Friday
Jul052013
by 
Bishop Hill
Bishop Hill Ross responds
Jul 5, 2013 Climate: McKitrick Economics Tax Ross McKitrick has responded (in considerable detail) to some of the criticisms of his T3 tax proposal in a paper posted at his website.
Reader Comments (19)
Google news gives one result for Ross's work with "gwpf" as a search term. It gives three results searching on "Ross McKitrick", one of which is a ReutersAlertNet blog item.
Were any members of the press at the presentation?
NBY, El Reg's Orlowski was there - and he reported on what he heard including confirmation (not that any was needed!) of Josh's excellent cartoonerizations of Worthington's and Rapley's desperate attempts to move the measuring goalposts, so to speak:
Thanks Hilary - I'm in the UK and it seems to me this topic is ripe for serious treatment by a UK financial or political journalist. At the moment I don't see anything coming through the wires - maybe a Sunday edition will pick it up in the context of the WMO Report.
http://www.bbc.co.uk/news/science-environment-23154073
http://wattsupwiththat.com/2013/07/03/u-n-world-meteorological-organization-report-pans-the-idea-that-severe-weather-and-severe-weather-deaths-can-be-linked-to-climate-change/
I've not read the report but interestingly there looks to be a century old precedent for some current temps:
http://www.sfgate.com/news/us/article/Death-Valley-temp-may-tie-June-record-4638799.php
Fame at last. I suggested a window tax (tongue in cheek). A window tax would in fact be fairer and simpler. You could buy coloured tax discs and display them in, er, the taxed window. Tax inspectors could have sniper rifles with telescopic sights and check the tax disc before shooting out untaxed windows.
The money would of course all go to "front line services" like schools and hospitals and hospital-schools and school-hospitals. Think of the children.
Rapley suggests sea level rise as a metric. NOAA 's Battery tide gauge at the end of Manhattan shows a constant sea level rise for about 160 years. Therefore, there should be no tax.
Ross, I understand your position on this completely. But its like playing chess against the school bully. Intellect will not win.
You will be forever misquoted on this: "Ross likes carbon taxes".
You need to watch the episode of Scooby-Doo where Fred spots a reporter's trap: "You want to trick me into saying that Coolsville sucks". On TV that night they show the footage of Fred saying "Coolsville sucks".
The tax rate increases as a function of increasing temperatures. How is the scale factor set?
For example, I propose an initial tax of $0/ton.
If the temperature increases by 0.1 C (annual, running average, whatever), then the tax for the following year increases to $1/ton.
Or $10/ton.
Or $100/ton.
Or $0.1/ton.
The scaling factor needs to be informed by the perceived negative impact of the temperature rise. But this is a core disagreement in climate policy, because it may even be a positive impact at current global temperatures.
Or is the scaling factor being set by the new futures market?
Also, it seems like the proposed carbon tax is rectified (in an electrical engineering sense), i.e. it cannot drop below zero. Why is this? Why shouldn't there be a carbon rebate when carbon emissions have a net positive impact?
Three commenters asked "What happens if the temperature rises but CO2 is not the cause?"
McKitrick's response (his point 9) is:
"it actually makes sense for the tax rate to be higher if there is [sic] has been an increase in the temperature measure even if it was due to natural warming: because the tax is meant to price the marginal damage of CO2-induced warming..."
Wha? The supposition was that CO2 does NOT "induce warming". Given that this is somewhat unlikely, still it is not entirely unreasonable. Just look at the history of the world before the introduction of fossil fuels. The question deserves dealing with on its merits. A rise in temperature will increase the carbon tax but not deal with the actual cause.
Perhaps recognizing the weakness of the response, Ross goes on to say something like "but what if it cools? Then the tax will go to zero." That's great, but the tax should also go to zero even if the temperature increases, provided that CO2 is not the cause.
Lance, when it comes to taxing, there is no room for doubt. All doubt is banished with a "when you don't have to pay a tax, why are you asking questions?"
I rather like the idea and Ross explains it in clear terms, but I fear it will overturn too many apple carts and gravy trains for it to be embraced by the powers that be, i.e. the powers that tax.
They are completely out of control, folks.
When will people learn not to concede on new taxes as they never go away?
Ross McKitrick,
Thank you for your responses to the main criticisms posed on BH and WUWT. An issue not yet mentioned is what would be the compliance cost of this, or probably any, carbon pricing scheme? This is an issue that seems to be largely ignored in the economic analyses to date (eg, Nordhaus, Tol). I doubt the compliance cost would be trivial.
