Tuesday, January 5, 2010


When Murphy Debates McKitrick, the Temperature Rises

OK the post title was awful, I admit it. On my MasterResource post criticizing Ross McKitrick's proposal to tie a carbon tax to observed temperature changes, McKitrick posted the following comment:
Hello Bob and others,

I’d like to respond to some of the points made here. The main concern I have in reading your posting is that you seem to have some ideal alternative in mind, in which perfect information for all time now and in the future is available to decision-makers, and there is no difficulty overcoming the obstacles to forming a coalition to implement it. So if you are going to criticize my proposal in comparison to an ideal alternative, I hope that in a follow-up post you will tell us what the ideal is. So far all the alternatives I have seen being seriously discussed are much worse, except for the strategy of doing nothing. However, my tax idea strikes me as a near approximation to doing nothing since the tax rate would start low and gradually taper off from there. That’s my expectation: others would expect the tax to start low and rise.

Your first objection is that we can’t say for sure what the present value of the marginal damages of a tonne of CO2 is. So? All we can ever do is work with estimates. Without some working estimate of the marginal damages you have no rationale for any emissions policy, whether price or cap-based. At least with my proposal, the direction of change over time has a higher chance of being correct than other instruments that do not build in learning mechanisms (i.e. everything else). Bear in mind that if you require perfect information then there is no possibility of setting any policy correctly.

In other words you are criticising my policy because in order to implement it requires picking an initial dollar value, and the choice is inherently uncertain. But that applies to any policy option. Given the uncertainty, my proposal lowers the expected costs of making a mistaken commitment, compared to any alternatives I know of.

To implement any policy, either an emissions tax, tradable permits (worse) or command regulations (worst), involves picking an explicit or implicit dollar value of the marginal damages. One of the worst aspects of regulations like the ethanol mandate and appliance efficiency rules is that they appear not to place a price on emissions control, when in fact they do. It just happens to be buried in the costs of regulation, and often comes out to thousands of times higher per tonne of actual abatement achieved than we would think is a reasonable emissions tax level.
You are also concerned about price volatility since the “Earth’s temperature” bounces around a lot. I have always suggested that the tax be smoothed out using a simple moving average, between 12 and 36 months, so that the change in the tax is primarily driven by a sustained trend not by weather variability. By applying a simple smoother it is not hard to ensure that the tax variations remain reasonable, especially in comparison to the cap and trade case where a vertical supply curve and a nearly-vertical demand curve interact. (That’s why Europe’s ETS system has such explosive price variability and always will, as will a cap and trade system implemented in any industrialized economy.) Having some variability is not a problem–we cope with energy price fluctuations all the time. In this case a certain amount of variabiltiy has a theoretical justification (marginal warming, if it is damaging at all, is more damaging at times when there has already been a spike in natural warming).

Your third objection is to suppose, what if the IPCC is correct, but natural forces mask warming for a while, then we delay the correct policy response. Once again you are imagining an alternative world in which we have perfect information. If the IPCC is correct, and we know them to be correct, then people will anticipate the future tax increase and plan accordingly. If the IPCC is correct but we do not know them to be correct (or believe them to be incorrect), then no one is in a position to make the right choice. At least under my proposal, policy will eventually update as new information becomes available. Every other policy proposal is impervious to new information. We have a choice between policies that assimilate new information as it becomes available, versus policies that never assimilated new information. We do not have the option of policies that assimilate information before it becomes available.
Note that in the above, I edited out a lot of his comment, since he was addressing other people and not just me. I replied:
Ross (if I may),

Obviously it’s hard to be precise in a blog post, but I think you are misunderstanding my problems. When you ask me for a rival policy that responds to new information and is superior to yours, I can glibly reply: Sure, let’s have a carbon tax calibrated to the best-estimate of the social cost of carbon. And then as we get new information (including new temperature readings), we update the SCC using Bayes Law and adjust the tax accordingly. That is literally the theoretically best policy, given our uncertainty.

Now why don’t we do that? It’s because we all can’t *agree* on what the SCC actually is. There are people who think it’s really high, like Joe Romm, and that we should be taxing the heck out of emissions right now. Then there are people like Richard Lindzen, who thinks the IPCC estimate of climate sensitivity is too high, and (I presume) the “optimal carbon tax” should be a lot lower than what most other experts would say.

