates more jobs for civil servant desk jockeys.
@michael hart. Yes, it is cruel.
We just got word from the UK govt that they don't know if temperatures are increasing
Nullis,
Your proposal might be fine in theory, but suffers from two issues.
First, like Ross McKitrick's, it suffers from knowledge problems. You might get an objective measure of sea level rise, but that is just the start. Policy needs to offset the costly consequences of climate change. For sea level, that includes rate of rise and the difference between expected and actual.
Second is an issue that you have found. Policy is based upon ideology, not upon a measure of economic optimization (maximum benefits for minimum costs). But the advocates of current policy have not and don't want to consider policy. Guy Leech (7.32pm) believe's McKitrick's proposal is tongue-in-cheek. He probably right as it is unworkable. But it does challenge people to consider the issues with current policy. To use the language of Stern, climate activists want to save the planet for future generations. For climate science to correctly forecast impending climate catastrophe is not sufficient. Policy will only benefit future generations if it not only alleviates that problem (constrains CO2 rise) but does so at a cost less than the total costs of climate change. Current policy, by any measure, will make virtually no difference to CO2 rise and will impoverish future generations. So Nullis, your proposal, like Ross McKitrick's, might be unworkable, but it challenges policy-makers to think about issues they have not considered.
Nullis, I don't get it. You hypothesize "Say the government demand £x/ton of CO2 tax...". This is the root of the problem. It is upfront costs that are demanded/imposed by government. If people wish to invest in windmills or shale-gas, then that is fine by me. But legal obligations to address a (non-existent) problem is a different kettle of fish. It is an opportunity cost issue.
Like others, I also suspect McKitrick is having a bit of a laugh with this proposal.
Very clever idea.
This circumvents the precautionary principle by putting in place remediation only if the remediation is required. For opponents to call on the precautinary principle they now have tot show that disaster is irreversible before the timescales of this proposed tax.
Which they can't.
More than that, this does pull the rug out from under the Climate Change Act. If people want to back out of that then this is a convenient doorway.
Of course, many on the right will object to any new tax - conveniently supporting D Cameron and his green brigade's support for the Climate Change Act.
But with the SDP now in the LibDems/Cons there is a good chance that Labour (heartland: shaly north) might take it up.
Google found one news source that picked up on the McKitrick/GWPF paper:
http://www.commodities-now.com/reports/environmental-markets/14846-new-paper-proposes-cost-effective-climate-policy.html
Anybody have any others?
Rhoda
As a right-winger I feel the need to add that giving politicians an excuse to tax is like giving dope to an addict.
Pray tell, as a right winger, how you propose to keep away the great unwashed or the poor masses from a revolution and from forcibly taking away your wealth, earned or inherited, except by way of taxation.
The tax you pay ensures social stability and it is a fair alternative to the violence and poverty you might suffer otherwise.
Think of Marie Antoinette and think of massive amounts you'll have to pay to private security guards to keep you and your wealth, earned or inherited, from rape and pillage.
The politicians you so much despise run the state and the state's police in order to keep you and your wealth, earned or inherited, safe and secure for much cheaper price than you'll have to pay to private security.
Giving free security to the wealthy is like giving free drugs to a dope addict.
Manicbeancounter,
"Policy needs to offset the costly consequences of climate change."
The approach can do that too. You buy bonds as insurance against the future consequences, and the market price converges on the amount people are prepared to buy to cover the perceived risks. This balances expected consequences against expected costs against current priorities. It doesn't matter that the pay-out condition isn't exactly proportional to the social cost so long as the relationship is monotonic.
"Policy will only benefit future generations if it not only alleviates that problem (constrains CO2 rise) but does so at a cost less than the total costs of climate change."
But the problem is that we don't agree on what the total costs will be. When people disagree on the value of something, that means there is an opportunity to make money from the difference of opinion, and by doing so to re-balance the perceived risks and respond in a way that keeps everybody happy.
Since we don't agree on the future cost of climate change, we can't agree on how much to spend on it now. But if you pay in an asset whose value we don't agree on either in the same way, you can arrange to spend the appropriate amount on it to meet everyone's expectations. You spend in a coin that those who think more should be spent think is more valuable.
michael hart,
"This is the root of the problem. It is upfront costs that are demanded/imposed by government."
The beauty of the scheme is that if the problem is not real, then there are no upfront costs (or at least, very much lower ones.). It only requires that you invest your savings in a special financial arrangement until everybody else realises the same thing, and then you can reclaim your money without having spent a penny. The government can tax as much as it wants - you won't have to pay any of it.
sHx,
"Pray tell, as a right winger, how you propose to keep away the great unwashed or the poor masses from a revolution and from forcibly taking away your wealth, earned or inherited, except by way of taxation."
Mmm. The Mafia used to run a scheme like that. The easiest answer is to not create any wealth to steal. There's no point in going to the effort if you're not going to enjoy the benefit of it, and if you're going to be poor, you had might as well not have to work hard as well.
But a right winger would answer that if you didn't charge such high taxes, the poor would be richer, and would not need to steal it. The money not going on taxes would instead go on wages, purchases of manufactured goods and services, investments, setting up businesses to employ people, and reducing prices, all of which advantage the poor. The more rich people there are, the fewer poor people there can be.
It's like living in a country inhabited only by bandits and farmers. (Think 'The Magnificent Seven'.) Nobody wants to be a farmer, because of all the bandits. You work hard everyday, and get nothing for it because it's all stolen by somebody on a horse with a gun. Everybody wants to be a bandit. You get a life of leisure interrupted only briefly by going and stealing your next meal from some dumb farmer. You might think life would be better if you got rid of all the bandits and everybody farmed. There would be more food for everyone, and nobody would get shot. But ohh nooo. If you suggest that you stop paying the bandits to sit around producing nothing, they'll ride into town and shoot everybody dead. And will then promptly die themselves, there being nobody left to steal food from.
It's a very strange picture of the world. Or at least, so think the right-wingers.