The T3 Tax as a Policy Strategy for Global Warming

ross.mckitrick.googlepages.com 1

Ross R. McKitrick, Ph.D.Associate Professor of EconomicsUniversity of Guelph

-$8.00

-$6.00

-$4.00

-$2.00

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

My background Ph.D. (Econ), UBC 1996

>2 dozen peer-reviewed journal articles in both economics and climatology journals

Book: Taken By Storm, 2002 Donner Prize

Web site: ross.mckitrick.googlepages.com

This talk: click on ‘T3 Tax’

Outline

Basic logic of the T3 Tax

2 Components Role of the tropical troposphere Pricing CO2 emissions with a tax

How it would work Adapting to C&T system

Basic Logic Suppose we put a low initial price on

CO2 emissions.

Then pick a stable temperature measure that tracks the effect of CO2 on the global climate.

Now tie the level of the tax to the temperature measure

Basic Logic

If the temperature trends up, so does the tax But if the temperature doesn’t change, neither does

the tax The tax might even go down over time.

Whatever happens, it is the right outcome. We don’t have to know in advance who’s right. Everyone expects to get their preferred outcome.

The temperature measure

Two recent reports: IPCC 2007 US CCSP 2006

Both identify the key region for measuring GHG-induced warming:

The troposphere over the tropics

Tropical troposphere

8-16 km above the surface 30N to 30S Half the atmosphere

IPCC Hindcast

1890-1999

Fig9.1

IPCC Hindcast

1890-1999

Fig9.1

Sun Volcanoes

GHG’s O3 Depletion

SO4 Aerosols Total

US Climate Change Science Program Report (2006) Page 25

1958-1999Hindcast

Same outcome

TT Trend shouldbe underway

Future projections in IPCC AR4 (Figure 10.7)

Features expected in data

Warming of tropical troposphere:

Should be underway if CO2 is driving climate

Will lead future warming Only GHG’s will do it – unique signature

Good data exist

Good-quality daily measurements by NOAA satellites, analysed by independent teams at RSS and UAH

Compilation of current trends (IPCC AR4, Fig 3.4.3)

At present: positive but insignificant trend in tropical troposphere

Surface data: measurement problems Half the world’s met network disappeared

in early 1990s

Other problems: urban heat bias, discontinuities, etc.

Poles subject to confounding influences

Tropical Troposphere Temperature (T3)

Science tells us this is the feature of climate to monitor

High-quality data, continuous monitoring ensures good data are available

PART II: Carbon taxes

Regulators can use price or quantity target

“Demand curve” Shows marginal

value of additional emissions

Marginal Abatement Cost (MAC) of reducing emissions

$ per tonne

Total Emissions

“Demand” curve or Marginal Abatement Cost curve

100 Mt

Price or quantity?

We’ll be wrong either way

How to minimize expected economic cost of making wrong guess:

Make choice along axis with least uncertainty

Price or quantity?

CO2 case

Optimal quantity is extremely uncertain

Optimal price range is likely small

Marginal Damages Tol (2005)

If models are correct, optimal price is around $5 US / tonne

Relatively little price uncertainty

Debating price removes incentive to understate or exaggerate control costs

Optimists vs. pessimists

Revenue recycling Good options:

Reduce income taxes Swedish NOx model: refund to industry

according to output share

I oppose the Tech Fund approach Undermines economic incentives Political involvement in investment decisions Steers money to inefficient projects

T3 Formula

Use satellite (MSU) data to get T3 Mean of UAH & RSS estimates 3-year moving average x 20

361 )()(203i

itRSSitSCT

T3 Rate since 1981

Current value = $4.76

T3 Tax Rate (US $ per tonne of Carbon) Dec 1981 - Aug 2007

-$8.00

-$6.00

-$4.00

-$2.00

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

IPCC Projections

0.2 – 1.2 C/decade warming in Tropical Troposphere

Implies $4 - $24 rise in T3 tax per decade

Actual rate depends on actual warming

In principle, everyone should like it

Skeptics will like it (or they should): they expect the tax will stay flat or fall

Alarmists will like it (or they should): they expect the tax to soar

Policymakers will like it because they don’t have to guess who’s right, and it yields the right outcome either way

Benefit for policy maker

Alarmists say things like “Your climate policy is too weak! We

have to cut carbon emissions faster, because the science shows global warming is a crisis!”

Benefit for policy maker

Simple Answer “Maybe you’re right. And if you are, the

carbon price will rise rapidly, forcing the rapid cuts you are calling for.”

Another criticism It starts too low! At $5 nobody will cut

emissions.

Answer: It starts low because the social costs of carbon emissions are low. If carbon emissions cause bigger effects in the future, the tax will rise. But if nobody cuts emissions for $5/tonne, so be it. They are paying the social cost of their emissions, that’s the important thing.

Forward-looking aspect One criticism is that we have to see the warming

happen before the price changes

2 responses

First, the tropical troposphere is the atmosphere’s “leading indicator”—warming there leads surface effects

Second, investors have to be forward-looking Today’s decisions are based on forecast of tax rates 5-

10 years from now

This way, investors will start building in projections of future warming into today’s decisions

Added benefit: market for ACCURATE climate forecasts

Investors will need accurate forecasts of tropical troposphere climate

Today’s GCM’s are tuned to meet academic needs, not forecasting needs

Market for accuracy may lead to scientific improvements in climate modeling

Applying T3 rule to tradable permits

Set cap, auction or give away permits

Set ‘safety valve’ price using T3 formula

Essentially becomes a tax with tradable exemptions

Summary There must be a feedback between the

actual effects and the stringency of policy

The tropical troposphere is where the effect of GHG’s should be assessed

Tie the price of carbon emissions to the mean tropospheric temperature and we get the right outcome over time without knowing in advance who’s right.

Tropics: Aloft versus Surface

Warming at surface > warming aloft

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Surface Troposphere Trend-Surface Trend-Troposphere

Tropics versus globe

Tropical warming < global average

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Tropical troposphere Global troposphere

Trend-tropics Trend-global

8 data comparisons Surface (Ts); Troposphere (T2LT)

Models: (Ts - T2LT) < 0 : negative Data: (Ts - T2LT ) > 0 : positive

US CCSP Report p. 111

8 data comparisons Surface (Ts) - Troposphere (T2LT)

Models: (Ts - T2LT) < 0 : negative Data: (Ts - T2LT ) > 0 : positive

US CCSP Report p. 111

Models:

negative

positive

Poles: N

Poles: S

Weather Balloons & Satellites 1979-present

Balloon record(CCSP p. 111)

Satellite record(http://vortex.nsstc.uah.edu/data/msu)

The T3 Tax as a Policy Strategy for Global Warming

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