Tie CO2 Tax to Temperature

by on December 15, 2009 at 8:23 am in Economics, Science | Permalink

John Tierney relays today what seems like a very sensible idea from economist Ross McKitrick, tie a carbon tax to the temperature.  If the temperature rises the tax goes up, if the temperature does not rise (as McKitrick, a climate change skeptic thinks) the tax will stay at a low level.  Temperature of the troposphere would be measured by satellite at the equator and averaged over a period of time.  (More here and a more detailed version here).

In theory, both climate change proponents and skeptics ought to agree to this proposal, but I predict the proponents will object.

Addendum: 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.

1 Jon December 15, 2009 at 8:28 am

Horrible idea given that temperatures have had substantial nonanthropogenic variations over time. What happens if we use minimal amounts of carbon and temps still rise?

2 dearieme December 15, 2009 at 8:39 am

The only medium term prediction for global temperatures that has (I guess) wide support is the return of an Ice Age. That’s why our time is called an “interglacial”. So surely it’s preventive action against that that we need?

P.S. Am I right to guess that none of the climate models currently predict that next Ice Age?

3 improbable December 15, 2009 at 8:45 am

Can you imagine how political temperature readings would become? And the various corrections needed… if a change in the last decimal place of the factor correcting for satellite altitude changes, or for dust in the atmosphere, or for cloud density, was suddenly worth billions and billions of dollars?

I like the idea, but I think the implementation would be problematic.

4 Dquartner December 15, 2009 at 8:54 am

Proponents for a carbon tax (like myself) would object because a carbon tax ultimately is meant to shift behavior away from using carbon and to using alternative forms of energy. Thus, linking it to temperature does not fulfill the tax’s intended purpose, in the short-term. and medium-term.

I agree with the second comment, this is like closing the barn door after all the sheep have escaped. The damage to the climate will have already been done by the time average temperatures rise enough to deter behavior.

5 KingM December 15, 2009 at 8:55 am

This proposal is no good. In addition to the other objections, whose measurements are the accurate ones? People can’t even agree if the last 10 years have been hotter or colder than average. When it comes down to huge taxes, the objections will be over the top.

@capitalistimperialistpig: The Netherlands will be fine no matter what the climate does, because it is filled with Dutch people.

6 David Curran December 15, 2009 at 8:58 am

I presume this logic could be followed for all sin taxes. If traffic is bad petrol taxes could be raised. If smnokers are costing more cigarrette taxes go up etc.

If one simple (or not simple as Improbable pointed out) measurement could be used for a cO2 sin tax what other measurements of sin could be made? Could a betting market for effect of BMI to health be used to set a fat tax, or would this be open to exploitation?

7 Andrew December 15, 2009 at 9:13 am

It’s called weighted average coupled with a refund.

People have no imagination, apparently.

Boy, it sure is a good thing that our temperature data is beyond reproach.

8 Andrew December 15, 2009 at 9:19 am

Another thing, you don’t even have to tax the carbon or temperature, you tax the resource usage and you make the rebate based on temperature and known resource reserves, which had better be right. Oh, and how ’bout make it revenue neutral.

9 libert December 15, 2009 at 9:24 am

The problem is that carbon emissions today lead to warming in the future. If we could tie today’s carbon tax to actual warming in 2050, then that would be a great idea. But that’s not possible. Tying today’s tax to today’s temperature would in effect be tying today’s tax to how much industry polluted 50 years ago, which is a sunk cost and completely irrelevant to present margin incentives for abatement.

10 john December 15, 2009 at 9:30 am

The argument seems to tie two not necessarily related ideas, both oncerning CO2 emissions. 1. The amount of C2 being released into the atmosphere exceeds the earth’s ability to process; and 2. that excess is going to disrupt the balance in the bioshpere.

Some argue that the excess will cause global warming. Others argue that too many variables are at work to make a coherent long term prediction possible. But all agree – there is too much CO2 being released.

11 Bob Murphy December 15, 2009 at 9:38 am

Alex, besides all the other problems that others have mentioned, isn’t the “pure” problem that reducing temperatures is a public good? (We’ll assume at some point the warmer temperatures confer net harms, and that we’re at that point.)

Forget climate change. Suppose someone wants to deal with pollution by levying a tax on smokestacks in proportion to how many people die of lung cancer each year. You can see that’s not equivalent to a tax levied on each firm for how many tons of pollutants that firm pumps into the atmosphere each year, right?

12 Mike S December 15, 2009 at 9:51 am

Just keep in mind the three D’s of conservative discourse on this topic. Deny, distort, destroy.

There is an large sub-section of warming denialists that admit warming but deny its ties to human activity.

13 jean December 15, 2009 at 10:02 am

The problem with this approach is that CO2 emissions have a long lasting effect (one century).
Current emissions will be undertaxed (or even subsidize them if you take into account the fact that a climate a few tenth of degrees warmer than today would be beneficial) and future emissions possibly overtaxed.
So, your process would converge to an equilibrium only after a few centuries, when fossile fuels would have been exhausted anyway (ok, cement production would still have an impact).

An alternative solution would be to compute the damages done by climate change each year (maybe by using temperature as a proxy) and to ask for payment *past* emitters (or reinsurers if they have transmitted this liability). Of course, it would be necessary to force them to make provisions for each ton of CO2 emitted.

14 Bill December 15, 2009 at 10:14 am

How about tying it to glaciers melting?

Oops. We’re already behind.

15 josh December 15, 2009 at 10:38 am

Shouldn’t it be tied to something more fundamental then temperature. What if increasing temperature is a good thing?

16 aretae December 15, 2009 at 10:46 am

Tyler,

I’m with Jason.
As per a prior post of mine, there are a lot of questions around climate change. Whether the earth is getting warmer is not even the most important one.

1. We might ask instead whether we prefer the world warmer or colder, net.
2. @Jason properly asks whether human activity, and specifically CO2 is significantly contributing to the warming.
3. We also would need to know whether our activity had any reasonable chance of making a difference (without India/China buyin).
4. Isn’t it almost guaranteedly better all around to try to tech-solution in the future and focus on growth now?

17 Mattyoung December 15, 2009 at 10:49 am

CO2 tax tied to temperature is great, and I am a climate change proponent. I have posted on this for too long, tie climate change damage to CO2 polluters.

All of those advocating for top down planning, all of them, will generate a net inefficiency in the use of fossil fuel. We still have to rely on the Hidden Hand.

18 Jim December 15, 2009 at 11:03 am

“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.”

Er, that’s not true, and you need to actually read what commenters say before telling us how they met your low expectations. I see lots of people making the sensible and very obvious point that the long time lags involved make this tax a very bad idea.

19 Doc Merlin December 15, 2009 at 11:06 am

Horrible, I don’t like the idea of a carbon tax at all. It gives too much power to the government to control all aspects of production, and gives too much room for graft.

20 Ken Nelson December 15, 2009 at 11:20 am

I suppose temperature measurement isn’t politicized enough and rife with fraud already. So, yes, we should further incent scientific silliness by tying a tax to their measurements. What could go wrong?

21 Seward December 15, 2009 at 11:25 am

The Soviets couldn’t properly divine a system of producing shoes, yet we’re expecting a group of largely unknown, unelected bureaucrats to centrally design and plan the climate.

22 a December 15, 2009 at 11:27 am

I like Alex’s “I told you so” taunt in his update. It’s an interesting rhetorical trick: propose a policy, tell your audience they should agree with it, and then predict that they will disagree. Either way you win.

The main problem with the proposal is that it puts off action for an indefinite period. Since we already have good data on increasing temperatures, why not simply start with a tax now and peg future rates to temperature fluctuations?

If this were a serious proposal, that might actually get broad support.

23 Seward December 15, 2009 at 11:33 am

jj,

Well, ground reporting is not terribly accurate either.

a,

The reason why a broad, universal tax will not happen has nothing to do with that; it has to do with rewarding vested interests, etc., all the public choice problems one should expect would arise from such an effort.

24 Rick Schaut December 15, 2009 at 11:36 am

“In essence, they argue that the problem is so serious that we must act before the evidence is in.”

Alex, that sentence might just well get you booted out of my RSS reader. You’re equivocating two different connotations of the phrase “the evidence is in.” If you’re referring to the causal relationship between CO2 emissions and increases in global temperatures, then the scientific evidence is quite conclusive.

If, in your use of the phrase “the evidence is in,” you’re referring to the extent to which we start to feel the negative effects of CO2 emissions, then you might be rhetorically correct but terribly wrong in your overall conclusion. Indeed, the whole point of some kind of carbon tax is to monetize the cost of CO2 emissions before the negative effects become horribly obvious. To focus on the apparent effects is to ignore the scientific evidence which shows a significant time lag between cause and effect.

Now, you’re an economist, or at least you claim to be one, so you should understand the distinction between present and future value. So, really, there is no excuse for you to make this kind of rhetorical mistake. That means you’re either lazy, or you are deliberately trying to obfuscate the central issue. Which is it, Alex?

