Submission to Senate Taxation Inquiry

I made a submission to the Senate Inquiry on the changes to capital gains tax. Just very simple economics, nothing complicated. Seems that the changes incentivise taking less risk and innovation. Here is more information for those of you not familiar with what has been proposed in the recent Australian federal budget. I am always sceptical about the value of making submissions to these inquiries, but had already written out these arguments on Twitter and so thought, why not write it up and send it in?

 

My Climate Change Policy Assumptions and Expectations

Matthew Kahn posted a list of his working assumptions on climate change. I think it is really enlightening to see these laid out rather than just expressed implicitly. So I thought I'd list my ideas in response to each of Matt's points. In the following, Matt's points are in bold and mine in plain text.

1. I believe that global GHG emissions will continue to rise for decades. 

Technological change in non-carbon emitting energy technologies has been surprisingly fast despite climate policies having been relatively weak. This makes me optimistic that emissions will soon begin to fall. We used to talk about steeply rising emissions paths like RCP 8.5. In the most recent IPCC report, business as usual is now a fairly flat emissions path (not that we should put too much weight on consensus). On the other hand, I am pessimistic on energy intensity falling by as much as is assumed in many integrated assessment models (IAMs).  So, my expectation is for some fall in emissions or at least a flat path till 2050. I don't expect a steeply declining path because so much fossil fuel infrastructure continues to be built. My best guess is that we will somewhat overshoot the 2ºC target but in the later part of this century we will get really serious about carbon sequestration, which will eventually bringing the temperature down again. If we are lucky, impacts will remain fairly linear and we will avoid tipping points.

2. I do not take integrated assessment models of the impact of climate change seriously.

In general, I agree. On both the impact and technological change sides they are mostly just speculation, particularly on the impacts side. On the other hand, having some idea of how much we need to cut emissions at what cost is useful... and they can generate the social cost of carbon (see below). 

One of my standard assumptions is that technological change in terms of increasing technical efficiency of production will eventually end. It's likely that the level of technology will follow a big S shape curve from the Industrial Revolution on, and we are somewhere near the middle of the curve right now.

3. /4. Urbanization increases one’s income as one acquires more skill to succeed in the urban market. Private income growth fuels adaptation as people have more resources to protect themselves from the serious threats we now face.

Urbanization is part of the development process that increases energy use and to date carbon emissions but also provides some more adaptation capacity though it reduces other abilities to adapt. Density reduces the overall need for transport and for heating but increases the need for cooling. So overall I don't have a strong opinion on urbanization.

5. Due to market innovation, I believe that the Social Cost of Carbon (SCC) will actually decline over time.

The resource scarcity literature teaches us that the expectation that the efficient path of a price of a non-renewable resource is simply to grow at the discount rate as in the simplest Hotelling model isn't necessarily true. And if we solve the climate problem, then maybe the SCC will come back down again. I say "maybe" because though carbon in the atmosphere might be falling, we will have more to protect from impacts? In the long run, the carbon sink isn't a non-renewable resource. However, in the near term it seems reasonable to expect that the SCC is rising. Of course, the SCC is just an estimate, which is either generated by an IAM or depends on the same assumptions as an IAM. On the other hand, as long as we don't have an effective carbon price, we need a social cost of carbon number to put in cost benefit analyses.

6. The proper role of government here merits much more research. When do government efforts protect the poor versus when do government investments and rules create moral hazard and “Peltzman” effects such that we take on more risks such as moving to a risky area that the government has invested in sea walls to protect?

I think the government needs to take climate change into account when planning and adapting public infrastructure. And it has an important role in providing people information about climate change. But beyond that I don't see it has a role in adaptation. People bear the costs of adapting privately. I don't see a market failure there except due to information. So, I don't know why this should get specific attention rather than just be a side effect of general social welfare policy. Should we be building sea walls to protect land from flooding and is that a coordination problem? Well, I can't see how that can be anything but a short-term solution and so probably we shouldn't.

7. I am a fan and a producer of reduced form climate correlations. For example, over the last 4 decades how much lower has the growth rate of a nation’s per-capita income been during years when it very hot? These correlations are interesting. They play a “Paul Revere” role teaching us what future costs we could bear if we fail to adapt.

