Following is an edited version of my address to the annual conference of APEC Centres on 19 April published in The Age of 20 April. The edited version does not include a number of references to uncertainties about the science behind the temperature predictions. Although not included, I ended my address at the conference by predicting that within ten years there will be a reversal of the so-called scientific consensus now prevailing.
The other two speakers in the section in which I participated, Brian Fisher (former head of ABARE) and Bill Bowen (ITS Global) did not discuss the science per se. Both took the view, however, that it is very unlikely any international agreement will be reached on emission reduction targets or on carbon trading and that, despite indications that recent changes in the US political and judicial scene suggest a more favourable attitude in the US to implementing policies to reduce emissions, political and economic realities will prevent targeting or signing of a new Kyoto after 2012 by that country, let alone by developing countries.
If that is the case the whole Stern/IPCC strategy falls to the ground and it is difficult to see how even the European targeting/carbon trading will get very far once the adverse effects on international competitiveness of European businesses emerge. There are already signs that the Europeans may be starting to run into political difficulties with their schemes on this account. Although seemingly ignored by the media and most of the business
community, the implications for what policy Australia should adopt are obvious.
Fisher and Bowen argued that the AP6 scheme of helping developing countries apply emission reduction technologies is the most likely course to be followed in reducing emissions in developing countries, which will (as pointed out in my paper) will account for 60 per cent of world emissions by 2030 on a business-as-usual basis (more if the Europeans do achieve some reductions).
I have also included below a report on an economic analysis presented at a Melbourne Institute lunch which suggests only small aggregate adverse economic effects of reducing emissions as recommended by Stern. However, even if the Stern line that "it will only cost 1% of GDP pa" were accepted, there would be considerable changes to the structure of the economy. This seems to have largely been overlooked.
Counting the cost of Carbon Trading
Governments should accept responsibility for putting a price on emissions.
April 20th, 2007
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 carbon dioxide emissions.
As (like Stern) a former senior Treasury officer, I also declare that I am not a scientist. But, in contrast with Stern, 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 in the February report of the Intergovernmental Panel on Climate Change by 10 qualified economists and scientists, 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. 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 jells 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 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. 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 many who express varying degrees of uncertainty about either the scientific or the economic analysis - or both - is our highly respected Productivity Commission. In its recent submission on emissions trading, the commission acknowledged that anthropogenic contributions to climate change could require co-ordinated action to manage the risks to future generations. It went on to say, however, that "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."
Possible adverse electorate reactions to higher electricity and petrol prices may also limit the overt use of carbon pricing through either trading or higher taxes. Notwithstanding advice from economists that market pricing of carbon is a more efficient method of reducing emissions, governments may well decide to obtain a significant proportion of such reductions by further increasing subsidies for renewables through government budgets. That would in turn also limit the size of any carbon trading market.
Overall, then, my assessment is that the various difficulties involved, not least being measurement and certification, make it unlikely that an international emissions trading scheme can be developed and that such trading as does develop is likely to be small and to play a limited role in any policy actions taken to reduce emissions. The difficulties involved in trying to achieve major emission reductions through a carbon trading system suggest that other approaches are likely to be adopted.
These could include the imposition of higher taxes on emissions that, the Productivity Commission suggests, "could provide advantages in terms of . simplicity of administration and compliance . more flexible dynamic properties . reduced incentives for regulatory gaming . and little concern about sovereign risk". Indeed, given that any emission reduction program necessarily involves government intervention to deal with perceived market failure, there is much to be said for requiring governments to accept direct responsibility for the pricing of carbon emissions, including which types of emissions that should be targeted.
Des Moore is director of the Institute for Private Enterprise. This is an edited version of a speech he gave on 19th April in Melbourne at the APEC Annual Conference.
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