25 baro December 15, 2009 at 11:50 am

The reason he expects proponents to object is that he beleives proponents real motivation is not to stop global warming. The true objective is to impose a way of life on other people. Proponents of environmental causes and social ones for that matter often demonstrate the same behavior as religious proponents. In this case, carbon is merely a pretext for the greater cause. BTW: It looks like he is right.

26 Chuck December 15, 2009 at 12:21 pm

Addendum: “In essence, they argue that the problem is so serious that we must act before the evidence is in.”

Well, if you are a climate scientist or believe climate scientists (as climate change proponents* would), the evidence is already in.

From that perspective, this kind of thing just another stalling tactic, just another legislative goalpost that can be moved (“in light of the recession/deficit/war (whatever) we have to lower this tax for the next few years…”)

Just sayin’.

*climate change proponents would ‘translate as’ “those who advocate climate change” – kind of muddles the position of a climate change ‘proponent’, no?

(No doubt that proponents of action on climate change is a mouthful…)

27 libert December 15, 2009 at 12:28 pm

In response to the addendum: I believe most proponents of action on climate change would happily agree to a tax that is based on an objective look at the evidence of human-induced climate change.

But who decides what evidence is deemed credible? The obvious answer is the scientific community, but try getting those opposed to climate action to agree to that!

28 Mike S December 15, 2009 at 12:42 pm

You should look up John Henry and Ed Seykota and see what they might think about your proposal to do nothing until problems show up.

This attitude is a recipe for losing all of your money as a trader, ruining an economy as a financier, and suicidal for a civilization.

I think you should just start driving and ignore every stop light where you don’t see a car coming. Try this as an experiment in personal risk management and chart your results. You’ll have a many times where nothing happens, a few small fender benders, and a then huge accident where you are finally either killed or paralyzed.

29 Seward December 15, 2009 at 12:51 pm

Tim Lambert,

You know, uncertainty goes both ways.

30 Adam Hyland December 15, 2009 at 12:52 pm

“In essence, they argue that the problem is so serious that we must act before the evidence is in.”

You are a smart, smart man Alex. Don’t ruin things. We aren’t insisting that folks “act before the evidence is in”, the evidence is in. Has been for years. We are insisting that waiting around until the effects become catastrophic is rank foolishness.

31 Jon December 15, 2009 at 1:04 pm

I wonder if there is a way to create a market for CO2 that would tie the price of current emissions to market expectations of future temperatures.

32 Silas Barta December 15, 2009 at 1:29 pm

1) Mario_Rizzo deleted my comments on the Pigou posts at ThinkMarkets, so I’ll make it again here, but more briefly: the strongest arguments against trivialization of negative externalities is the very act of trying to write up a clever blog post while someone is revving his Harley loudly enough to keep you from thinking, while technically within the bounds of the law. Go ahead — try a Coasean buyout. He’ll just send his buddy to try the same extortion. You have to buy out *everyone*. Good luck with that.

2) I don’t think alarmists actually mean this: “In essence, they argue that the problem is so serious that we must act before the evidence is in.” I think they mean the problem is so serious we must act before *the worst harms* are in, which is not the same thing as evidence. I’m not saying I agree with their evidence, but they certainly think the evidence is in already, and are not doing epistemic backflips.

3) That said, as I’ve argued before, if you aren’t willing to agree to *something* of this form, where there’s a penalty for being wrong about the future dire predictions, then you clearly don’t think the problem is that urgent, or don’t “get” how probability works.

33 a December 15, 2009 at 2:31 pm

@savetheplanet: I disagree that a carbon tax would be a departure from capitalism. It would only correct a current market failure, putting a price on carbon emissions. If the tax raised the cost of emissions to match the true social cost (a big if, then market forces would take over and we would get the socially optimal amount of production.

Capitalism doesn’t work properly in the face of externalities, but the solution is to internalize those costs, not abandon capitalism.

34 caveat bettor December 15, 2009 at 3:31 pm

This is not a bad suggestion if there is a strong positive relationship between temperatures and carbon emissions.

But what if this theory is falsified, and the theory that solar activity is the main driver of temperature fluctuation? Then this becomes a terribly distortive contract.

I really did expect more from you, but hey, I guess no one bats 1.000.

35 Dan H. December 15, 2009 at 3:51 pm

To me, the biggest problem is variance. Even if global warming is occuring, you can have periods of unusual cooling that can last decades. And even if it’s not occuring, you can have periods of unusual warming that last decades.

Tying a tax to the wild variation of temperature would be chaotic. So you’d have to smooth it out over a period of time long enough that you’re capturing the real rise in average temperature and not short term noise. The problem is that periods like that are measured in decades.

You would also have to correct for the predicted warming that would occur even if man didn’t release any CO2 at all. That’s somewhere between .7 and 1.1 degrees per century in the period we’re in.

