Science & Technology

Is a Temperature Indexed Carbon Tax the Real Solution to Global Warming?


CO2 Tax

University of Guelph economist and statistician (and long time critic of the scientific "consensus" on climate change) Ross McKitrick is offering an intriguing new idea for addressing the problem of man-made global warming: a temperature indexed carbon tax. It would start out low, be revenue neutral and indexed to the temperature increases or decreases in the tropical troposphere. McKitrick points out its advantages:

Proposals for carbon taxes have to answer two questions: what should be the starting rate, and how should the tax rate change over time. Since, as I have said, a low carbon tax coupled with reductions in income taxes would likely be neutral or mildly beneficial at the macroeconomic level, it is conceivable that agreement could be reached in favour of a small carbon tax, even if people are otherwise divided about the underlying seriousness of the global warming issue. The second question, namely what the dynamic rate-setting process should be, is where views get polarized and agreement breaks down. How quickly should the tax rise, or should it go up at all? One side considers CO2 a great threat to the planet and wants a firm commitment to a rapid rise in the tax rate over the coming decades, to slow down the emissions they believe are causing global warming. The other side does not view global warming as a problem, and would view any plans to increase in the tax as an unnecessary cash grab.

There is no grand scientific answer to this dilemma. Some economists crank up giant computer models that were built on the assumption that we understand all the parameters of the climatic and economic systems, and they print out what they view as the mathematically-optimal tax path based on computations of marginal social damages and so forth. Of course the polarized groups do not believe these models or their printouts, for different reasons, so such plans are usually dead on arrival.

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. In this way everybody will expect to get the policy they think best, and whoever turns out to be right deserves to be so. Sceptics who do not believe in global warming will not expect the tax to go up, and might even expect it to go down. Those convinced we are in for rapid warming will expect the tax to rise quickly in the years ahead. Companies managing factories and power plants will have to figure out who is more likely to be right, because billions of dollars of potential tax liabilities will depend on what is going to happen. Nobody will benefit from using false or exaggerated science: instead the market will identify those who can prove they understand the climate well enough to make accurate forecasts. And policy-makers will be guaranteed that, whatever the tax does in the future, the policy will turn out to have been the right one.

At first blush, McKitrick's proposal seems quite sensible because it harnesses the vast dispersed knowledge of scientists, manufacturers, fossil fuel suppliers, renewable energy innovators, and speculators to address the problem of climate change. Take a look and see what you think.