## Saturday, January 24, 2009

### Microcanonical leftists & cap-and-trade system

Do you prefer the microcanonical ensembles over the canonical ones? Then you're a leftist, a TRF theory claims. ;-)

In thermodynamics, a microcanonical ensemble chooses microstates according to the value of their energy (or another extensive quantity) that must belong to an interval. Each microstate in the ensemble has the same weight.

A canonical (or grand-canonical) ensemble chooses a temperature or a chemical potential (or another intensive quantity) and allows different microstates to contribute differently, by the exponentially decreasing weights. The average energy is calculated out of the temperature.

I have always found the canonical ensemble to be the more natural one, for many reasons. The microcanonical weights are discontinuous and depend on an arbitrary choice of an interval (and its length). The canonical weights are smooth and admit a natural calculation in terms of a periodic Euclidean time.

Now I believe that this preference of mine is a by-product of my being a rightwinger. ;-)

Conservative people like to define fixed laws in the society that apply to everyone, and it is up to everyone what he or she does with them. The outcomes are not known in advance and they depend on the detailed dynamics - the Hamiltonian, if you wish.

On the other hand, leftists prefer plans (like in a planned economy). So they decide what the energy should be in advance and eliminate every microstate that doesn't agree with their plans. Those (microstates or people) who make it through the microcanonical filter must be treated in an egalitarian way while the rest is sent to a Gulag.

We recently encountered this funny analogy during a discussion of the carbon cap-and-trade system. Is that a better idea than ordinary taxes, or fees paid for every ton of CO2? In the cap-and-trade system, one first defines the "emission goals" for everyone (the cap part) and companies are then allowed to buy or sell the indulgences or "credits" (the trade part).

This costs us about half a trillion dollars a year right now.

Is that a market-economy solution? Well, if the "caps" were natural, the "trade" part would surely be more market-friendly than strict pre-determined plans required from everyone. Such a trade could increase the efficiency of the system.

On the other hand, there's still the microcanonical "cap" part here which is completely artificial and dirigistic in character. There would be no indulgence market if there were no caps. The strictness of the regulator will always be the main force that will determine the price of the indulgences. That's why we have seen the price of carbon credits oscillate wildly, by many orders of magnitude.

Price oscillations surely exist in genuine market economy, too. However, these particular price oscillations - in the carbon markets - were clearly driven by the government policies. And I find them almost completely unnatural and counterproductive.

If the carbon dioxide emissions are viewed as "finite damages", someone should have at least a vague idea what are the damages caused by one ton of CO2. I believe that they're zero, if not negative, but those people who believe that CO2 hurts should have a positive number in mind and an argument that justifies it.

This number should be simply added as an extra tax. You can still emit whatever you want but it will cost you some money. The difference between the cap-and-trade system and a tax is the same as the difference between the microcanonical and canonical ensemble in physics. The main difference is that the cap-and-trade system admits a variable price of one ton but the variations are primarily determined by the regulators, anyway.

To put it differently, it is not true that the cap-and-trade system is more market-friendly than the extra taxes. It's because the whole nonzero price of the whole market is effectively dictated by the government - in the same way as if the government determines the new tax rate. In a genuine market, the price to emit 1 ton CO2 would clearly be zero. The indulgence price swings look like genuine price swings in the free markets but they are not: they just reflect the hawkish or dovish mood of the regulators and the precise details about their choice of the caps (which moreover increase the risk of insider trading and corruption).

Moreover, if it turned out that the carbon indulgences must be extremely expensive to achieve a sizable reduction of CO2 emissions (which would be likely if we saw no new technological breakthroughs), the damages to the economy could become much higher than even what the alarmists believe to be the damages caused by the CO2, which is simply wrong.

So if any policy of this form ever has to be adopted, a new tax is the cleanest solution. The best formula for the CO2 tax rate was promoted by Ross McKitrick, the T3 tax. The tax rate would be determined by the measured warming of the tropical troposphere where the greenhouse effect should leave the cleanest and strongest fingerprints.

Needless to say, during the recent years, the T3 tax would have been negative because we have seen cooling, especially in this particular part of the atmosphere, so I guess that according to this policy, CO2 emitters should have been paid extra money!

The T3 tax should satisfy everyone. Those people who don't believe that CO2 production causes significant temperature change have pretty much equal chances to expect a loss as to expect a profit, and those who believe that the warming will escalate because of CO2 production should be looking forward to a high carbon tax rate. ;-)

#### 1 comment:

1. President Bush took a parting shot at the French by raising the duty on Roquefort cheese from 100% to 300%. This was in retaliation for a French ban on American beef. The French are notorious for protecting their crummy agriculture industry. Many people think President Obama will reverse the decision. He loves the French and they love him back. A cheesy dispute with France