I am not a fan of this literature. I think it is more or less meaningless regarding climate change in general. If there is a one time hot year, you are not going to do long-term adaptation as Matthew points out. On the other hand, long-term impacts of climate change like sea level rise and species extinction won't happen due to one hot year. The literature can tell us something about what will happen if there are more of these exceptional years in the future but that's about it in my opinion.

Should We Stop Investing in Carbon-Free Energy So That We Will Be Able to Afford CCS?

Myles Allen has a new interesting paper in Nature Climate Change:"Drivers of Peak Warming in a Consumption-Maximizing World", which has attracted media attention. The article in The Australian is framed as: "If we spend money now on renewable energy we won't be able to afford carbon sequestration later". This didn't sound right to me as I'm an "all of the above" kind of guy when it comes to climate policy and if there is less carbon in the air that needs scrubbing in the future the less it would seem to cost to scrub it.

I haven't done a thorough read of the mathematics in Allen's paper and this isn't going to a proper critique of his article. I just wanted to understand where the journalist got this idea from.

Allen uses a very simple cost-benefit framework where there is "backstop technology" - a technology that can remove carbon dioxide from the atmosphere at constant cost. The key assumption I think is that the "social cost of carbon" depends linearly on the level of income per capita. The following graph illustrates the main result:

If economic growth is rapid, then the social cost of carbon will rise much faster than if economic growth is slow. Therefore, it will pay off earlier to employ the backstop technology. This means that, paradoxically, peak warming will be less than under slower economic growth.

It is a long leap from this to arguing that we shouldn't be investing in renewable energy. Allen's model allows for an efficient level of abatement until the marginal cost of abatement hits the backstop cost. Also the model has no feedback from abatement cost to the rate of economic growth, which is exogenous. Almost all economic research, including my own, finds that the growth costs of climate mitigation are very small, at least until extreme levels of abatement are reached. So, the model is an interesting thought exercise about CCS but doesn't have as strong policy implications as the media suggests.

Really, What is the NBN For?

What I mean is, why do we need a new government network in urban areas? We just got a "set top box" for streaming Chinese TV channels. My mother-in-law is going to be visiting :) It operates via wifi from our Telstra "modem". TV is better than reception of free Australian channels so far. Of course, there are lots of such services from Netflix etc. which seem to work in Australia without major problems. Maybe an RBN (Rural Broadband Network) is what the government should be focusing on?

Superannuation Reform

I started writing this on Twitter but it got too long :) Peter Martin proposes taxing superannuation contributions at ordinary income tax rates and then not taxing earnings or payouts of superannuation funds. This would greatly simplify the superannuation system and is the logical progression of Costello's introduction of tax free superannuation pensions and the recent move to increase the contributions tax people earning more than $300k p.a. It is equivalent to the U.S. Roth IRA. It could, in theory make running a self-managed super fund as simple as having an ordinary brokerage account (as it is in the U.S.) as the funds wouldn't owe tax.

There is one drawback, though. Taxing up front, leaves less capital to accumulate and so super payouts and the tax collected will be smaller than if instead we followed the U.S. 401k model. This is where payouts are taxed at regular income tax rates and contributions and earnings are tax free.* But, at this point, this would be a more radical change than the Roth IRA route. Existing superannuants would have to be grandfathered or they would complain about double taxation compared to current contributors. So, it's more likely we go down the Roth IRA route.

Most likely, of course, is a relatively minor change that complicates the system further or doesn't reduce the complication such as reducing the contributions tax concession to 15% across the board. Or eliminates the up-front concession but doesn't eliminate taxing superannuation earnings.

* There are probably some equilibrium effects that reduce the difference between the two....

How Ambitious is China's Proposal to Peak CO2 Emissions by 2030?

A few days ago China and the US jointly announced emissions targets for 2030. China proposes that their carbon emissions will peak by not later than 2030. How ambitious is this goal? In our 2010 paper in Energy Policy, Frank Jotzo and I asked how ambitious China's 2020 target to reduce emission intensity by 40-45% between 2005 and 2020 was. We concluded that it represented significant effort beyond expected intensity reductions under business as usual.