I suspect the compliance cost for any carbon pricing scheme will become substantial over time. I expect it would increase as more and more, and smaller and smaller, emissions sources are required to be included.
I expect the compliance cost would relate more to the size of the emission sources and the complexity of measuring emissions from those sources, rather than the quantity of total emissions covered. (For example, it is cheaper per tonne to measure emissions from a large power station than from a paint factory or a farm (see comment below regarding compliance issues for a paint factory). So, the compliance cost per tone would increase as the participation rate increases.
I also expect that, over time, any carbon pricing scheme would tend towards requiring more and more participation; i.e. more countries included, more emissions sources included, more of the twenty-three Kyoto greenhouse gases included and lower threshold for inclusion. Any carbon pricing scheme will tend towards requiring every GHG emissions source in every country be included and the emissions measurements must be as precise and accurate as they are for trade, including international trade, in any other commodity we trade. At the limit, the emissions from every cow, sheep and goat in every country (e.g. including Eretria, Ethiopia, Mogadishu and Somalia) will have to be measured and reported.
“The ultimate compliance cost of the ETS” http://www.onlineopinion.com.au/view.asp?article=13578 suggests some of the cost items that need to be estimated.
Contributors to compliance cost
Question: what would be the compliance cost for carbon pricing once it is fully implemented and running at the level of financial integrity that will be expected?
For example, what would be the annual cost for a country (e.g. Australia) for:
– Bureaucracies (e.g. for Australia these bureaucracies would have a role: Department of Climate Change and Energy Efficiency (DCCEE), Treasury, Australian Taxation Office (ATO), Australian Federal Police, state police forces, state bureaucracies, Attorneys’ General Departments, Federal Department of Resources, Energy and Tourism, Bureau of Energy and Resources Economics (BREE), the equivalent state departments of energy, resources, agriculture, forestry, environment, Prime Minister and Cabinet, State departments of Premier and Cabinet, the law courts, High Court, jails, any others I haven’t thought of?
– The businesses that have to report their emissions - what is the cost to implement and maintain the monitoring equipment and to report? See the EPA monitoring requirements: http://www.epa.gov/airmarkets/business/ecmps/docs/ECMPSEMRI2009Q2.pdf and http://www.epa.gov/airmarkt/emissions/docs/plain_english_guide_par75_final_rule.pdf
– What is the cost to update and replace equipment, reporting systems and legacy data each time the rules change (as they do every few years; see history of past changes in US EPA’s monitoring requirements: http://www.epa.gov/airmarkt/emissions/docs/plain_english_guide_par75_final_rule.pdf , Section 1.2)?
– Farmers and all the upstream and downstream industries (farming will be included eventually)
– Accountants, lawyers, law courts?
– Firms that use the data, analyse it and report? What is the cost for them to have to maintain and continually update their systems and legacy data?
– Cost of monitoring the compliance of international carbon credit schemes?
A real world example of the compliance cost of carbon pricing:
Comment by an engineer, Graeme No.3: http://forum.onlineopinion.com.au/thread.asp?article=13578#235297
Graeme No.3 posted four other interesting comments on the subject and finally this one: http://forum.onlineopinion.com.au/thread.asp?article=13578#235415
These comments illustrate some of the real compliance costs of carbon pricing. It's important to recognise that once carbon pricing is begun the participation rate will increase over time to include smaller and smaller emissions sources. Eventually, when full international carbon pricing is in pace, most emissions source in every country will have to be measured And they measurements will be required to be precise and accurate.
My Question: What will be the compliance cost for carbon pricing one it is implemented to the standard that will eventually be required?
Peter, the proposals I have seen involve a tax on the fuel itself in relative proportion to its carbon content, with the tax applied at the point where it enters the market for combustion purposes (as opposed for use in making plastic or other petrochemicals). So it would be applied at the wellhead or the minehead, with exemptions for the portion exported.
The examples you gave above refer to reporting conventional air contaminants like VOCs and NOx, where the amount emitted depends on minute details about the combustion process. As you note, that's very onerous for firms. CO2 is different because the level of CO2 emissions is almost completely determined by the volume of the fuel used, not by how it is burned. Firms wouldn't report their emissions at all. The tax would simply be built into the price of the fuel they purchase.
