GreenGeld

The normally rather sane Tim Worstall has written, again, about the desirability of a “carbon tax”. In Tim’s world this is the most efficient and therefore least bad means of dealing with the problem of CO2 emissions and their impact.

Interestingly, Tim asks us to simply take on faith that CO2 is a problem and that its emission will have a negative impact. His proposal for a carbon tax is put forward as a less bad alternative to wind power and solar energy (though not, I note, nuclear) which he seems willing to acknowledge are pretty useless in addressing the energy needs of modern Western countries.

Tim does not want to engage the question of whether or not CO2 emissions are, in actual fact, a negative. He simply assumes they are and then tries to come up with a policy prescription which does the least harm. In this case a carbon tax.

His rationale for a carbon tax rests on the sound economic notion that “negative externalities” should not be created. Put another way, a producer should bear the full cost of production rather than being allowed to pass on the costs to the community of such things as water or air pollution.

In a fundamental sense this is the economic rationale for environmentalism and a position which even the hardest core free marketer should accept. However, embedded in that position is a requirement that the “negative externalities” be proven negative and that measures to control to imposition of such externalities be efficient. From an economic perspective, an efficient measure is one which costs less than the negative externality it is meant to address.

To give a simple example: propose that a pulp mill discharges a substance which kills 3 large fish a day. Propose that each of those fish has a value of $100 so the negative externality can be valued at $300 per day. An efficient measure to control the discharge is economically efficient if it costs $300 or less per day, it is inefficient if it costs more than $300.

Obviously, it is complicated to calculate the value destroyed by a particular negative externality. For example, there may be a cascading effect where killing 3 fish a day for a hundred days has the effect of killing the entire population of the fish. And so on. However, in principle, any measure aimed at a negative externality can and should be tested for its economic efficiency.

Which means that a carbon tax needs to be assessed against the harm it is alleged to be preventing as well as against other measures designed to prevent that same harm. This, in turn, means that the harm posed by CO2 emissions needs to be quantified. Without such quantification it is impossible to determine an economically efficient price for CO2 emissions reduction and thus impossible to arrive at an economically sensible rate of tax.

This can be illustrated by a simple thought experiment: imagine that we knew with 100% certainty that a doubling of CO2 would lead to an immediate doubling of temperature (with the consequence that life on Earth would become extinct]; the price of CO2 emissions would be efficient if it was set high enough to prevent any emissions which lead to such a doubling. Conversely, if we knew with 100% certainty that a doubling of CO2 would lead to a .1 degree temperature rise, a carbon tax would be inefficient if the value of the economic activity it deterred was greater than the cost of such a minimal rise.

Unfortunately for Tim, the state of climate science is such that it is effectively impossible to quantify with any precision a) what the temperature consequence of a doubling of CO2 is, b) what the cost of a rise in temperature is.

As climate science matures and more observational studies become available to calibrate climate models, the difficulty in attributing temperature rise to CO2 is becoming manifest. Black carbon, changes in solar radiation, non-CO2 man made effects (in particular urbanization), errors in the adjustments to the temperature record and plain natural variability all erode CO2’s centrality as the driver of the Earth’s temperature.

The underlying science is simply not good enough to provide any serious answer to the question of what an efficient price should be for CO2 emissions and therefore what an efficient rate of tax should be.

We simply do not know what, if any, contribution CO2 emissions have made, are making or will make to temperature rise.
More worryingly, we also have no idea what an optimum world temperature is or if it makes the slightest sense to speak of such a thing. Is a degree of warming a good or a bad thing? What about three?

Observationally, it seems clear that warming – which has been going on since the late 1800s – is a mixed blessing. A warmer world may make the poles hotter while leaving the tropics pretty much unchanged. If that is the case – and let’s assume it is – then is this a “bad” thing? If bad, how bad? The answer to that question has to be known and quantified so that we can accurately price the harm we propose to prevent by way of a carbon tax.

As Tim knows, while it is difficult if not impossible to price the harm prevented by reducing CO2 emissions, it is relatively straightforward to price the harm such a tax will inflict. A CO2 tax will increase the price of virtually all economic activity in the jurisdiction which imposes it. Basic economics tells us that as the price of an activity increases, less of that activity will occur. (Which, of course, is the basis upon which a CO2 tax promises such benefits as it may deliver.)

A good, stiff, CO2 tax should reduce the economic output of the jurisdiction which imposes it by some quantifiable number. If, for example, a CO2 tax increases the cost of energy by 20% one would be realistic in assuming that economic activity would decline in that jurisdiction by 20% of whatever fraction energy costs represent of the inputs for economic activity in that jurisdiction. In most jurisdictions such a tax could lead to significant reductions in GDP making the citizens less well off. Poorer.

So, in the end a CO2 tax is certain to make people worse off but uncertain to optimize temperature. Normally we would characterize this as folly and move on; however, Tim (and many other seemingly sensible people) continue to advocate this bit of craziness. Why?

Tim is as rational a commentator as you are likely to find on the net. He does not, so far as I know, believe in astrology or 911 conspiracy theories, so why advocate a carbon tax?

Many years ago Anglo-Saxon England was plagued by Vikings. The Vikings would raid coastal villages and often go a good distance inland plundering, killing, raping and generally being nuisances. Eventually the Anglo-Saxons grew so sick of the Vikings’ raids that they agreed to pay them to stay away. Danegeld was a very rational way of paying less than the raids were costing.

My own sense is that Tim has given up trying to fight the Green Vikings. He has realized that appealing to their better nature is not working. He understands that the Greens are immune to scientific argument and are economically illiterate. Worse, Tim realizes that the Green CO2 hysteria is going to take at least a decade before it finally burns itself out.

So Tim, willy Anglo-Saxon that he is, proposes to pay Greengelt in the hope that the costs of a CO2 tax will be much smaller than the staggering opportunity costs of mal-investment in windmills and solar farms and endless subsidies. Better still, while such mal-investment is a sunk cost, a carbon tax can, at least, be spent on things which are a bit less daft.

But, best of all, when the Green Vikings are finally routed scientifically and economically, a carbon tax can be quietly repealed with only minimal harm done.

Tim is not nearly as silly as his advocacy of a carbon tax might suggest; rather he is cunning.

Update: Judith Curry has this to say about the uncertainty surround CO2 sensitivity:

Until we better understand natural internal climate variability, we simply don’t know how to infer sensitivity to greenhouse gas forcing. The issue of how climate will change over the 21st century is highly uncertain, and we basically don’t know whether or not different scenarios of greenhouse gas emissions will be (or not be) the primary driver on timescales of a century or less. Oversimplification and overconfidence on this topic have acted to the detriment of climate science. As scientists, we need to embrace the uncertainty, the complexity and the messy wickedness of the problem. We mislead policy makers with our oversimplifications and overconfidence. climate etc