So what I was doing in my post wasn’t so much saying, “Whoa, McKitrick’s plan backfires because the IPCC might be right!” Rather, what I was saying is that I don’t believe there is actually a wide overlap where both sides in the debate could agree to a McKitrick tax.

For example, to get Rob Bradley to sign off on the tax, the initial rate has to be low. So in principle, if tropospheric temperatures stayed flat for the next two years (or even fell), then we would have a very low carbon tax for 2 years in a row.

Knowing that possibility, someone like Joe Romm would insist that this low initial tax rate would have to go up by a factor of 20 or something at the first blip in global temperature. If we didn’t concede that to him, then Romm would never sign on to the policy, because there would be (in his mind) an unacceptably high probability of catastrophe.

Do you see where I’m going with this? Because of the natural variability in temperatures, I don’t see how you actually could get honest people who have wildly different estimates of the SCC to agree to a McKitrick-style tax. Thus, I don’t think you are necessarily “smoking the other side out” if they balk at your proposal, since you’re asking *them* to sacrifice their view on the front end.

Maybe that’s a good way to frame my point: We could just as well propose a Murphy temperature tax, in which we start out with a $100 / ton tax on carbon. But then for every 1% the tropospheric temperature falls behind the IPCC suite of models’ forecasts (given the observed emissions and updating the forecasts all along), we knock down the Murphy tax accordingly. So we can “smoke out” the skeptics and see if they actually think the IPCC models are overpredicting temperature rises, or if (on the contrary) the people criticizing Waxman-Markey etc. are really just philosophically opposed to government intervention.

Does that help clarify my point?
If I were famous, blogs across the geeconosphere would go nuts: "Murphy proposes $100 / ton carbon tax!!"

I see what you mean, but I'm not convinced that McKitrick's tax plan isn't better than other alternatives. It seems that an appropriately-designed McKitrick tax would assign lower-than-"appropriate" rates to temperatures close to the current temperature and higher-than-appropriate rates to temperatures that skeptics consider unlikely. That way everyone wins -- the skeptics win by not really paying much carbon tax if they're vindicated, and the warmers win by getting everyone on board to seriously fight the climate in the near future, even if not immediately. And I think that's the intention of McKitrick's plan. I'm pretty sure that some function for tax rate versus temperature could be determined that would garner many more votes for the associated McKitrick plan than any other carbon tax plan I know of. In fact, this must be true because in the case where the tax(temp) function is fixed, the McKitrick plan degenerates into a fixed carbon tax.
Just general advice: one way to really clarify your point is to just say what you mean, no comparisons, no bizarre analogies.

Example (based on actual exchange):

Bad: Tradeable fishing quotas (TFQ) are nothing like carbon cap and trade (CCT) because with the latter, I don't have to worry about every time an Australian wants to go to the mall.

Good: TFQs differ from CCT in practicality because it is harder to monitor for violations of carbon permits.


So you're position here is, translated in a plainspeak, stripped of analogies and comparisons, is:

"There actually isn't a temperature-indexed carbon tax (TICT) that is politically feasible, because everyone will want to formulate it there's a huge chance of it swinging to their personal SCC estimate."

While that may be true, it kind of sidesteps the broader issue: should carbon restrictions be indexed to actual future events so that alarmists (and skeptics) pay a cost for being wrong? If so, then given that general principle, can't it be applied to pretty much any proposed policy? You don't have to settle on a SCC estimate to do that.

(Btw, the easiest way to find the SCC is for there to be private property rights in environmental resources. Where is your advocacy for this seemingly uncontroversial step?)

Aww man, I thought you'd like my switcheroo. Because if the skeptics flip out and say, "What are you nuts? Why would I agree to an economy-killing carbon tax upfront? What if there are sun spots and temperatures rise for the next 3 years?!"

...then they can totally see why Joe Romm would say of McKitrick's plan, "What are you nuts? Why would I agree to an environment-killing carbon tax upfront? What if there are volcanic eruptions and temperatures stay flat for the next 3 years?!"
I get your point. It's just that there are less convoluted ways of making it.
See, Bob, you've never really gotten anything at all published, have you, while Silas is a hugely successful author, so it would really behoove you to change your writing style to what he says it should be.
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