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Weekend reflections

June 15th, 2007

Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.

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  1. Terje (say tay-a)
    June 15th, 2007 at 07:07 | #1

    It would be good to here your views on the T3 carbon tax proposed by Ross McKitrick.


    In essence it’s a global carbon tax linked to the tropospheric temperature anomoly. The neat thing is that whilst the tax starts low any investor building a power plant today has to anticipates the tax being very high in the years going forward if temperatures actually do go up. Basically a global warming skeptic that invests in coal will loose lots of money if they are wrong, whilst a AGW advocate that invests in wind power will lose lots of money if they are wrong.

    Of course it does embrase the notion that global warming is anthroprogenic. And if this is wrong then we end up converting to wind farms with no net benefit.

  2. Ernestine Gross
    June 15th, 2007 at 09:06 | #2

    Terje, you’ve given a concise description of the reality that all investment is risky because the future is uncertain. Business people know that. Mums and dads know it. Students know it. Corporatists want to avoid it by shifting the risk to the public. I believe the latter is the cause of the public debate.

  3. June 15th, 2007 at 09:18 | #3

    Actually I’ve been told that tropospheric temperature is generally uneffected by global warming that originates from the sun, so supposedly the T3 tax approach deals to an extent with the possibility that global warming is not due to green house gasses. On the face of it the T3 tax seems very neat.

    Ernestine – one of my biggest concerns about big government is that it acts as little more than a risk transfer machine. It ensures that the wise pay for the foolish and that the well connected or popular can dump risks onto others. To be sure these things can happen without government however government is a huge enabler when it comes to dumping risk onto third parties.

  4. Ken Miles
    June 15th, 2007 at 09:43 | #4

    A carbon tax linked to tropospheric temperature changes, while perhaps good in principle, has a major methodological flaw.

    That is: we don’t know what the tropospheric temperature trends are.

    There have been a number of attempts to determine them, however each attempt gets a different answer. We have no way of knowing what (if any) answer is correct.

  5. Ken Miles
    June 15th, 2007 at 09:48 | #5

    Actually I’ve been told that tropospheric temperature is generally uneffected by global warming that originates from the sun, so supposedly the T3 tax approach deals to an extent with the possibility that global warming is not due to green house gasses. On the face of it the T3 tax seems very neat.

    In order to determine the tropospheric temperature trends, the satellites “look” through the stratosphere which contaminates the trend. As the stratosphere is warmed by high energy radiation interacting with molecules such as ozone, the stratospheric temp trend is significantly effected by solar effects, ozone concentrations etc. Carbon dioxide also has a cooling effect. So in practice, the measured troposphere temperature trends are effected by solar trends.

  6. June 15th, 2007 at 10:02 | #6

    In so far as such measurement error and uncertainty will feed into any policy initiative it does not necessarily make T3 any more flawed than any other policy approach. However unlike other approaches it does seem to permit a market based decision regarding which climate model is the most reliable. It says that if temperature is destined to rise then anticipate a high tax on coal and invest accordingly. It asks investors to look at the risks and then put their money where their mouth is.

    Of course like all carbon taxes and trading schemes it suffers from the difficulty of auditing emissions that exists pretty much everywhere except the energy sector.

  7. Paulkelly
    June 15th, 2007 at 10:04 | #7

    Regarding the Australian Electoral Commission.

    I think we should just stop mucking around and make Tony Abbott the Electoral Commissioner. There would then be no problems with anything.

    Or at the very least Peter Shergold. He would make an excellent Commissioner.

    Independence in these matters is just a feeble delusion of the left. In fact, let’s do away with elections altogether. John Howard is obviously the better man.

    I’m sure Oz editorial writers would agree.

  8. Ken Miles
    June 15th, 2007 at 10:21 | #8

    Terje, it goes far beyond a simple measurement error. It wasn’t that long ago that the troposphere was reported to be cooling – which later turned out to be totally wrong.

    If we had that scheme then, the carbon tax would be dropping, when it should have been rising.

    Which out of the four temperature trends should we use? Ross McKitrick, unsurprisingly, chooses the trend which gives the lowest result. The experts in the field can’t decide which trend is correct. Can policy makers?

  9. June 15th, 2007 at 11:16 | #9

    we don’t have to worry about whether we should shift to renewable energy- it’s a finite world, and it’s going to happen.

    talk about clean coal and nuclear power doesn’t solve the problem, it just transfers the problem to future generations. that would be morally acceptable, except that the problem will be made much worse in future by not solving it now.

    i would like to see a plan to stabilize human population, and perhaps reduce it in a ‘humane’ way, and run capitalism in a sustainable way, if that’s possible.

    so far, all i’ve seen is discussion of how to protect share-holders from the consequences of greed.

  10. June 15th, 2007 at 13:45 | #10

    Its hard to imagine population growth decelerating faster than it is without being inhumane. Most of the world has rates of fertility below replacement and most of the growth bubble is now driven by increasing life span. A world without children would be a very depressing place.

