The case for a carbon tax

After the 10:10 campaign accidentally hit the self-destruct button just a week before their big day, it is useful to remind people that greenhouse gas emission reduction is still a worthy goal, beyond collecting taxes.

This will soon appear in La Stampa:

Florence is said to have the best climate in the world. Surely, tourists from around the world flock to the northern shores of the Mediterranean, as do growing numbers of pensioners. That will change in the future as more northerly destinations will become more attractive and northern Italy may get too hot for the average Brit and German.

The impact on the Italian tourism industry is but one of the many effects of climate change. Some of these impacts are positive. Less energy will be needed to heat homes in winter. Crops will grow better as there is more carbon dioxide in the atmosphere. However, for most people, the impacts of climate change are, on balance, negative. This is surely the case in the longer term.

People often portray climate change as the greatest problem of the 21st century. Twenty years of economic research pooh-poohs the idea that there is an impending catastrophe. Poverty and air pollution kill more people per year that climate change will in a century. But that does not take away that climate change is a real problem that does real damage.

Climate change primarily affects poor people in faraway places. Poor people often live in hot places. They are more exposed to the weather. They cannot afford to protect themselves against the vagaries of the weather. This means that climate policy is not for our benefit, nor for the benefit of our children and grandchildren. Climate policy is primarily for the benefit of the children and grandchildren of people in distant countries. We have a moral obligation, however, to avoid harming others or to compensate them if we do.

We should also wonder what is in the best interest of future generations. Greenhouse gas emission reduction would slow the spread of malaria. A malaria vaccine would eradicate the disease. Climate change may cut food production in Africa by one-third. If African farmers would use the latest farming methods, food production would increase ten-fold. Climate policy should therefore not come at the expense of development policy. But it does: A growing share of development aid is spent on climate change. This should stop.

Some of the impacts of climate change are really impacts of poverty in disguise. If we leave these aside, there is still plenty to worry about climate change, including its impact on ice sheets. And there are many things that we do not know or understand. The effect on biodiversity is one such area. We know climate change will have widespread negative effects, but we do know how bad it will be. We know that the negative impacts of a gradual warming in the 21st century would be modest, but there has been no serious study of the impacts of more rapid warming or of the impacts in the very long term. If emissions continue unabated, climate change after 2100 could well be much more dramatic than anything foreseen for this century. Nor do we know much about the indirect effects of climate change. Tropical countries tend to grow slower than economies in the temperate zone. If climate is a contributing factor to the inability to develop, as some scholars suspect, then the impacts of climate change are much larger than current estimates suggest. But we simply do not know.

Everything about climate change is uncertain. Uncertainty is no reason not to act. In fact, it is the other way around. What we do know, suggests that climate change is a real problem. There is a small chance that current concerns are overblown. There is no reason to believe that climate change will make us all rich. But there is also a small chance that climate change will wreck the livelihood of many people. A relatively modest investment in greenhouse gas emission reduction would take away the worst risks. If the climate optimists are right, we would have made energy a bit more expensive for no reason. If the climate pessimists are right, we would have avoided a catastrophe. A rational person would err on the side of the pessimists.

There is another way of looking at the same problem. If we burn all fossil fuels that are still in the ground, Earth could get very hot. We cannot let the planet get warmer and warmer and warmer still. That must get us into real trouble sooner or later There is only one way to stop the carbon dioxide concentration in the atmosphere, and hence the temperature, from rising: Emissions have to go to zero. That is a daunting task. We will need a century to do this. You will not make it to the end of the journey if you do not start. We may decide to start slowly and cautiously, but a small start is better than no start at all.

Similarly, solving the problem of climate change will require the cooperation of all substantial countries on the planet. It is easy to wait for others to move, but that guarantees failure. A responsible country reduces its emissions, regardless of what others are doing. Perhaps one should not step too far ahead of one’s main trading partners, but lagging behind creates more long-term problems than short-term gains.

[Final paragraph removed, as it is about Italy’s lacking climate policy]

28 thoughts on “The case for a carbon tax”

  1. At the risk of sounding like a nutter, I’m a little sceptical about the widespread belief that climate change will effect the Gulf Stream. While this stream is essential, it is partly determined by the rotation of the earth interplaying with the shape of the atlantic ocean. These things won’t change with climate change.

