Should We Subsidize CO2?

Alberta’s NDP government passed its carbon tax law today.

Many agree that it is one of the stupidest taxes ever created, however even many arguments against the tax accept the basic premise that CO2 is a negative externality and “something must be done.”

But what if the premise underlying the tax — not to mention any other “climate change” policy — is wrong?

What if the social cost of carbon is negative — i.e. the net effects of carbon are positive?

A new paper by Dayaratna, McKitrick, and Kreutzer finds reason to believe this is justified by the empirical data:

Substituting an empirical ECS distribution from LC15 yields a mean 2020 SCC of $19.52, a drop of 48%. The same exercise for the FUND model yields a mean SCC estimate of $19.33 based on RB07 and $3.33 based on the LC15 parameters—an 83% decline. Furthermore the probability of a negative SCC (implying CO2 emissions are a positive externality) jumps dramatically using an empirical ECS distribution. Using the FUND model, under the RB07 parameterization at a 3% discount rate there is only about a ten percent chance of a negative SCC through 2050, but using the LC15 distribution, the probability of a negative SCC jumps to about 40%. Remarkably, replacing simulated climate sensitivity values with an empirical distribution calls into question whether CO2 is even a negative externality. The lower SCC values also cluster more closely together across difference discount rates, diminishing the importance of this parameter.

This all makes perfect sense, because there are non-climate effects of CO2 and they are extremely beneficial to the planet (plant growth, crop yield, human well-being). Furthermore, the climate effects of CO2 observed in the real world are far less damaging than what’s been predicted by the models of climate change propagandists — and these too are largely beneficial. On this, see Goklany’s Carbon Dioxide: The Good Newsfrom GWPF.

So using the logic of carbon tax advocates, since carbon provides us with overall benefits, we should subsidize carbon rather than tax it extra.

CONCLUSION

From the standpoint of economics and ethics, we should neither subsidize carbon nor tax it.

If you have a carbon tax, get rid of it. If you don’t have one but think you need one, forget it.

Carbon taxes are an abomination — they do nothing to improve the environment and exist only to plunder citizens so that politicians, central planners and cronies can enrich themselves.

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Ontario Government’s Centrally Planned Electricity Debacle

“One of the most devastating audit reports on government bungling and malpractice in Canadian history,” says Terrence Corcoran.

The AG reports that consumers have transferred billions of dollars to companies supplying green renewables on the basis of contracts awarded at grossly inflated prices. Because of the lack of competitive pricing for new power sources, nominally to replace coal generation, Lysyk estimates the extra burden on ratepayers at $9.2 billion — to pay for contracts at double to triple the going market price.

Over the next 17 years, she says consumers are expected to shell out about $133 billion in adjustments to cover the cost of the Liberals’ massive and scandalous restructuring of the electricity supply industry. Many of the dollars will go to pay companies to not produce electricity.

Read more.

The Central Planning Gambit: Can Central Banks Avoid a Crash?

The Bank for International Settlements put out its annual report on June 29. It says that the recovery is driven primarily by new fiat money generated by central banks. As a result, the pricing of capital assets is badly distorted. The overall theme is Austrian, not Keynesian.

Here is the summary:

A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis. This will involve adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth.

The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise. Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows, and unusually accommodative monetary conditions, investment remains weak. Debt, both private and public, continues to rise while productivity growth has extended further its long-term downward trend. There is even talk of secular stagnation. Some banks have rebuilt capital and adjusted their business models, while others have more work to do.

To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective — one in which the financial cycle takes centre stage. They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth.

Resources have been grossly misallocated by these interventions. Chapter VI begins with the following observations:

Nearly six years after the apex of the financial crisis, the financial sector is still coping with its aftermath. Financial firms find themselves at a crossroads. Shifting attitudes towards risk in the choice of business models will influence the sector’s future profile. The speed of adjustment will be key to the financial sector again becoming a facilitator of economic growth.

The banking sector has made progress in healing its wounds, but balance sheet repair is incomplete. Even though the sector has strengthened its aggregate capital position with retained earnings, progress has not been uniform. Sustainable profitability will thus be critical to completing the job. Accordingly, many banks have adopted more conservative business models promising greater earnings stability and have partly withdrawn from capital market activities.

Looking forward, high indebtedness is the main source of banks’ vulnerability. Banks that have failed to adjust post-crisis face lingering balance sheet weaknesses from direct exposure to overindebted borrowers and the drag of debt overhang on economic recovery (Chapters III and IV). The situation is most acute in Europe, but banks there have stepped up efforts in the past year. Banks in economies less affected by the crisis but at a late financial boom phase must prepare for a slowdown and for dealing with higher non-performing assets.

Then it discusses commercial banks — they are relying on the low interest rate environment to keep submarginal borrowers afloat. This is postponing inevitable losses.

In the United States, non-performing loans tell a different story. After 2009, the country’s banking sector posted steady declines in theaggregate NPL ratio, which fell below 4% at end-2013. Coupled with robust asset growth, this suggests that the sector has madesubstantial progress in putting the crisis behind it. Persistent strains on mortgage borrowers, however, kept the NPL ratios of the two largest government-sponsored enterprises above 7% in 2013.Enforcing balance sheet repair is an important policy challenge in the euro area. The challenge has been complicated by a prolonged period of ultra-low interest rates. To the extent that low rates support wide interest margins, they provide useful respite for poorly performing banks. However, low rates also reduce the cost of – and thus encourage – forbearance, ie keeping effectively insolvent borrowers afloat in order to postpone the recognition of losses. The experience of Japan in the 1990s showed that protracted forbearance not only destabilises the banking sector directly but also acts as a drag on the supply of credit and leads to its misallocation (Chapter III). This underscores the value of the ECB’s asset quality review, which aims to expedite balance sheet repair, thus forming the basis of credible stress tests.

The holy grail of central banking is this: shrink asset bubbles without crashing the economy.

No central bank has ever accomplished this. Yet monetary central planners have big egos — they think they are the smartest people in the entire universe. Right now, they think they have the economy under their control — unemployment slowly falling, economic activity slowly improving, and consumer price inflation is nowhere in sight.

Business cycle “recovery” phases (even weak ones) can’t last forever. The question is, can they pull off their ultimate gambit?

If central banks can unwind the massive increases to their balance sheets without causing recessions, it will show that Keynesian economics works. It will be nothing short of a miracle.

Do you believe in miracles?

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