Few appreciate that once a country introduces an economy-wide carbon tax, it's time to downsize the Ministry for the Environment and demote the Minister for Climate Change. Their work is done.
A carbon tax puts a price on carbon emissions and leaves it to the market to decide which industries should shrink or grow and where to invest in innovation. Provided the carbon tax was set at the correct initial rate, a competitive market system subject to a carbon tax works itself. No further guidance is required from ministers or ministries.
The only role for the junior minister who looks after climate change in his spare time is to Skype into international meetings to report that yes, New Zealand has a carbon tax, which is why the air-ticket was too much, and it was set at the rate everyone agrees it should have started. We have done our bit.
There will be layoffs at Greenpeace too because environmentalists no longer need to call for the end of oil or of coal because a carbon tax will decide how much coal and oil should come out of the ground and when. A carbon tax will make the next best alternative fuels more attractive to buy.
A carbon tax replaces the need for mandates, bans and subsidies. There is no longer a need for green subsidies for solar or wind because a carbon tax will decide the pace at which competing energy sources are selected in the market and which should be on the way out and how soon.
The only unresolved issue is by how much the carbon tax should rise in the future. Fortunately, that does not require a minister or a ministry. No bureaucrats required.
Canadian environmental economist Ross McKitrick suggested a solution where the carbon tax be automatically increased under a public formula in line with increases in the temperature of the atmospheric troposphere. That's the first 18km of the atmosphere near the equator.
Linking carbon tax increases to the atmospheric troposphere has the big advantage that it is the part of the atmosphere most affected by greenhouse gas driven warming, it is affected early, and it is subject to reliable independent measurements by weather balloons and satellites.
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By announcing the formula for the increase in advance, you take the issue out of politics and make any further attempt to politicise the carbon tax plain to all. This is a much more effective solution than the Green proposal for a reserve bank style carbon commission with the wisdom of Solomon to independently set the pace for carbon reductions.
If there is rapid global warming, a temperature-linked carbon tax will increase rapidly because the atmospheric troposphere is one of the first places to be affected and will be affected big time.
Linking the tax to an objective measure of global warming will give a strong incentive for investors to invest in reliable forecasts of global warming so they will know what the carbon tax is likely to be in five, 10 and 15-years' time and then reinvest accordingly. Move out now of the industries that will be heavily carbon taxed in the future and invest in the industries that have small carbon footprints.
It will even be possible to hedge portfolios by writing futures contracts based on where you think thecarbon tax rate will be in the future based on how fast you think global warming will be.
A temperature-indexed carbon tax would take the politics out of fighting global warming.
• Jim Rose is an economic consultant who works in Wellington and blogs at utopiayouarestandinginit.com