    Nonetheless, I do agree that climate change is happening, will be a net harm, will devastate biodiversity, and we should do as much as we can to avert it getting worse.

  2. @Ger
    Climate change is unlikely to affect the Gulf Stream in any substantial way. That scenario is supported only by models that oversimplify the physics of ocean circulation. It is a mathematical artifact in an inappropriate model.

  3. Climate change primarily affects poor people in faraway places. Poor people often live in hot places. They are more exposed to the weather. They cannot afford to protect themselves against the vagaries of the weather. This means that climate policy is not for our benefit, nor for the benefit of our children and grandchildren.

    Seeing as though noted climate scientist* Richard Tol is now sharing his thoughts with us again on all things climate science, perhaps he might like to get around to that retraction that Dealga asked him about a short while back? (met with a rather curt reply at the time that he was no longer going to talk about… climate science, which seemed like a wise decision for him to make)

    * it’s amazing the things that a degree in economics apparently gives you expertise in. Why other degree programs (such as the natural sciences) bother trying to fill a void which the market has clearly already filled beats me…

  4. The complexity of the changes are of immense scope, and of course they interact with other factors. The marine census was recently in the news.

    It would appear that acidification of the oceans is a significant threat to biodiversity. Probably around 1/4 of CO2 added to the atmosphere is absorbed by the oceans. The impacts on major calcifiers, many organisms can not build their shells or skeletal structure is evident.

    I think we made fascinating progress in our attempts to understand the bigger picture, whether projects like the marine census, or E.I.S. extreme ice survey, all of them are contributing to a better understanding.

    I watched a report on the marine census last night on BBC, moderated by Richard Attenborough, he made a dramatic statement that life in the oceans would start to collapse as early as 2050 at the current rate of acidification.

    Earth science helps to understand the impacts, develop and fine tune models.

    Europol reported that the European Union’s Emissions Trading Scheme (EU ETS) had fallen victim to fraudulent trading activities over the past 18 months, worth €5 billion for several national tax revenues.

    It estimates that in some countries, up to 90% of the whole market volume was caused by fraudulent activities.”

    National interests, fraudulent banks (carbon credit trade/180- million tax fraud Deutsche Bank) insufficient policies, increase of criminal activities in the energy sector, and many more indicators paint a truly disturbing picture.

  5. @EWI
    No thoughts on the actual piece? Just the usual personal attack?

    The piece is compelling, but it doesn’t really argue specifically for a tax (rather than cap & trade). Are you still opposed to cap & trade?

  6. In my opinion, Cap & Trade, in it’s current form, being traded on the chicago exchange CCX and as indicated above, was identified in Europe to be infiltrated by fraudster is nothing short but a total failure.

    In a german TV report they mentioned that China built manufactures to produce a gas that is used for cooling and that causes 1,200 more effect than CO2. There is no demand for this gas, and it is destroyed after it is produced, part of the cap and trade scam.

    You could not make it up!

  7. @ George
    To be fair, the coolant problem is more a cdm problem than a direct cap and trade issue. cdm ignores the lack of complementary legislation in Target countries. A tax could also incentivise undesirable forms of co2 reduction if unaccompanied by complementary legislation…

  8. Listening to financial people talk about climate change is always humorous. The same people who will harangue for hours over a one tenth of a percentage point increase in the interest rate, all but scoff at the notion of an equivalent increase (~2K/300K) in average temperature over the next 100 years globally. You can show them thousandfold increases in pollutant levels in lakes and rivers mere miles from their homes and and you may as well be showing them gas spectra from Saturn’s moons.

    Meanwhile, they behave as if the numbers of their stock indices hold actual meaning(Dow is 10,700, but 10,700 what exactly?), and treat their analysis and interpretation with strictest gravity. Overall, I think it would be better for the world if economists stopped commenting on global warming—and probably on economics for that matter.

  9. @OMF
    Since when was RT one of the “financial people”? Anyone who regularly reads this blog knows that his interests are in enviromental and social economics, amongst other things.

