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 – 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 don’t, the tax stays the same.
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 Mann’s “hockeystick theory”. 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: “The 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.”
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. McKittrick’s 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: “Everybody 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.”
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, “policymakers 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.”
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. “There 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 forecasts”.
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, “would become the world’s most accurate climate model”. With billions of dollars at stake, “investors will ruthlessly sift information sources for an edge in predicting the value of such contracts, thereby bringing all the world’s knowledge to bear on the future path of climate.”
For example, he adds, “if a scientist concludes from his analysis that we are nearing a ‘tipping
point’ 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.”
What are we waiting for?