This proposal just doesn’t work. Proponents of global warming and opponents should both be agreed on that.

36 Eric G December 15, 2009 at 4:15 pm

Is McKittrick trying to pull a fast one? According to a previously published paper, he does not think that the concept of a “global temperature” is physically meaningful.

The abstract of “Does a Global Temperature Exist?”:

Physical, mathematical and observational grounds are employed to show that there
is no physically meaningful global temperature for the Earth in the context of the issue
of global warming. While it is always possible to construct statistics for any given set of
local temperature data, an infinite range of such statistics is mathematically permissible
if physical principles provide no explicit basis for choosing among them. Distinct and
equally valid statistical rules can and do show opposite trends when applied to the
results of computations from physical models and real data in the atmosphere. A given
temperature field can be interpreted as both “warming† and “cooling† simultaneously,
making the concept of warming in the context of the issue of global warming physically
ill-posed.

The paper compares averaging temperatures to averaging phone numbers:

Regardless of the fact that enough data exist to compute something analogous
to a “global temperature† for the money markets, neither the level nor the trend in such
a statistic would provide any meaningful information about the global economy. Another
example: Individual telephone numbers are both meaningful and useful, while the sum or
average over telephone numbers in a directory have no meaning.

37 Keith December 15, 2009 at 4:24 pm

“You seem to think that stronger evidence implies a larger tax, but actually more uncertainty implies a larger tax”

False. There is an equivocation about uncertainty that Brad de Long started and this equivocation has to stop now.

If we mean uncertainty as the the SIZE of the effect of human action on global climate change, CONDITIONAL that there already IS an effect, then yes, that kind of uncertainty implies a larger tax.

But if there is uncertainty about whether there IS an effect AT ALL, that uncertainty mitigates against a tax. That uncertainty doesn’t make tails fatter, it just shifts the mean expectation lower.

38 Eric G December 15, 2009 at 5:03 pm

Adding a closing tag for the italics.

39 rjs December 15, 2009 at 6:01 pm

but do they pay us for using more carbon if the tmeperature falls?

40 Millian December 15, 2009 at 6:57 pm

“if that is what you believe, then this sort of proposal should represent a golden opportunity to take advantage of the ignorant hubris of the “denialists” by getting them to agree to huge tax levels they would never agree to otherwise, by presenting it as a sort of wager that they are certain to lose.”

Sorry, this is a total mental surrender to the denialist meme that everyone who believes in AGW is a socialist. I want overall tax rates to be low, but I also don’t want to see mass involuntary migration in the Third World caused by changes in local climates.

41 Seward December 15, 2009 at 9:16 pm

…in yet another inconvenient public good that can really only be provided by inter-governmental intervention?

Most if all public goods cane be provided for by markets. In most cases the claimed government monopoly* on such goods has very little to do with markets.

*Even these monopolies aren’t that. For example, there are far more private cops in the U.S. than public ones, and of course most people spend resources defending themselves against crime because they realize that the police really can’t fulfill that role in most cases.

42 Jay December 15, 2009 at 9:25 pm

“but I predict the proponents will object.”

Remember, these are the die hard liberals who faithfully believe that the ONLY reason communism failed was because it was not taken far enough. No comprimises allowed.

And to the poster that claimed this to be the mantra of the right, “Deny, distort, destroy.”
Funny, that sounds like the AGW communities mantra.

Deny: Why would I share my data with you when you are trying to disprove it.
Distort: Graft tree-ring proxies with satelite data, even if the two don’t agree over the years the overlap. Make sure to hide the divergence.
Destroy: Raw data? We don’t got no stinking raw data. Just “value-added” data!

43 JeffreyY December 15, 2009 at 11:52 pm

Since CO2 emissions today affect future temperatures, not today’s temperature, tying the tax to today’s temperatures would get the incentive wrong. On the other hand, I could get firmly behind a CO2 tax based on a temperature futures market: http://www.fivethirtyeight.com/2009/11/best-idea-of-day-climate-change-futures.html

Now, Alex-the-economist ought to like the idea of tying CO2 taxes to the consensus about the evidence, as measured by a market. But this post was actually written by Alex-the-climate-change-denier, so I’m going to predict that he’ll be opposed to any proposal that has a chance of accurately taxing carbon.

44 dwinds December 16, 2009 at 6:36 am

Why at the equator? Isn’t the only pertinent measuring point your personal backyard?

