Another Free Marketeer for Carbon Taxes

Julian Morris, executive director of the London-based International Policy Network, has come out for carbon taxes over cap-and-trade in an op/ed in the Wall Street Journal (subscription required). IPN is a non-profit that aims to encourage better public understanding of the role of the institutions of the free society in social and economic development.

Morris cogently writes:

Even if the Kyoto Protocol were fully implemented -- not just by the EU, but by all of the more than 160 signatories -- and its restrictions kept in place until 2100, its effect on the climate would barely be discernible. It would merely delay the projected warming by less than a decade over the course of the next century. Meanwhile, the economic cost has been estimated at between 0.1% and 3% of gross world product. Even at the lower end, that is an enormous price to pay for essentially no benefit.

Given these undisputed facts, you may be wondering what is driving the global push for cap and trade. The answer is that the scheme has been gamed by various vested interests. Several big companies, including Shell, BP and Exxon, were granted more permits than they required and were able to sell them to companies with lower allocations who thought they needed more.

Meanwhile, other companies, such as Climate Change Capital, have made money by buying up emission permits in China cheaply and selling them in Europe.
In May 2006, it became apparent that the EU allocated more permits than were required during the first period of trading, which started in 2005 and runs through the end of this year, and the price of such permits collapsed. The same vested interests who initially made money from carbon trading worried that the same would happen in the 2008-2012 period and so lobbied the EU and member state governments very hard to issue fewer permits for that period.

A more cost-efficient and effective alternative to stem global warming would be to invest in new technologies that could cut greenhouse gas emissions in the future. One way to incentivize such investments is to impose a small but rising tax on carbon. Environmental economist Ross McKitrick has suggested a carbon tax that would be tied to the mean temperature of the tropical troposphere (a region of the atmosphere that is believed to be particularly susceptible to greenhouse gas-induced warming). If the temperature rises, the tax should rise; if it falls the tax should fall. This is an intuitively appealing idea, since a higher tax would probably spur more rapid developments of low-carbon technologies, countering further carbon-related increases in temperature.

Such a tax would also, among other things, motivate private-sector investments in climate forecasting, since companies would want to know what the tax level was likely to be in coming years. This would introduce long-needed competition and progress in a field currently dominated by government funding.

Those those without a WSJ subscription, the whole op/ed is available here.

Disclosure: I am proud to acknowledge that IPN has in the past generously paid my travel expenses to report on some U.N. Climate Change Conferences and World Trade Organization meetings.