    “it’s amazing the things that a degree in economics apparently gives you expertise in.”

    Yeah – things like Time Series Analysis

  10. @MarcusOC
    I had only 1000 words.

    I used to be opposed to cap and trade per Weitzman (1974). Nowadays, we have experience where green-eyed regulators met with corporate lobbying, the sharp edges of capitalism, and white-collar crime. I think that, in principle, cap and trade can work almost as well as taxation. However, in practice, I think that environmental regulators do not have the wherewithal to get it right.

  11. @Richard

    Italy has been rolling out a subsidized PV scheme through the national energy company ENEL. It is quite attractive. Loan from bank is paid out of the revenue generated. A scheme should pay for itself (in a domestic setting) within 7 to 10 years. Due to smart metering, which the Italians have had for years, there’s no guesswork about the amount of current a site puts back into the network.

  12. @ Richard

    Thanks for posting this. Sometimes your positions are hard to discern (and in this article there is much to agree with) so this very clear piece is welcome.

    However, the article would lead one to believe that their is a “consensus” among economists on issues of climate change. The “Twenty years of economic research pooh-poohs the idea that there is an impending catastrophe” is a pretty authoritative statement.

    Many other well regarded economists view the issue with much more urgency.

    Could you perhaps give an overview of the spread of opinion among economists on appropriate reactions to climate science?

  13. @Colin
    How about: “Twenty years of economic research pooh-poohs the idea that there is an impending catastrophe, but there are of course of bunch of people who have not contributed to the literature but disagree.”

  14. @Richard

    That’s a pretty defensive response.

    This site does list a body of academic literature (even one of your papers) much of which is authored by the “bunch of people” involved.

    And what about Stern? you may not agree with him but it can’t be ignored if you are being objective.

  15. @Colin
    Among the “real economists”, only Ackerman and Stanton have published on the impact of climate change in the peer-reviewed literature. Their papers are derivative.

    We’re still waiting for the first journal paper by Nick Stern on the subject.

    If you don’t want to believe me, please do your own literature review.

  16. @ Richard

    REally Richard, this is a very poor piece. You remind me of a contortionist, trying to twist himself into several positions at the same time.

    You tell us that “Twenty years of economic research pooh-poohs the idea that there is an impending catastrophe”.

    Firstly, it is not for climate scientists to tell us whether we are facing catastrophe or not?
    (as an aside I came across this confusing attempt you made to describe himself as a climate scientist:
    ….comment 86)

    Second, the climate science is very clear – the planet could easily warm by 5 degrees this century on BAU.

    Impacts of warming of this magnitude would not restricted to developing countries. Agriculture would no longer be possible in Australia for example. We only need look at what is being experienced in the hottest september of the hottest year on record in the US with thousands of record temperatures being set:
    But in a clear contradiction you acknowledge that catastrophe is possible yourself when you state that “If the climate pessimists are right, we would have avoided a catastrophe” so you don’t need me to tell you any of this.
    The only thing we disagree on now is that I am clear that this is the mainstream position.
    So Richard, is catastrophe a possibility or not?

  17. @ Richard

    I am not being contrarian for the sake of it as I am interested in your opinion.
    Are these not journal papers from Stern on the subject

    Reflections on the Stern Review: A robust case for strong action to reduce the risks of climate change
    Simon Dietz, Chris Hope, Nicholas Stern and Dimitri Zenghelis
    World Economics (2007) 8(1): 121-168.

    Why economic analysis supports strong action on climate change: A response to the Stern Review’s critics
    Simon Dietz and Nicholas Stern
    Review of Environmental Economics and Policy (2008) 2(1): 94-113.

    The economics of climate change
    Nicholas Stern
    American Economic Review: Papers & Proceedings (2008) 98(2): 1-37

  18. @Colin
    No, these papers do not count. First, they are not peer-reviewed. Second, they do not offer new material. Rather, these papers rehash material from a book that was written by civil servants which was never reviewed, prior to publication, by independent experts.