In a recent paper Xiliang Zhang and coauthors project Chinese emissions under three scenarios. Under a no policy scenario, emissions rise to 16.5 billion tonnes (Gt) in 2030 and continue to rise throughout the century. Under their "continued effort" scenario where current policy initiatives are continued, emissions rise to 11.8 Gt in 2030 and peak in 2045. Finally, under their accelerated effort scenario, emissions rise to 10.2 Gt in 2030 where they peak. So, on this basis, China's proposal does constitute a new accelerated effort.

Another way of looking at these scenarios is in terms of the rate of reduction in emissions intensity in 2030. The rates are -1.9%, -3.4%, and -4.1% respectively. China's 2020 emissions intensity target represents a 3.6% annual rate of reduction in emissions intensity from 2005 to 2020. So, by this metric the new target represents an increase in effort over the current policies.

Revenue-Neutral Carbon Tax with Global Temperature Indexation

The Climate Colab at MIT is running a competition for innovative climate policy proposals. Richard Hobbs is a local contender in this competition. You can support his proposal or make comments here. The winner will get to fly to MIT to present their proposal to US politicians, policy makers, economists, business executives and NGOs. Richard's proposal is a revenue-neutral carbon tax meant as a policy platform for the Republicans to bring forward to the next US election. It is revenue-neutral (cutting capital gains taxes and corporate taxes) and it is temperature indexed (so if climate sceptics are right the price trends to a low level).

Frank Jotzo Responds to Danny Price

Frank has an op ed in today's Australian Financial Review - responding to Danny Price's op-ed last Wednesday which I also commented on, on this blog, last week. Here is a non-paywalled version of Frank's op-ed.

Direct Action vs. Carbon Pricing

There was an op-ed in yesterday's Australian Financial Review by Danny Price criticising the 59 economists including me who agreed to sign a statement in favour of carbon pricing and praising direct action. First, a clarification. By signing that statement we were not endorsing the previous Labor government's Emissions Trading Scheme. We were simply endorsing some pricing mechanism on carbon. Price criticises carbon pricing because of the "cost to the broader economy of any tax". Here he seems to be referring to the tax interaction effect. Where there are existing distorting taxes,  a new tax interacts with these and increases the costs of the new tax beyond the amount of the direct costs involved with abating pollution. The advantage of a carbon tax is that the revenue from the tax can allow the government to cut existing distorting taxes and reduce of offset this effect. This is known as a "green tax reform" and was much discussed in the so-called "double dividend debate". But imposing a regulatory cap on emissions (and issuing free tradeable permits) results in the same increased costs in the presence of existing distortionary taxes. So, this is why economists generally recommend auctioning emissions trading permits rather than giving them away.* This raises revenue allowing other distortionary taxes to be cut. Direct action is effectively a cap on emissions where the government subsidizes firms reducing emissions through a reverse auction. But this uses government revenue and doesn't allow the cutting of other taxes unless the government budget is cut drastically, which doesn't look like happening. If other spending isn't cut at all then the government will have to increase the existing distortionary taxes. So, direct action is worse than a carbon tax or traded permits on this basis. However, Price says that under direct action the government only imposes one dollar of costs on the economy for every dollar spent. This seems to be incorrect.

On top of that are the problems of the incentives for firms to inflate the baseline from which they claim they will reduce emissions.

So, I'm still in favor of carbon pricing of some sort though I think there are also important problems with emissions trading schemes that only provide a very volatile short-term price signal. The article by Ottmar Edenhofer in the latest issue of Nature Climate Change discusses some of these issues.

* I've argued that the Australian scheme failed because due to objections by the Greens, not enough free permits were given away allowing the scheme to be characterised as a "huge tax". The Australian scheme was less generous than the European scheme. But any such giveaway should be a transitory policy that would be replaced by more auctioning of permits over time.