45 Julian December 16, 2009 at 8:48 am

To begin with, global warming is a trend, not a flat year-on-year increase. Creating such a tax would encourage wishful thinking every time there was a year-to-year temp drop in equatorial regions, with politicians and businessmen proclaiming gw to be “over” as they decreased the tax. Second, there’s the difficulty of collecting a carbon tax. If one tries to collect it at extraction, the extractors can always just lie about their production (besides, such a carbon tax would be of limited utility unless it were applied globally to all mines, pumps, ect.). More than this, to reliably ensure that the tax is collected, one would need to certify every carbon-harvesting business’ production, which means placing regulators at every mine, pump, quarry ect ect in the U.S.

Applying it as a sales-tax surcharge on every product requires the government to sit down and decide how much carbon is used in the production and transportation of every object. Considering that similar products (lettuce, for instance) aren’t all transported in similar way or at similar costs, this could lead to bizarre differences in prices as different transport companies compete to provide lower-carbon transport. It would also likely cause all sorts of lobbying of the gov by such corps to down-classify their carbon use, and it would not be strange to see certain senators and congressmen seeking favorable classifications for constituent businesses as part of legislative deal-making. I’m not necessarily opposed to a gigantic carbon-value schedule, though I do think that the task would be herculean in scale and require a massive increase in government oversight and intervention in all commerce, and that, as mentioned above, such a program would be highly vulnerable to gaming within our shiftless Congress. Considering that conservatives see a Japanese-style, annually negotiated, health care cost schedule as “too invasive” for the Union, I doubt a similar program for carbon use would find much traction.

That’s why I find the libertarian championing of a carbon tax so odd. For it to be effective, it would require a significant increase in government intervention in business, which supposedly, libertarians are opposed to. If one were cynical, one might think they either 1)haven’t thought it through, or 2)realize how vast a project it would really be and hope that its sheer size would lead to a highly compromised system that was easily avoided. After all, that’s exactly what cap-and-trade was in Europe for the first few years, though some experts say it’s slowly improving. Of course, a honest dedication to preserving the human species, even if it requires a setting aside of ideology, would be a much more welcome explanation.

46 Michael December 16, 2009 at 1:33 pm

That will just give the government an incentive to fudge the temperature stats. All the schemes I’ve ever seen for dealing with externalities involve a government tax. I find economist’s faith in government to pass on those collected funds to be touchingly naive. The increased taxes will simply be used to make government larger and then to justify even more intrusion.

47 Kyle December 18, 2009 at 7:13 pm

We should tie it to ocean acidification, too. That stuff is scary.

48 Ross McKitrick January 5, 2010 at 6:13 pm

It seems the main objections to my proposal are: (1) the time lag between emissions and effects; (2) Taxes and government intervention are always bad; (3) the temperature data would become rigged; (4) the equator is an irrelevant place to measure; (5) we might have lots of warming not caused by CO2.

I have several papers discussing the idea in more detail at http://sites.google.com/site/rossmckitrick/#t3tax, which deal with all these objections. Briefly:

(1) Read the IPCC report’s discussion of warming in the tropical upper-troposphere in response to GHG emissions. And look at the model backcasts for the 20th century in the IPCC and CCSP reports, as well as the projections for the 21st century (i.e. Fig 10.7 of IPCC WG1). That region is projected to respond rapidly to emissions, and it is where the maximum warming is expected to occur, and should already show a rapid upward trend in response to historical emissions. The Vostok ice-core 800 year lag scale is irrelevant when looking at (model-projected) response times in the tropical troposphere since it’s a different aspect of the system. It is for these reasons that I suggested the tax be calibrated to the tropical mid-troposphere readings. Models provide no basis for claiming the emissions response has a long lag in that region.

(2) My proposal minimizes the government intervention in response to the externality. The alternatives: cap-and-trade, command-and-control etc., are far worse.

(3) The incentives to rig climate data are already strong. That is one reason we cannot use surface temperature data, since it has been concealed from independent examination and the adjustments made prior to publication are typically arbitrary and undocumented. The satellite MSU data are publicly available and I have proposed taking the average of the series generated by 2 independent teams. But if we really worry about the data being rigged then that’s a problem that needs to be solved regardless of which policy is used. In addition to satellite data for the tropical troposphere there are also several independent balloon-borne radiosonde series (RICH and HadAT) which could be used as well. Bear in mind that they are all in reasonable agreement with each other, and they all (including RSS) show the models are overstating warming in the tropical troposphere.

(4) See #1.

There’s also the objection that the evidence of a crisis is irrefutable and there’s no reason to delay strong action. Well sorry, but if “evidence” means anything, it must mean “data”, and I would like policy to be based on data, not model projections or similar pseudo-evidence. Policy needs to assimilate new information as it becomes available, which means tying it to real measurement, not model projections.

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