  19. @ Coiln

    You are right. There is no consensus in the economic literature. Several very highly respected economists such as Weitzman (who is mentioned above) agree with the conclusions of the Stern Review, even if he disagrees with the methodologies employed.
    We are, after all, dealing with a huge amount of uncertainty here (Weitzman’s main point in his response as far a I recall). How could anyone with a straight face tell us they know beyond doubt what the future holds?
    I mean economists couldn’t see three months into the future in 2008, see ESRI’s medium term review if you don’t believe me. I know that’s a bit snide, but I think it is important to remember that none of us has a crystal ball. When the risks are so great (even if “low probability”, but this point is very contentious) it is in my view important to employ a precautionary approach.

  20. @MarcusOC

    No thoughts on the actual piece? Just the usual personal attack?

    Given that I was asking RTol about a withdrawal of his character-based claims about Pachauri (which have since been proven entirely false), I’d consider your request to be ‘irony’.

  21. @EWI
    Please stop the misrepresentation.

    I’ve known Pachauri for many years, and I like him as a person.

    He is, however, unsuitable for the position and a liability to the organization, because he is a bad leader (e.g., WG1 v WG3), a bad communicator (e.g., voodoo science), he has conflicts of interest (e.g., TERI’s Himalaya programme), and he has overstepped the IPCC mandate (e.g., ice cubes).

    The only information that has since been added is a partial account of his personal finances. I have no problem with Pachauri being very well-to-do.

  22. This is a depressing thread
    Carbon tax should be a no-brainer
    Besides global warming there is also peak oil
    It behoves us to use finite resources as efficiently as possible, a carbon tax would go some way to changing consumption behaviour, improving efficiency and promoting renewables

    Instead we appear to be heading for the worst scenarios that were originally outlined in the Limits to Growth

  23. @Richard,

    Despite your preference for a carbon tax you seem to be coming to terms with the fact that cap-and-trade appears to have the political wind in its sails (EU ETS, legislative initiatives at the federal level in the US and Renewable Portfolio Standards (and tradable certificates) in a growing number of States, etc.).

    I find it helps to place the volume v price argument in context. CO2 emissions will decline over time as fossil fuel reserves are depleted and fossil fuel prices will increase sharply as a result. Indeed, given the short-run price inelasticity of the demand and supply of fossil fuels (in particular, oil) we are likely to see much increased price volatility and price spikes.

    However, the reduction in emissions accompanying the depletion of reserves will come too late to be of any use now or in the immediate future. So the question becomes: should we bring forward a carbon emission-adjusted replication of the price increases that will accompany the depletion of fossil fuel reserves or should we bring forward a carbon emission-adjusted replication of the future depletion?

    My instinct is to favour the latter because the energy industry has more experience of, and capability to deal with, price volatility arising from discreet movements in volumes. In addition, it provides more certainty with regard to the reduction in emissions and, if a carbon tax is required beyond the remit of the trading mechanism a price is readily available.

  24. That is a pretty shocking piece.

    From the questionable (I am being charitable here) malaria/AGW linkage to the tiresome use of the logically corrupt “uncertainty principle” your “case” is flims at best.

  25. @fergaloh

    I don’t have the hard numbers for this but the scenarios which envision catastrophic climate change are based on a substantial increase in the consumption of fossil fuels across this century. If, on the other hand, there was a scenario envisaging no more consumption of fossil fuels due to exhaustion by say 2030, the challenge of reducing emmisions would be more or less gone. No need for a carbon tax. You can’t have it both ways.

  26. Neil
    You miss the point, regardless of the environmental impact, a carbon tax makes renewables more attractive, more competitive and speeds up their development

    The alternative is business as usual until we fall off the energy cliff without having developed alternatives to fill the energy void

  27. Fergaloh,

    A carbon tax will make renewables more competitive, but so will a shortage of fossil fuels because with scarcity is an increase in their price. Gas prices are very low at present because of a glut in global stocks. If we are truly running completely out of FFs, people who want to make some money will be busy looking for and developing alternatives – that’s all the incentive renewables will need. It also works against the possibilty of falling off an energy cliff. A carbon tax makes sense for AGW but only makes us poorer if used for peak oil.

    Please note that I don’t get to go online everyday so bear with me if I’m slow to respond. But at the same time neither do I want to get into a protracted argument about oil running out which I believe will never happen. As per below:

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