Economists Statement on Carbon Pricing

My name is included in the list of economists supporting a statement on carbon pricing released by WWF Australia. The statement is a little vague I think to maximize the number of people who would be willing to sign up. I think a price on carbon is a very useful part of a climate change policy. It can provide an incentive for finding cost-effective solutions, which otherwise might not be found. I favor a carbon tax now over emissions trading but the statement leaves that open. This seems to be where mainstream opinion is now heading.

World Congress of Environmental and Resource Economics

I am, like almost 1200 other participants, at the WCERE in Istanbul. Yesterday there was an interesting panel session on climate change with Jeffrey Sachs, Ottmar Edenhofer (who is apparently meeting the Pope today), Marianne Fay from the World Bank,  Laurence Tubiana - the new French climate change ambassador - and Carlo Carraro as chair. All the participants agreed that the new framework for climate change policy that will be established at Paris next year must make a break from previous agreements and pledges in consisting primarily of designing long-term transformation pathways rather than primarily short-term targets. Obviously, short-term steps will still be needed. The thinking behind this was best expressed by Marianne Fay. She showed a slide with a picture of the Freedom Tower in New York and a small cottage side by side. She asked: "If you wanted to build this tower, would the house on the left be a reasonable first step?" Similarly, we could ask whether shifting to natural gas is a reasonable first step to decarbonizing the economy. A long-term perspective is needed. Jeffrey Sachs made a point that spot carbon markets aren't an appropriate tool for long-term climate policy. The short-term price keeps fluctuating and there is no long-term futures market. Instead a predictably rising carbon tax is needed. Technology policies are also needed to complement the carbon price. The consensus is that this is where we should head.

Climate Change and the World Economy Now Available

Our collection of classic papers, Climate Change and the World Economy, is now available via Elgar's website. For more information on this project please check  my previous blogposts.

Climate Change and the World Economy

The blurb for our forthcoming book is below. Thanks to those who suggested papers that we included in the book! Previous posts on this project.

Climate Change and the World Economy

Edited by David I. Stern, Professor, Crawford School of Public Policy, The Australian National University, Frank Jotzo, Associate Professor, Crawford School of Public Policy, The Australian National University and Leo Dobes, Adjunct Associate Professor, Crawford School of Public Policy, The Australian National University, Australia.

World economic activity is a cause of climate change and climate change has an impact on economic activity. Adaptation to climate change can occur locally, but action on climate change requires global cooperation or at least coordination.

Covering all aspects of the problem, this collection contains both classic and recent key published articles on this burning issue. The first section explores global trends in emissions and their drivers as well as the most important forecasts of global greenhouse gas emissions. The second section covers mitigation policy at the international level reviewing costs, benefits, and analysis of policy instruments. The final section focuses on adaptation and the roles of risk and uncertainty in responses to climate change.

The extensive, authoritative introduction provided by the editors puts these contributions into context. This volume will be of interest and value to researchers and policy professionals in the areas of climate policy and environmental economics.

40 articles, dating from 1956 to 2012

Contributors include: N.P. Gleditsch; R. Mendelsohn; N. Nakicenovic; W. Nordhaus; G. Peters; B. Smit; S. Smith; N.Stern; R. Tol; M. Weitzman

May 2014 c 752 pp

Hardback ISBN 978 1 78100 918 5

Price c £250.00

Substitutability and the Cost of Climate Mitigation Policy

Yingying Lu, my post-doc on our ARC project, and myself have a new working paper on our research on the effects of assumptions about substitutability on the estimated costs of climate change mitigation policy. Some of the results are in line with our expectations and some are quite surprising...

I originally proposed this project because I was surprised that there could be such different views on the costs of stopping climate change. The mainstream economic community working on these issues usually finds that the costs of even quite strong action are in the neighborhood of lowering GDP by 1-4% below what it would be under business as usual (BAU). As GDP is expected to continue to grow strongly in such models, this seems to be a quite trivial cost to avoid disaster. It implies that   doubling today's level of GDP will be delayed by just 1 to 2 years. Tavoni and Tol argued that these figures ignore those models which failed to be able to simulate the stronger policy scenarios. But even when they compensate for that bias they estimate that the net present value of the reduction in GDP is about 8% of BAU GDP. On the other hand, Tim Jackson argued that we need to stop economic growth in order to have any chance of dealing with climate change. This does not seem to be an uncommon view among natural scientists, environmentalists, and also many climate skeptics. Roger Pielke argues that such unprecedented decarbonization is "all but impossible". Again, the implication is then that growth must be stopped in order to reduce emissions.

