Practical realities of carbon trading

I begin with a disclaimer.

My disclaimer is the same as Nicholas Stern’s when last month he addressed the National Press Club in Canberra. Stern then declared he was not a scientist but then proceeded not only to accept the so-called consensus but to use it to call for urgent policy action globally to reduce CO2 emissions.

As (like Stern) a former senior Treasury officer, I also declare that I am not a scientist but, by contrast, I take a position similar to the Dual Critique of the Stern Review by 14 well-qualified scientists and economists. Their conclusion was that the Review is “flawed to a degree that makes it unsuitable … for use in setting policy”.

I also agree with the not dissimilar conclusion on the IPCC’s February report by ten qualified economists and scientists, including Australian meteorologist, William Kininmouth, in a February 2007 publication by Canada’s Fraser Institute.

One reason for my view is related to that given in the CSIRO’s 2001 publication on Climate Change Projections for Australia (PDF 1.65MB). It was there correctly acknowledged that, as projections based on results from computer models “involve simplifications of real physical processes that are not fully understood”, no responsibility can be inferred for conclusions reliant on the results.

This gels with my experience of formulating policies in the world of economic modelling. That taught me that modelling of possible outcomes reflect assumptions that are not necessarily correct about the weightings given to possible influences, or about the simplifications of highly complex human relationships. My analyses of past scientific predictions also suggest to me that, when looking to the future, science faces modelling problems similar to economics and has made as many if not more erroneous predictions.

But what you may ask has this got to do with assessing the possible size of the global carbon market?

Quite a lot, I suggest.

If there is uncertainty about the underlying analysis behind the IPCC type predictions of increased temperatures, and the associated causes of recent global warmings and what action governments might take in response, that is likely to make sensible individual governments cautious about the severity of policies adopted to reduce emissions.

Among those expressing uncertainty is our highly respected Productivity Commission. In the Commission’s key points of its recent submission on Emissions Trading it stated the following:

There is a growing consensus that the anthropogenic contribution to climate change could pose serious risks to future generations and that co-ordinated action is needed to manage these risks. However, uncertainty continues to pervade the science and geopolitics and, notwithstanding the Stern Review, the economics. This is leading to divergent views about when and how much abatement effort should be undertaken.

Another example comes from New Zealand where the Executive Director of the Business Roundtable made the following statement accompanying the BR’s submission in response to discussion documents issued by that country’s government: