Policymakes have been faced with huge dilemmas when considering climate change policies. But now a brilliant plan has been conceived to come to a global climate change policy that no reasonable person could object to. It has the beauty of being able to appeal to both climate change believers and sceptics â and anybody in between. And no, I am not joking: it is a serious proposal, made by Canadian economist Ross McKitrick, who presented it to the House of Lords in London on 3 July. His idea: establish a carbon tax whose rate varies in line with global temperatures. If temperatures rise, the tax goes up. If they donât, the tax stays the same.
Illustration: climatesafety
Ross McKitrick, Professor of Economics at the University of Guelph in Ontarion and Senior Fellow of the Fraser Institute, is known in global warming circles as a climate sceptic. He is particuarly known for his long-running dispute with scientist Michael Mann over Mannâs âhockeystick theoryâ. But his proposal for a new global CO2 policy is not a reflection of his critical climate change stance. On the contrary, it is calculated to please all sides and all stakeholders in the global warming debate.
I know it sounds impossible, but I think McKitrick he actually manages to do just that. The first part of his proposal is not new. It is to establish a simple tax on CO2 emissions: âThe basic mechanism involves building a tax per tonne of carbon dioxide (CO2) emissions into the price of all forms of fossil energy (oil, coal and natural gas). CO2 is uniquely suitable for taxing in this way because in almost all cases there are no abatement options: once burned, the entire carbon content of the fuel ends up as CO2 in the air. So if we know how much fuel is used, we know how much tax should be paid. Users of the fuels will then economize by reducing the most carbon-intensive forms of energy consumption.â
McKittrick does attach a number of caveats to his tax proposal. A tax, he says, should come instead of, rather than in addition to, other regulatory mechanisms. It should be revenue neutral (i.e. the proceeds should be used to reduce taxation elsewhere, not for example to subsidize green schemes). And there should be no quantitative targets set, as is the case in emission trading schemes.
But as I said, this part of the plan is not new. The second part is, however. This concerns the tax rate that should be chosen. McKittrickâs proposes that, after a modest initial tax rate has been established, say $10 a tonne, the tax rate should then change over time in accordance with the evolution of global average temperatures.
If temperatures rise, the tax rises. If they do not, the tax stays the same.
Frankly, I find this quite brilliant.
The consequences of this very simple scheme are far-reaching. As McKittrick puts it:Â âEverybody will expect to get the policy they think best, and whoever turns out to be right deserves to be so. Sceptics who do not believe in global warming will not expect the tax to go up, and might even expect it to go down. Those convinced we are in for rapid warming will expect the tax to rise quickly in the years ahead. Companies managing factories and power plants will have to figure out who is more likely to be right, because billions of dollars of potential tax liabilities will depend on what is going to happen. Nobody will benefit from using false or exaggerated science: instead the market will identify those who can prove they understand the climate well enough to make accurate forecasts. And policy-makers will be guaranteed that, whatever the tax does in the future, the policy will turn out to have been the right one.â
McKitrick explains that his idea will solve the big dilemma that policymakers currently face. Reduction in greenhouse gas emissions are expensive, he notes, but no one knows for certain how necessary they are. Thus, âpolicymakers confront a choice between imposing an economic catastrophe that might turn out to be for nothing, or doing nothing and risking a planetary catastrophe. Small wonder no one knows how to proceed.â
By tying in climate policy to observed temperature changes, this dilemma is solved in a simple but effective way.
McKitrick also notes that his proposal would force everyone with a stake in the global warming debate to put their money where their mouth is. âThere is no incentive for industry to promote or use wrong forecatss. The greatest benefits will accrue to those who base their plans on the most accurate numbers. Losses will pile up for those who make bad forecastsâ.
In fact, very likely a futures market would be set up in which people could buy contracts to cover the per-tonne-costs of emission taxes a number of years ahead. This futures market, says McKitrick, âwould become the worldâs most accurate climate modelâ. With billions of dollars at stake, âinvestors will ruthlessly sift information sources for an edge in predicting the value of such contracts, thereby bringing all the worldâs knowledge to bear on the future path of climate.â
 For example, he adds, âif a scientist concludes from his analysis that we are nearing a âtipping
pointâ at which rapid temperature increases are inevitable, he might get frustrated  if colleagues or policy-makers keep ignoring his warnings. But under the plan I am describing, if he has a valid analysis, market participants will not ignore him, instead they will objectively assess whether his warnings are credible. Likewise, if Lord Stern believes that global warming will make fossil fuel reserves worthless, owners of such reserves who accept his argument will have a strong incentive to invest in carbon tax futures to hedge against the risk to their assets. Hence, futures prices will reflect objective forecasts of future temperatures. Indeed if a scientist (or Lord Stern) believes his own forecast of the coming climate tipping point, he could earn significant profits by investing his pension in carbon tax futures while they are still cheap. And if he does not trust his own science enough to bet his pension on it, then he can hardly blame others for ignoring it too.â
 What are we waiting for?
A.Formosa says
Interesting indeed, but aren’t climate policies as currently framed intended to avoid the prospect of a rise in temperature (i.e. using the precautionary principle) as once there is a temperature rise it will be too late? Additionally if the temperature in a year does not rise (but even drops) that does not mean that temperatures are not rising generally. it would be interesting to see how the economist plans to regulate such a system
Mike Parr says
Nice site Karel.
If the earth’s climate is like a super-tanker = takes some time to react to changes then the lag between CO2 rise and temperature rise could be problematical. I have long favoured carbon taxes (& indeed BCTs). Dieter Helm did an outstanding article a few years back on the subject (whilst attacking the EU’s ETS). I’d also support Carbon rationing – everybody gets a quota – say 3 tonnes/year – after that costs progress geometrically (not linearly).
Aida Mezit says
I wouldn’t neccessarily agree with taxation levels in line with rise in temperatures . There have been various scientific studies that claim that global warming is not a linear process – i.e. more carbon emissions don’t immediately lead to rise in temperatures. There seems to be strong evidence that rises in CO2 cause a number of complex atmospheric changes over time that lead to temporary weather abominations (sometimes even causing a drop in temperatures), but whose cumulative and long term effect is that of warming. Seeing that there is no exact mathematical model/formula that connect the rise of carbon in atmosphere and temperature levels on a short term basis, i think applying this very inexact science to taxation levels wouldn’t help us at all. For example it could be that the years following the highest levels of emissions would result in no increment in temperatures, with the big rise happening later, coinciding perhaps with the years of lowest emissions.
Interesting concept that could work brilliantly in other business areas, but I think nature is too complex/unpredictable to be applied standard economic theories. I look forward to more comments on this.
Herve DUPERRAY says
Brilliant indeed.
A simple comparison would explain why: Heavy investment Energy sector needs about 60 years to perform a complete U-turn, otherwise sacrified existing investments would skyrocket energy cost. Therefore, turning it is like for a tanker captain to change its course by 180°. The pain is that it takes 30 minutes for Captain to perform it, not 60 years: In case Captain wheels his tanker like a car, he would unavoidably crash it againt next cliff…
So, increasing tax when CO² increases would take 40-60years to achieve the rate change….
You could not invent a less reactive tool to master CO², indeed to unofficially maintain its growth !