Nathan Taylor

There is a common misconception about the climate change policies being debated in parliament at the moment. The constant refrain is that the proposed climate change policy will embed market forces in efficiently removing carbon from the economy. Paul Kelly reports:

“Treasury’s July 14 minute to Wayne Swan gives the expected answer on costs: Abbott’s direct action scheme ‘would roughly double the economic cost’ of hitting the target. Why? Because of Abbott’s refusal to embrace the market mechanism.”

This is both absolutely right while being completely irrelevant.

It is true that market forces will efficiently act towards the outcomes set by the Government. Market forces will establish the price of removing additional tonnes of carbon. This price will efficiently embed all available information and will respond to changes in the broader macroeconomic environment in a much more responsive fashion than any government could hope.

As a consequence, market forces are the most effective mechanism for achieving the governments quota of reductions in carbon emissions in the economy.

Yeah for market forces.

I have two key problems with the proposal:

1. The variability arising from the carbon pricing of markets will be managed by companies by a range of activities but particularly via lobbying; and
2. The wrong efficiency is being sought.

The first point is discussed here under The Political Nature of the Market.

The second is that the market will efficiently price the marginal cost of removing carbon from the economy – but that should not be the goal!

Given the nature of the environmental problem carbon emissions are causing, the only effective long term policy response is to focus on the marginal benefits of removing carbon emissions from the economy.

Climate change is not a problem that will be solved tomorrow. The best focus of public policy attention should be on creating a cost on carbon emissions that is linked to the social benefits of it being removed from the economy.

This is probably going to be very low at first. Actually, it probably will be pretty cheap initially as we remove initial forms of carbon emissions. But then, when we run out of cheap and easy ways to remove carbon emissions, it will get expensive. Very expensive.

The core problem in addressing climate change is that the modern economy utilises a great deal of energy. This energy is, currently, based on burning fossil fuels. Until we develop reasonable alternatives mitigating climate change is going to be very expensive.

Do I care if Australia hits the Government’s targets by 2020? Not one whit. I care deeply that the world keeps carbon emissions at a manageable level. But not what targets Australia reaches. (To my mind, the fact Australia can fund the removal of carbon emissions elsewhere in the world is the best aspect of the program.)

The global economy is like a luxury ocean liner that is ploughing through the ocean at full speed in a direction that produces lots of annual carbon emissions. The best policy response is to slightly, subtly nudge the ocean liner until it

I fear that the current policy proposal of imposing a quota is like trying to slam on the breaks. It doesn’t halt momentum and, when the costs of slamming the breaks are finally borne, it will result in future voters (those that bear the cost of the brakes being applied) to be willing to endure the costs.

I fear they will reject the costs – particularly if they are widely divorced from the benefits of reducing carbon emissions.

On the anniversary of September 9/11 an interesting estimate of how much Australia has paid to reduce the risks of terrorism. Including moneys given to policy and intelligence agencies as well as expended in the wars in Iraqi and Afghanistan, Australia has spent almost $30 billion.

Mark Thomson, a former Defence Department official and now an analyst at the Australian Strategic Policy Institute, estimated that Australia has spent an extra $21.3 billion on defence and security since 2001 on top of what the government would normally have spent.

This money was spent as:

• military commitments in the Iraq war ($2.4 billion) and Afghanistan ($7 billion and counting).
• There has been$1.5 billion in aid given to Iraq and Afghanistan; and
• A further $10.4 billion has been spent on extra security at home, mainly on the federal police and ASIO. ASIO’s budget has grown by 471 per cent over nine years. Its budget allocation in 2001 was $69 million. This year it is close to $400 million.

Another defence expert estimated that:

“the likelihood of an Australian being killed by a terrorist is one in 7 million a year.”

Why do not question why so much money is spent on counter terrorism?

It is because of the nature of the risk. There are three characteristics that make it particularly difficult for us to estimate the nature of the risk. They are:

1. It is vivid, distinct and emotional. As a consequence, our brain can easily imagine ‘terrorist’ acts. This makes it more likely that we would rank this risk as being high.
2. There are lots of images and experiences of negative consequences – which serve to reinforce our expectation of extreme negative experiences; and
3. It is an extreme event. We are not good at evaluating the probability of risks as they approach the tails – ie an event that is 0 % likely and 5 % likely are both going to be very different in people’s minds (as opposed to 55% and 60% likely – people tend to consider them the same level of risk).

It is like an ‘outbreak’ of swine flu all over again.

Life, Forrest Gump said, was like a box of chocolates. (It’s probably long enough since the movie for that quote to be quirky.) In the annals of historical metaphor’s this is labeled under ‘Pretty dumb.”

A fascinating contextualization for time is from Robert Krulwich:

Biologists have compared the heartbeats of mammals and discovered that on average (this won’t apply to any individual, just to groups) elephants and shrews and most of the critters in between have a limit of about a billion and a half heartbeats in a lifetime and then they die.

The reason an elephant lives longer than a shrew is not because its heart beats longer. It’s because its heart beats slower. So it takes a few more years for the elephant to complete his or her up to one and a half billion beats.

That is amazing!

George Johnson describes this relationship between size and speed as:

these and a large variety of other phenomena change with body size according to a precise mathematical principle called quarter-power scaling. A cat, 100 times more massive than a mouse, lives about 100 to the one-quarter power, or about three times, longer. (To calculate this number take the square root of 100, which is 10 and then take the square root of 10, which is 3.2.) Heartbeat scales to mass to the minus one-quarter power. The cat’s heart thus beats a third as fast as a mouse’s.

Think about it next time you are deciding whether to see a scary movie or not. Do you really want to speed up your experience of life just to watch some zombies eat some people?