Transcript Maybe you`re right. And if you are, the carbon price will rise rapidly

T3 Tax Rate (US $ per tonne of Carbon) Dec 1981 - May 2007
$8.00
$6.00
$4.00
$2.00
$0.00
-$2.00
-$4.00
-$6.00
-$8.00
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
The T3 Tax as a Policy
Strategy for Global Warming
Ross R. McKitrick, Ph.D.
Associate Professor of Economics
University of Guelph
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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’
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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
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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
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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.
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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
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Tropical troposphere
 8-16 km above the surface
 30N to 30S
 Half the atmosphere
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Tropical troposphere
 8-16 km above the surface
 30N to 30S
 Half the atmosphere
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Tropical troposphere
 8-16 km above the surface
 30N to 30S
 Half the atmosphere
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IPCC
Hindcast
18901999
AR4
Fig9.1
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IPCC
Hindcast
18901999
Sun
Volcanoes
GHG’s
O3 Depletion
SO4 Aerosols
Total
AR4
Fig9.1
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US Climate Change Science Program Report
(2006) Page 25
1958-1999
Hindcast
Same outcome
TT Trend should
be underway
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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Future projections in IPCC AR4
(Figure 10.7)
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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
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Good data exist
 Good-quality daily measurements by
NOAA satellites, analysed by
independent teams at RSS and UAH
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Compilation of current trends
(IPCC AR4, Fig 3.4.3)
 At present: positive but insignificant
trend in tropical troposphere
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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
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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
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PART II: Carbon taxes
 Regulators can use price or quantity
target
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“Demand curve”

Shows marginal
value of additional
emissions
$ per
tonne
-or
Marginal Abatement
Cost (MAC) of
reducing emissions
“Demand” curve or
Marginal Abatement Cost curve
$20
90
Mt
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100 Mt Total Emissions
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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
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Price or quantity?
 CO2 case
 Optimal quantity is extremely uncertain
 Optimal price range is likely small
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Marginal Damages
 Tol (2005)
 If models are
correct, optimal
price is around
$5 US / tonne
Relatively little
price uncertainty
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Debating price removes incentive to
understate or exaggerate control costs
 Optimists vs. pessimists
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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
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T3 Formula
 Use satellite (MSU) data to get T3
 Mean of UAH & RSS estimates
 3-year moving average x 20
1
T 3  20  36
35
 SC(t  i)  RSS(t  i)
i 0
1
2
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T3 Rate since 1981
T3 Tax Rate (US $ per tonne of Carbon) Dec 1981 - Aug 2007
$8.00
$6.00
$4.00
$2.00
$0.00
-$2.00
-$4.00
-$6.00
-$8.00
1981
1983
1985
1987
1989
1991
1993 1995
1997
1999
2001
2003
2005
 Current value = $4.76
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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
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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
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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!”
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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.”
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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.
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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 510 years from now
 This way, investors will start building in projections of
future warming into today’s decisions
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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
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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
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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.
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End
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Tropics: Aloft versus Surface
 Warming at surface > warming aloft
Surface
Troposphere
Trend-Surface
Trend-Troposphere
1
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
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1998
2000
2002
2004
2006
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Tropics versus globe
 Tropical warming < global average
1.5
1
Tropical troposphere
Global troposphere
Trend-tropics
Trend-global
0.5
0
-0.5
-1
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
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1998
2000
2002
2004
2006
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8 data comparisons
 Surface (Ts); Troposphere (T2LT)
 Models: (Ts - T2LT) < 0 : negative
 Data: (Ts - T2LT ) > 0 : positive
 US CCSP Report p. 111
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8 data comparisons
 Surface (Ts) - Troposphere (T2LT)
 Models: (Ts - T2LT) < 0 : negative
 Data: (Ts - T2LT ) > 0 : positive
Models:
Data:
negative
positive
 US CCSP Report p. 111
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Poles: N
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Poles: S
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Weather Balloons & Satellites
1979-present
 Balloon record
(CCSP p. 111)
 Satellite record
(http://vortex.nsstc.uah.edu/data/msu)
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