Thus it would be no more costly than adjusting the rates on existing fuel taxes. In fact, since there are already taxes on motor fuels, you could just relabel the existing motor fuel tax a "carbon tax" and adjust the excise tax rates on natural gas, heating oil and coal to the correct relative proportions and you're done. Then there'd be no change in the price of petrol, almost no change (I think) in the price of heating oil, some increase in the price of coal and perhaps even a reduction in the tax on natural gas.
Ross McKitrick,
OK. Now I understand. Thank you. Is the British Columbia's 'carbon tax' an example of how you would suggest it works?
[link for benefit of other readers: http://www.fin.gov.bc.ca/tbs/tp/climate/carbon_tax.htm ]
Ross McKitrick,
I presume fuel taxes would have to be applied uniformly throughout the world? If not, wouldn't they be highly distorting?
[Please don't feel obliged to answer my probably trivial questions if you don't have time.]
Ross McKitrick,
Further to my question about the need for a uniform price throughout the world - and to the need for a high level of participation - I'd be interested in your comments on the points I raised in my article posted on 'Quadrant Online' this morning:
Carbon pricing – why it will not succeed
The article is here: 'No gain and lots of pain with the ETS'
Dear Peter
The BC carbon tax (as best I understand it -- there may be hidden details) is close to what I have in mind. But while they avoided some bad policy moves by opting for it (for instance they didn't go the Ontario route of wind mills and solar) they still have dumb rules alongside it, such as requirements for carbon neutrality by public entities. That stuff should go, otherwise the tax does not yield efficiency. And of course it gets adjusted over time in an arbitrary manner, rather than following a meaningful state variable.
If a country imposes a unilateral carbon tax of large magnitude then it risks loss of competitiveness. But low carbon taxes coupled with reductions in other taxes can be unilaterally beneficial, depending on the details of a country's pre-existing tax system. But only at low levels, not enough to reduce emissions appreciably. The main advantage of a county unilaterally imposing my carbon tax is the creation of a climate futures market that the rest of the world could observe. In other words it would only require one country to implement the tax to reveal the objective, market-based expectations path for global climate, which I suspect looks nothing like the array of GCM output that feeds into climate models.
I'll try to have a look at your Quadrant piece some time.
Ross McKitrick,
Thank you for your reply. It is greatly appreciated experts like you, Richard Tol and others can take the time to answer questions on blog sites. Bishop Hill and a few other sites have been great for having experts respond to bloggers comments. So, thank you for your detailed response to the original comments and for your replies on this thread.
There is a great deal to like about your proposal. It’s a pity it wasn’t seriously considered as an option over the past two decades (when the main debate was between trading schemes and taxes on GHG emissions as distinct from tax on fossil fuels). However, even if it had been we still would have got all the green energy schemes, so such a proposal would, inevitably, have been in just as much of a mess today as the ETS (cap and trade) and carbon tax schemes.
I need to think some more, but in the meantime:
I accept that theoretically it is possible to apply a tax to fossil fuels and achieve a net beneficial outcome for the economy, but I am sceptical that it could be achieved in practice. Most new tax systems (such as the GST in Australia and Canada) had to be significantly compromised in order to win sufficient support to get them legislated. I also suspect that any fuel tax would inevitable have major issues, such as causing distortions, because it does not include all greenhouse gases.
On the other hand, and example of what happens in the real world: The Australian Government, led by Prime Minister Kevin Rudd, went to the Copenhagen Climate Change Conference convinced we knew how to save the planet and Australia would set an example the whole world would follow. The Government and its supporters were sure Australia had the right solution and were confident the world would follow our example. Luckily for the world, China, India and US Congress were wise enough to say “no thank you, Australia”. Richard Tol makes a persuasive case in this article that the world is unlikely to agree to a global carbon pricing scheme. I understand your argument that if one country demonstrates your proposal it will convince the rest to follow, and I understand your many good reasons for believing this could be the case. However, …
There is a lot to like about your proposal. I am certainly interested.
Ross McKitrick,
My article ’No gain and lots of pain with the ETS’ uses work by William Nordhaus, Richard Tol and Australian Treasury to make these points:
- carbon pricing cannot succeed unless it is global;
- global carbon pricing is unlikely to be achieved; and
- the Australian carbon pricing scheme, if continued, would be high cost and deliver little or no benefit.
I recognise your proposal is substantially different to the carbon tax and ETS schemes that have been the main focus of policy analysis and debate for the past two decades. However, I would be interested in feedback about whether the arguments I presented (based on Nordhaus and Tol) about the need for high participation rate for any scheme to succeed also applies for your proposed scheme.