Hans Labohm read yesterday’s article about Ross McKitrick’s plan for a temperature-indexed carbon tax. Hans – as you will see – is not very positive about the proposal. He prepared a reaction for his DDS blog in Dutch. I asked him to provide an English translation which he kindly did.

Ross McKitrick proposes new kind of CO2 tax

Ross McKitrick has launched a new proposal for a CO2 tax, whereby temperatures and the market play an important role. The Global Warming Policy Foundation (GWPF) has organized a special meeting to present his views in London.

And Marcel Crok  has written about it on his website, ‘The State of the Climate’, under the title: ‘Can a carbon tax solve the politicization of climate science?’.

Let me state from the outset that I hold Ross McKitrick in the highest regard as an economist who has specialized in climate issues. Together with Steve McIntyre he has proved that the so-called hockey stick temperature reconstruction by Michael Mann was incorrect. Their article in Energy & Environment on this topic has been a game changer in the climate debate. Moreover he has published a number of other excellent articles on climate issues. Yet, I am less enthusiastic about his latest proposal.

What is the content of his proposal? Marcel Crok writes the following about it:

I cannot explain it better than McKitrick did in his report: “I propose instead that the best way to proceed would be to put a small tax on CO2 emissions, and tie its subsequent evolution to a suitable measure of atmospheric temperatures. If temperatures go up, so does the tax. If they do not, the tax does not change.

Now why would or could that end the politicization of climate science? Again I quote McKitrick: “What if no one believes the forecasts [of temperatures]? Here is where the concepts really gets interesting. There is no incentive for industry to promote or use wrong forecasts. 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 one stroke we will solve the politicization of climate science by using the market to weed out bad models.”

This system could be coupled to a futures market.

Marcel Crok: Now to understand why this would be the case a longer quote from the report is needed:

“A colleague of mine (Hsu 2011) has also pointed out that, if a futures market were to be opened in which firms could buy contracts to cover the per-tonne costs of the emissions tax up to, say, 30 years ahead, not only would investors have complete pricing certainty for the coming years, but the futures market 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, 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 my objections against this proposal? I must confess that I did not study it in depth, but my first spontaneous reaction was as follows:

1. The world is not laboring under ‘tax scarcity’. My feeling is that the present tax pressure is too high, undermining incentives to work, save, invest and entrepreneurial risk-taking, which may lead to permanent economic stagnation. In this case there is no hope that the debt crisis can be solved, which at a certain point in time may lead to a deterioration of the current crisis. Additional tax is thus undesirable.

2. The proposal (implicitly) assumes that there is a fixed and significant link between rising emissions of CO2 and rising temperatures. The most recent peer-reviewed literature suggest that that is not the case.

3. The proposal leads to an additional layer of regulation with extra costs. There are no societal benefits as far as I can see.

4. CO2-based climate models, which produce projections of future temperatures, are unreliable, as the observations over the last few years have clearly shown. Yet, we don’t have better instruments to get an idea of how temperatures will evolve, unless we trust the models based on solar activity, which have a good track record over longer time periods. Many astrophysicists expect a cooling period, which may last several decades, because of the current decline of solar activity. Some climatologists (here) also expect cooling, but they attribute it to oceanic oscillations. In both lines of thought  CO2 does not play any significant role, at least not for the coming decades. It is inconceivable that estimates by inexpert market parties will lead to better forecasts of future temperatures than those which – even devided – science will produce.

5. It is illusory to believe that governments will be prepared to espouse the proposed CO2 tax as a substitute for present climate policies (including the European emissions trading system, ETS). Too much political capital has been invested in those policies. Abandoning them by political decision-making would lead to a loss of political credibility and reputation damage. However, that does not exclude the possibility that systems like the ETS will implode under the weight of their own contradictions, as is the case right now.

6. It is highly inconceivable that many climate scientists will actively participate in the speculation in the futures markets and, in doing so, will significantly influence them. Their primary interest lies elsewhere.

7. The proposal includes the possibility of the conclusion of contracts of 30 years ahead. But who can foresee what will happen in the mean time? Will all parties who have concluded contracts still be around at that time to honor their obligations? Or, will many of them have gone bankrupt (like Enron in the US).

8.The most important point, however, may be that the reduction of CO2 emissions will hardly have any impact on the average worldwide temperature. In The Netherlands, the lower house has requested the government information on the effect of climate policy on average world wide temperatures. A legitimate question. After all, this is the ultimate goal of climate policy. This question was never answered. Yet, the answer is approximately known: the effect will be undetectable.

All in all, an immature proposal by Ross McKitrick. It is, in a way, yielding to the logic of the proponents of the the anthropogenic global warming hypothesis, which is – to my mind – convincingly refuted by observations.

This is a somewhat updated version of my earlier posting to ‘De dagelijkse standaard’ (The Daily Standard). For my earlier contributions see http://www.dagelijksestandaard.nl/author/hans-labohm/

Drs. Hans H.J. Labohm is an independent economist and author specialized in climate issues. He is former dpt. Foreign Policy Planning Advisor at the Netherlands Ministry of Foreign Affairs, former dpt. Permanent Representative of the Netherlands to the OECD, former Senior Visiting Fellow and Advisor to the Board of the Netherlands Institute of International Relations (Clingendael) and former (critical) expert reviewer of the IPCC. Together with Dick Thoenes and Simon Rozendaal, he wrote: ‘Man–Made Global Warming: Unravelling a Dogma’, MultiScience Publishing Company, 2004.