  11. Razor
    June 15th, 2007 at 16:01 | #11

    JQ – any comments on the recent Productivity stats or the stuff about how the low income earners have been doing under JWH?

    Rudd got absolutely hammered in the Fin today! Any thoughts on that?

  12. Chui Tey
    June 15th, 2007 at 16:09 | #12

    With merger and acquisition activities, and private equity buyouts so hot, can you comment on how to effectively mitigate the risk to the general public from the highly leveraged purchased of essential public utility (such as Qantas) ?

    In Bond’s time, Bell’s shareholders simply lost a billion dollars. But today, the scope for damage is much higher and not limited to shareholders alone.

  13. jquiggin
    June 15th, 2007 at 16:24 | #13

    On low income earners my first comment is the same one made in the Fin. The data shows that the welfare state redistributes as it should. It doesn’t say anything about whether Howard has made things better or worse. Rudd should have made this point.

    FWIW, my perception is that policy under Howard has generally favoured families and single-earner couples at the expense of single people and childless two-earner couples. On the whole, I don’t have a problem with this.

  14. gordon
    June 15th, 2007 at 18:30 | #14

    Anybody still interested in the pros and cons of carbon taxes vs. carbon trading might be interested in William Nordhaus’ recent defence of carbon taxes, downloadable from here.

  15. Hermit
    June 15th, 2007 at 21:48 | #15

    Looking at the abstract of the Nordhaus paper I see it emphasises carbon price volatility and ‘finagling’. This is getting to the nitty-gritty. When the PM talks of ‘least cost adjustment’ in cap-and-trade I think in practice that will not mean technology so much as lobbying for favours like exemptions and inflated offsets. Nonetheless I still think the rationale for stringent cap-and-trade prevails.

    A new theme in the energy blogs is that of voluntary restraint. In the same way we give the evil eye to water wasting neighbours this idea says we will apply peer pressure to use less energy in cars, flights, airconditioning and so on. I’m not sure how this will sit with the marketing people.

  16. Mark U
    June 16th, 2007 at 01:18 | #16


    Labour productivity growth from quarter to quarter can be extremely volatile. So the government has pointed to the last few quarters to argue that there has been an improvement in productivity growth, but a quick analysis would suggest that it is not statistically better than the average since 1978 and has slowed a little since December 2003.

    You can make up your own mind by going to

    http://abs.gov.au/AUSSTATS/[email protected]/DetailsPage/5206.0Mar%202007?OpenDocument

    and looking a GDP per hour worked for the market sector in Table 1. Try the trend estimates.

  17. Peter Wood
    June 16th, 2007 at 12:49 | #17

    Re Ross McKitrick’s T3 carbon tax proposal: With there being so much gaming and lobbying by big business I like the proposal, because it eliminates much of that. Whether the proposal is a good idea or not depends on a crucial variable: the present cost of a tonne of CO2. McKitrick’s suggestion of US $4.70 per tonne (based on a survey by Richard Tol) seems to me to be far too low. The EU Emissions Trading Scheme futures market values 2008-2010 carbon permits at about 24 Euro per tonne. Choosing this variable to be too low would lock us in to a weak emissions reduction trajectory and a dangerously high stabilisation target.

  18. June 18th, 2007 at 13:08 | #18

    Peter – You seem to be ignoring the impact that future taxes under the T3 proposal will have on the net present value of any new power plants, or augementation to existing plants. If you are building a power plant with a 50 year life then you are interested in the carbon tax not just today but over the next 50 years. The T3 proposal appears to lock in a tax level that will be very high in future years if global warming actually happens. As such investors ignore the risk of global warming at their own personal financial peril.

    The neat thing about the T3 proposal is that it pushes the risk of global warming onto the emitters of CO2. This means that the government does not need to determine the risk of global warming but can move that assessment back to the private sector. It takes the externalities associated with global warming as well as the uncertainties and presents these as an internalised cost to the the emitters.

    Obviously T3 is open to the sorts of criticisms raised by Ken Miles, and I loath the prospect of any carbon tax that applies outside the energy and transport sectors, but assuming that it can cross these types of hurdles then it seems to be a reasonably neat solution.

    I’m not sold on T3 but I do think it deserves wider consideration.

  19. Peter Wood
    June 19th, 2007 at 17:23 | #19

    Terje, I am not discounting the impact of future taxes on present decisions and that is something I like about the proposal. My concern is of a different nature. Suppose that CO2 is initially priced at $5 per tonne and assume for the sake of argument that it rises to $50 by 2050. My understanding of the way the scheme would work would be that if CO2 was initially priced at $10, then the same temperature increase would raise the price to $100 by 2050. In both cases, future taxes would be higher but the relative amount of tax (and thus abatement) would still be very different.

    I am simplifying things a bit here because a higher initial tax rate could lead to less warming and a lower future tax rate than one would get from the same temperature increase. I also think that T3 is worthy of consideration but we have to be very careful about how it is implemented.

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