So, I wondered whether mainstream climate models are somehow missing something. Specifically, are they assuming that it is easier to reduce fossil fuel use than it actually is. If the economy was less flexible - if the parameters known as elasticities of substitution were smaller - it would presumably be harder to reduce fossil use. Very little research has been published on the sensitivity of climate policy costs estimated by mainstream computable general equilibrium (CGE) models to changes in the elasticities of substitution. And what there is is not really designed to answer this question.

Our research uses McKibbin and Wilcoxen's G-Cubed model. We ran the model under BAU and four policy scenarios ranging from a 20% global cut in emissions by 2030 relative to 2010 to a 20% increase, which matches the RCP scenarios quite well.

We perturbed most of the elasticities of substitution in production and consumption (but not those between domestic and foreign goods and services) by increasing them by 50% and reducing them by 50%. We also tried some other parameter sets, including setting all elasticities to 0.5; setting all elasticities of substitution between capital, labor, energy, and materials to 0.5 and all those between fuels to one;  setting all elasticities to 0.1; and setting all elasticities to 2.

Not surprisingly, as we reduce the elasticities, the cost of abating a tonne of carbon increases and vice versa. What is surprising, is the extent to which the BAU emissions path is changed. BAU emissions are reduced in the less flexible economies relative to emissions in the default model. This effect is so strong that usually the total cost of reducing emissions increases with increasing flexibility and vice versa. In fact, in our most extreme low flexibility scenario, emissions grow so slowly that the more moderate policy scenarios are not binding. Economic growth is in fact halted and so there is a much reduced climate problem to deal with. This seems to be an example of the de La Grandville hypothesis that, the greater the elasticity of substitution, the faster the rate of economic growth.

Yingying and I debated whether the growth effect is real or an artefact of our modelling. Jorgenson et al.'s study avoided the issue by looking at policy scenarios that are based on percentage reductions in emissions relative to business as usual. Babonneau et al. adjust the rates of technical change so that the BAU scenario reproduces the expected rate of economic growth in the European Commission's World Energy Technology Outlook. We believe that this is likely to be a real effect. On the other hand, G-Cubed assumes that the rate of technological is exogenous, whereas the rate would also likely vary with the elasticities of substitution. Additionally, the baseline levels of output and prices at the start of our simulation are based on the real world level of these variables which would also differ if the economy was very different. Therefore, our results are not a reliable indication of the relative performance of more and less flexible economies in the real world

So, what is the bottom line?

1. Because a less flexible economy has higher abatement costs per tonne of carbon but less emissions growth, if what we care about is the total costs of climate policy then it is not so important to get good estimates of elasticities of substitution. If we care about average and marginal costs of abatement, then these parameters are critical. We again find that the distinction between marginal and total costs of abatement is important.

2. Though stopping growth reduces the climate change problem, the reverse isn't true. We cannot find a model economy where the costs of climate mitigation are so high that such a policy would result in stopping economic growth or that mitigation cannot be achieved without stopping growth. Certainly, assuming that the economy is a lot less flexible than it is cannot generate high total costs. In fact the reverse is true.

Call for Papers: Special Issue of AJARE on Commodity Booms

Australian Journal of Agricultural and Resource Economics (AJARE)
Special issue on Resources and Energy Commodity Cycles: Maximising the Benefits of Resources and Energy Commodity Cycles

Focus
The Australian Journal of Agricultural and Resource Economics (AJARE) is publishing a special issue on managing mining and energy commodity cycles for publication in 2015. Submissions are welcomed.

