The fact is that world air temperatures peaked in 1998. The more important measure, ocean temperatures, have been falling for four years. The author of the 2005 paper linking hurricanes to global warming has just published new research questioning the link.

Evidence has accumulated that the sun (combined with changes in the way air temperature was measured) was responsible for the warming of the 1990s. The IPCC’s case has been largely falsified in that if CO2 is the driver of climate, temperatures would now be at record levels. Instead, they are below the levels of ten years ago.

Then experimental wrinkle that I would be most interested in involves a de-coupling of “means” and “ends” with regard to energy policy. Have a cap-and-trade, but base the credits on each year’s GAAP income rather than previous emissions — and have each years’ credits depreciate over the next X years. This would make the total annual pool a multiple of the current year’s allocation allotments, but since it’s just the number of slices of the same pie, this shouldn’t be too complex. As a side note, the trades would have to proceed on a single-market anonymous auction basis.

To trace a single thread through this model, a power plant showing a GAAP profit of $100K would have to raise its rates by a large multiple to purchase more emissions allowances. A highly-profitable legal firm, with no prior emissions, would find itself in possession of a number of emissions allowances and a whompingly-huge electric bill. It could cash out its allowances to pay the electric bill and forgo a rate increase because its net would remain roughly equal…

The question is whether such a regime would better reflect total societal system costs by, as it were, “including externalities”….and not create additional economic distortions.

My faith in legislators, bureaucrats, and admistrators is such that I’d much rather this sort of test case be tried-out on somebody else….but it is intriguing.

The one realistic political concession–giving permits away to existing emitters to buy off their opposition–opens up a huge can of worms for corruption and manipulation of the system. The proposed allocation scheme for long-term permits rewards the highest-emitting producers and punishes the lowest-emitters. Adjustments for this will allow endless rent-seeking and raising of rivals’ costs.

On a less importan but not trivial matter, the paperwork burden of this system would favor larger organizations over smaller ones, because there are substantial fixed costs of setting up a system to deal with all the permitting activities. it’s been suggested that permits could be applied to the production of fossil fuels rather than their consumption, which would take the burden off small factories, etc., but then you do get into serious issues with inventories of fuel.

Let’s go back to fundamentals. Why would you expect a sensible legislature to choose between carbon taxes and emissions quotas (cap and trade)? If the problem is really as big as the IPCC tell us it is, then surely you’ll need a hybrid system that captures the best of both approaches.
We know how it can be done. What is needed is a system that imposes a tax on carbon emissions, ratified by a global treaty and enforced by a newly created global authority, preferably one that operates outside of the UN system that gave us Kyoto. A tax on carbon emissions sheets home the problem to where it originates, making the polluters pay. But a tax also has its drawbacks, such as its falling most heavily on the most entrenched carbon emitters, giving them few political options other than to oppose it – which they have done very effectively for the past decade, and would no doubt continue to do so. So let us combine the tax with a permit system, under which tradeable permits can be allocated to the most intensive carbon emitters (at less than their current output). The tax in such a system can be imposed in the form of short-term permits that have to be bought from the government, to make up any deficit in carbon permits over carbon emissions.
The proposed hybrid scheme that combines a system of carbon permits with a tax at the margin achieved through the sale of short-term carbon permits, is what the world needs now to get past the Kyoto roadblock. It gets around the endless debates over whether quantitative or price-guided targets are preferred. The answer is: both are needed. This is the basis for a hybrid scheme that has been proposed and analyzed for a decade now by scholars such as McKibbin and Wilcoxen; Pizer; Aldy, Orszag and Joseph Stiglitz.
As expounded by McKibbin and Wilcoxen over the past decade, such a hybrid scheme establishes a system where carbon emissions have to be matched by carbon emission permits, where adjustments at the margin reflect the prevailing price of carbon. The scheme has three core elements: 1) a system of long-term permits (LTPs) to emit one metric ton of carbon per year that can be allocated in any way seen fit to the carbon emitters in a country, and henceforth can be traded in perpetuity; 2) a system of short-term permits (STPs), say annual permits to emit one ton of carbon, that can be sold by the government for a set ‘trigger’ price and are valid only for the specified short-term; and 3) an enforcement mechanism whereby emitters of carbon within the country concerned must have permits (both LTPs and STPs) that match their emissions. Effectively these three elements put an economy on a carbon-price footing, and force emitters to take the price of carbon into all their investment decisions. But it does so in a way that enrols carbon emitters as supporters of the scheme, by allocating the long-term permits to them at the outset (always at a level that forces them to reduce emissions or purchase short-term permits to cover the shortfall). The sale of short-term permits acts effectively like a carbon tax at the margin, generating fiscal revenue for the government and setting a cap on the costs of adjustment for emitters.
A hybrid scheme of the type proposed has the advantage of being national in scope, so that tradeable permits have an origin that is subject to national jurisdiction and control with the national government implementing it in such a way that it conforms to the country’s legal and institutional endowments. This is its huge advantage over the Kyoto system where permits can be created internationally from notional entitlements, such as Russian ‘hot air’ arising from its emissions in the mid-1990s being below its 1990 levels. But if the hybrid scheme is ever to get off the ground in time to save the planet, the details of the scheme will clearly need to be settled at an international conference and then implemented in a coordinated way. The key to coordination lies in adopting a common price for the short-term permits, not so that they can be traded internationally, but so that the scheme imposes equal efficiencies on each economy, and so does not create windfall profits from trade.

I had a letter published in the Financial Times over the weekend on this theme, calling for a global carbon pricing authority in opposition to the international carbon fund proposed by BP’s Browne and Butler.