The T3 Tax as a Policy Strategy for Global Warming
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The T3 Tax as a Policy Strategy for Global Warming
Ross R. McKitrick, Ph.D.Associate Professor of EconomicsUniversity of Guelph
-$8.00
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1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
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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
1890-1999
AR4
Fig9.1
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IPCC Hindcast
1890-1999
AR4
Fig9.1
Sun Volcanoes
GHG’s O3 Depletion
SO4 Aerosols Total
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US Climate Change Science Program Report (2006) Page 25
1958-1999Hindcast
Same outcome
TT Trend shouldbe 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
-or-
Marginal Abatement Cost (MAC) of reducing emissions
$ per tonne
Total Emissions
“Demand” curve or Marginal Abatement Cost curve
$20
90 Mt
100 Mt
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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
35
021
361 )()(203i
itRSSitSCT
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T3 Rate since 1981
Current value = $4.76
T3 Tax Rate (US $ per tonne of Carbon) Dec 1981 - Aug 2007
-$8.00
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$0.00
$2.00
$4.00
$6.00
$8.00
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
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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 5-
10 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
-0.6
-0.4
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0
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1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Surface Troposphere Trend-Surface Trend-Troposphere
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Tropics versus globe
Tropical warming < global average
-1
-0.5
0
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1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Tropical troposphere Global troposphere
Trend-tropics Trend-global
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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
US CCSP Report p. 111
Models:
negative
Data:
positive
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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)