The economic effects of commodity cycles in mining and energy sectors are a major policy topic in resource-rich countries. This Special Issue will follow a previous special issue on Mining and Resource Economics in the journal in 2012, which has been very highly cited.  Submissions to the Special Issue should be focused on identifying and analysing economic drivers and impacts, as well as evaluating different policy mechanisms available to manage and ameliorate boom and bust cycles.

It is planned that the Special Issue will be released in print form in April 2015. It is anticipated that an associated Symposium or workshop on the topic will be held in Australia in early 2015 to engage policy makers in the research findings.

Timeline
·         Issue Call – March 2014
·         Submissions due – 15th of September 2014
·         Manuscript selection – 30th of September 2014
·         1st round Reviews Due – 15th of November 2014
·         Review process completed – 31st of January 2015
·         Early bird publications – 28th of February 2015
·         Issued in print form – April 2015

Sample topic areas
·         Resource rents and taxation
·         Sovereign wealth funds
·         State roles to achieve benefit maximisation
·         Labour force transformations in the mining sector
·         Indigenous and remote area employment
·         Productivity growth over a commodity cycle
·         Positive and negative spillovers to other sectors / technology / workforce issues
·         Impacts of price and investment boom on exchange rates, interest rates and other sectors
·         Managing the transitioning from the peaks of resources and energy booms
·         Historical overviews of past commodity cycles
·         Managing conflicts over land use and environmental tradeoffs
·         Providing infrastructure, housing and services to resource regions
·         Economics of energy efficiency
·         Measuring and predicting price and investment cycles
·         Stranded capital and resource assets
·         Sustainable mining
·         Resource extraction and environmental tradeoffs
·         Coal and gas market analysis
·         Economics and regulation of unconventional gas
·         Energy demand and supply analyses

Editors  
The special issue will be coordinated by Professor John Rolfe (Central Queensland University) and Professor Quentin Grafton (Australian National University), with additional support from the AJARE Editorial team. Further information about the Special Issue can be sourced from Professor John Rolfe (Email: j.rolfe@cqu.edu.au / Phone: 61 (7) 4923 2132).

Early advice about intentions to submit would be welcomed. This can be done by emailing a prospective title and abstract to Professor John Rolfe (j.rolfe@cqu.edu.au).

Submission
Guidelines for authors and the process to submit an article to AJARE. 

Cost Concepts for Climate Mitigation

A new paper in Climate Change Economics by Paltsev and Capros lays out the different metrics one can use to assess the costs of climate change mitigation. The main content of the paper has been around for a while in working papers and a book chapter, which I have cited previously. The paper makes the following points inter alia:

• Total costs of abatement depend on both the marginal cost and the amount of emissions abated, as we discussed in our paper linked above.
• In a second best world where there are existing distorting taxes, the costs of abating emissions are greater than simply integrating the area under a marginal abatement cost curve.
• Terms of trade effects are very important at the macro-economic level. For example, as we are finding in our current research using the G-Cubed model, the loss of GDP in OPEC countries under a climate mitigation policy would come more from the reduction in demand for oil then from domestic abatement efforts.

Carbon Tax Thresholds

Jack Pezzey and Frank Jotzo have a new short piece in Nature Climate Change on carbon taxes with free emissions thresholds.

Jack Pezzey comments on this piece:

"We're hoping this piece will shift economists' views on a basic assumption about carbon taxation, which we argue is unnecessary, and is stifling the adoption of a tax, with its well-known advantages over carbon (emissions) trading.

The basic, unnecessary assumption is that a carbon tax must be charged on ALL emissions coming from any source that's included in the tax scheme. Our commentary notes that current tax schemes typically do charge for all emissions from included sources, and have low tax rates with key emitters given even lower tax rates or excluded altogether. On the other hand, charging a high tax rate on all emissions would generate implausibly large revenues, at least in the short to medium term. We highlight the academically established, but institutionally ignored alternative of taxing only emissions above fixed thresholds, which are equivalent to free tradable permits in many ways.

We're not arguing that carbon tax thresholds are always a good idea, or that they solve the intractable problem of international cooperation on emissions control, just that a tax with thresholds should always be considered as an option whenever emission pricing is debated (or explained in textbooks). For example, starting a carbon tax at a low rate and with no thresholds may be a good idea. But the trading equivalent of this is full permit auctioning and an unambitious emissions cap, which in the profession is now usually seen as inferior, so why not also consider a higher tax rate with thresholds, the equivalent of the standard trading system seen in practice, with some free permits and (sometimes) a more ambitious cap?

We do not advocate for carbon tax thresholds as a permanent feature. Rather, we see them as transitory measures that facilitate the introduction of carbon taxes, at higher tax rates than might otherwise be possible politically. Carbon tax thresholds could be phased out over time. In the article, we point out the potential benefits from treating carbon taxes as a source of fiscal revenue, and recycling it to achieve greater efficiency in taxation, and to assist low-income households in dealing with energy price increases.

Thresholds also raise contentious issues which complicate taxation; but as we note briefly in the paper, and at length in the Supplementary Information, many of these issues have already been "dealt with" for free tradable permits, that is, resolved, albeit imperfectly, well enough to allow permit trading in practice. So we contend that similar resolutions can be found for tax thresholds, but only if they are first put on the agenda."

Can Negotiating a Uniform Carbon Price Help to Internalize the Global Warming Externality?

Martin Weitzman has a new NBER working paper on whether negotiating a common global carbon price will be more likely to succeed than negotiating for emissions quantity reductions has been. His answer is, yes, on the grounds that it is easier to negotiate a common carbon price than separate emissions reduction targets for each country, and that each country has an incentive for a high price on everyone else and to collect taxes itself. For the developed countries it also has the political advantage that they won't be forced to buy permits from developing countries and transfer money overseas.

But, as we showed in our paper in AJARE last year, a common carbon price will impose much higher total direct costs on developing countries than developed countries. Developing countries already argue that global warming is mainly the historical responsibility of the developed countries and, therefore, they should take stronger action. So, a common carbon price doesn't look very politically attractive to developing countries unless there are large side payments. Weitzman misses this dimension of the problem. This will negate the supposed political advantage that developed countries would see in retaining all their carbon tax revenue. Weitzman does admit that: "The model of this paper is so abstract and so removed from reality that it is open to enormous amounts of criticism on many different levels" (p. 17). He does write that: "Nothing in the model excludes side payments to help obtain an international agreement on harmonized national carbon prices" (p18). But won't those change the political acceptability of such an approach?

Fossil fuel exporting countries are a group that will suffer high GDP losses under any emissions reduction plan. Not only do they have fossil fuel intensive economies, but the reduction in demand for fossil fuels under a carbon tax reduces their income, which maybe a cap and trade approach does not do to the same extent. I'm skeptical that they would find it optimal to agree to a high carbon tax. These countries differ from the players in Weitzman's model who only suffer costs from their own abatement.

I do think that carbon taxes have important advantages over cap and trade schemes but I'm skeptical that a global uniform tax rate would see more success than a global Kyoto style quantitative emissions reduction.

First Issue of Asia and the Pacific Policy Studies Now Online

Most of the papers for the first issue of the Crawford School's flagship journal are now online in "early view". All of the papers for the first issue have now been finally approved. It looks like a few more still need to be processed into the journal format (I know that there should be a paper by Bob Costanza and Shuang Liu in this issue). The journal is open access - so no problems or fees for anyone to download the papers.

The Economics of Global Climate Change: A Historical Literature Review

I have a new working paper coauthored with Frank Jotzo and Leo Dobes up on RePEc titled: The Economics of Global Climate Change: A Historical Literature Review. It is a by-product of a book of collected papers we edited for Edward Elgar to be titled Climate Change and the World Economy. The paper has three sections. The first is on trends and drivers of emissions, the second on mitigation and impacts, and the third on adaptation. I wrote the first section, Frank wrote the second and Leo wrote the third. I then edited all the sections together into a hopefully coherent whole. The paper is titled "A Historical Literature Review" because we focus to some degree on the evolution of the literature from some of the early classic papers to the latest contributions. Of course, there is no way we can write a review that is at all comprehensive. The IPCC reports struggle to do that. I think we do cover some of the key papers in the literature and it could be a useful reading guide for further research.