Just as Canada is about to hit a bump on the road to a national carbon tax, along comes the Royal Swedish Academy of Sciences. It awarded the Nobel prize in economics this week to Yale University’s William Nordhaus, the man who practically invented the idea of putting a price on carbon and the application of “market mechanisms” to reduce carbon emissions.
It didn’t take long for federal Environment Minister Catherine McKenna to tweet out the news implying that the Nobel committee supported the government of Canada’s carbon-price scheme. The Montreal-based carbon-taxing NGO, the Ecofiscal Commission, hailed Nordhaus for having “demonstrated” that a universal price on carbon was the most “efficient” way to curb climate change.
Before jumping aboard the Nordhaus bandwagon, however, carbon-taxing politicians and all Canadians might want to take a closer look at what they are being led into.
Nordhaus, now 77, has been promoting carbon pricing for more than four decades, based on the eye-rolling obviousness of the economic idea that the more it costs for a product containing carbon, the less people will buy products containing carbon.
In a 1976 paper, Economic Growth and Climate: The Carbon Dioxide Problem, a 35-year-old Nordhaus crunched some numbers and concluded that a carbon price starting at a few dollars a tonne (I’m converting roughly to 2017 dollars here) but rising to US$300 by 2040 and to US$400 by 2100 should pretty much eliminate carbon emissions.
At US$400 a tonne, the price of gasoline would go up by 90 cents a litre (again, in 2017 dollars) — about 75-per-cent more than fuel prices today in downtown Toronto. But carbon prices would also generate trillions of dollars in government revenue. Naturally, along with all other climate activists, Nordhaus immediately assumed — no questions asked — that the “market mechanism” and the “price” should be applied as a non-market statist mechanism via a new and unprecedented tax on just about every product. Once in place, the tax would provide generations of politicians and bureaucrats with slush money and the means to meddle in, if not take control of, much economic activity.
Nordhaus and his co-winner of this year’s Nobel in economics, former Stanford economist Paul Romer, are great believers in “incentives.” As Romer said in a post-Nobel interview (tweeted by McKenna, naturally): “I believe, and I think Bill (Nordhaus) believes, that if we start encouraging people to find ways to produce lower carbon energy, everybody’s going to be surprised at the progress we’ll make as we go down that path. All we need to do is create some incentives that get people going in that direction, and that we don’t know exactly what solution will come out of it — but we’ll make big progress.”
But why a tax? If all we need to do is deploy the price mechanism, why impose a tax? Let’s ignore for a moment the dubious assumption that the science and economics of climate change are sound and settled. Would it still not be better to have the government set the carbon price, require the energy companies to charge it, but allow the revenue to flow not to government but through to energy companies and their shareholders, and others in the supply chain? That’s where market forces and the above-mentioned miracle price mechanisms — rather than government planners — would determine where to invest and what energy alternatives are best. (No gas retailer could possibly eat the cost of a 90-cent-per-litre carbon tax, so they’d have no choice but to pass at least most of it along to the customer).
One of the ironies of carbon taxation is the enthusiasm for “market mechanisms” and “prices” among politicians who otherwise abhor and resist market pricing of everything from roads to health care to rental housing to public transit to education to broadcasting and telecom and the internet and the price of cannabis, not to mention the Canadian price of milk and chickens. With carbon, market pricing is suddenly a great idea, no matter how fanciful the analyses and speculative the projections.
The basic Nordhaus analysis goes like this: Carbon emissions are a “global externality” that spew into the atmosphere, a.k.a. the global commons, beyond the control of national governments. Since nobody now pays for these carbon emissions, there is no price.
To fix that gap, Nordhaus and other economists have cooked up a method of calculating the “social cost of carbon” or SCC. In a 2015 paper, Nordhaus ran through a maze of equations, estimates, models and graphs to conclude that the 2015 SCC was about US$40 a tonne. The number crunching at one point projects temperatures and consumption through to 2205 (yes, really — nearly two centuries out) and comes with repeated warnings about “major uncertainties” including the discount rate and “geophysical and economic uncertainties, such as those involving the climate system, population growth, or future productivity growth.”
Uncertainty concerns may be even greater than those raised by Nordhaus. In a lecture this week to counter the alarmist report from the United Nations panel on climate change, former MIT professor Richard Lindzen, one of the world’s leading climate-science skeptics, told the Global Warming Policy Foundation that the popular notion that the climate, “a complex multifactor system,” can be summed up by one variable — changes in global average temperature — which is primarily influenced by just one variable, carbon dioxide emissions, is “an extraordinary pair of claims based on reasoning that borders on magical thinking.” He added: “An implausible conjecture backed by false evidence and repeated incessantly has become politically correct ‘knowledge,’ and is used to promote the overturn of industrial civilization.”
Compounding the science issues is the complicated economic business of implementing a global carbon tax, a problem that’s been worrying Nordhaus for more than 40 years. The last words of his six-page 1976 paper asked a question: “How can we reasonably hope to negotiate an international controls strategy among the several nations with widely divergent interests?”
No problem. Today, the Nobel winner has a plan. No more unenforceable protocols and agreements. In his 2013 book, The Climate Casino: Risk, Uncertainty, and Economics in a Warming World, Nordhaus tracks the failure of the 1992 Kyoto Protocol and the 2009 Copenhagen accord. “The Kyoto model is a dead end,” said Nordhaus. As is, one assumes, the current Paris climate agreement.
As an alternative, outlined in his book and in a subsequent paper and slide presentation, Nordhaus has been promoting the idea of using international groups of like-minded nations, called “climate clubs,” to force global adoption of carbon taxes using tariffs to punish bad actors.
Nordhaus proposes that major sympathetic nations get together to form global cabals or “coalitions” of carbon-taxing climate-club nations that would use trade sanctions and tariffs to punish non-members of the club who didn’t co-operate with climate targets. The “bottom line,” says Nordhaus in a 2014 paper, is that we need “clubs with penalties and sanctions on non-participants” to enforce international climate agreements.
Without the use of tariffs and other trade barriers, no group of nations would be able to enforce a global carbon regime. Other nations — China, Brazil, India, Canada (singled out by Nordhaus as a bad actor) — would become “free riders” in avoiding the social cost created by their production of carbon.
To force compliance, Nordhaus describes a basic tariff of maybe five per cent on all goods from non-compliant nations. A better scheme, he says, would be to impose a tariff based on the amount of carbon in the imported product, a trick that involves yet more manipulations and models. “Assume that noncomplying Canada exports a ton of steel to Europe,” he writes in Climate Casino. “If calculations show that the ton of steel has used 1.2 tons of CO2 in its production, then Europe would level a border tax of $30 per ton of steel.”
On the other hand, one could speculate that Canada would become a member of the climate club that would impose a tariff on goods — cars, vegetables, food, machines, computer gadgets — imported from non-carbon-taxing nations, including the United States.
On the basis of hypothetical 100-year climate projections and theories — and using economic models filled with literally innumerable uncertainties over climate systems, economic structures, technology speculations, discount rates and steel prices — the world will solve the hypothetical risks of climate change with a new international trade regime (a sort of perverse World Trade Organization, which is cited by Norhaus as a model) that implies more trade wars in a global trading system that’s already fragile.
What has economics come to if this is the foundation for a Nobel prize in the field? And what will become of Canada if it joins Nordhaus’s carbon clubism?
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