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 Introduction Global Warming Population Alternative energy Storm surges Economics Comment page Quiz  • UN to discuss global warming as security issue (CNN) • EU show carbon trading not cutting emissions (The Guardian UK) • Automakers urge economy-wide approach to global warming (CNN) • Global warming may create 'novel climates' (CNN) • China and UN plan carbon trading exchange (Financial Times) • Carbon storage can fuel economy (The Observer UK) • EU meets to decide new 'green' policy (CNN) |
 On February 28, a panel of experts gathered at Jones Bay Wharf in Pyrmont, Sydney, Australia, for the fourth and last Principal Voices roundtable of 2006-7. The guests discussed measures to address global warming through reducing greenhouse gas emissions, notably the increasing practice of carbon trading, in front of an invited audience. An essay about the discussion can be read here and a page of key quotes here. Following is a full transcript of the roundtable. Participants:
Moderators: Michael Holmes (CNN) and Michael Elliott (Time magazine). Throughout the transcript, underlined words are linked to news stories or reference in outside Web sites offering more information on that particular subject. CNN does not take any responsibility for the content of outside Web sites. For ease of navigation, the discussion is separated into the following parts: 1/ Introductions. Cameron explains why global warming is a threat and some possible market-based solutions. Click here Part one INTRODUCTION to the discussion by Michael Elliott and Michael Holmes, and PANEL INTRODUCED.MICHAEL HOLMES: James, can I start with you? Tell us why issues of climate change are so crucial, why they have risen to the top of public policy agendas in so many societies around the world. And then explain why trading regimes are part of the answer for dealing with climate change in a public policy environment. 
JAMES CAMERON: First one has to assess the scale of the problem, and then match the scale of the problem with the right scale of response. We face, with the climate change threat, a level of risk that we have never experienced before in human society. The science of climate change is as solid, possibly more solid, than any other area of scientific endeavor. The consensus on the base principles of atmospheric chemistry, the ways in which CO2 and temperature are connected, the models which predict the progressive heating of the planetary systems, are solid and deep consensus-based ideas, and have been there for 20 years. But the consensus has hardened, and the evidence we have to deal with if we are rational beings has got more alarming. The time span for action has shortened, positive feedback mechanisms which, when I first started working on this 20 years ago were considered to be out in the future, are happening now, observably tangibly. And they create an urgency for action that means we have to change the trajectory of our global emissions significantly, within a decade, in order to have a chance of altering a business as usual projection which has to accommodate, say, 9 billion people on the planet by 2050, which if it remains will put us past the tipping point for 500 parts per million of concentrations of greenhouse gases in the atmosphere by 2050. In that case, we will be moving into a realm we cannot control, with irreversible effects that will be catastrophic for our civilization. That's the scale of the threat. So, how to respond in an appropriate way. We live in rather messy, liberal democracies, on the whole -- obviously there are other that don't, but let's deal with this to start with -- where we have to have pricing mechanisms that match values with economic value. 
One of the best strategies for coping with the status quo, and altering that trajectory, is to put a price on carbon and a value associated with reducing emissions that is clear and long-lasting, so that people can invest behind it. It's not the only strategy, there are others that are necessary and workable, but it's the essential starting point for an effective policy regime to match the millions of everyday decisions that we take with an outcome that would lead to a stable climate over, say, a 50-year period. We've started to build those systems. We learned from America, ironically, first of all, on how market-based mechanisms might actually drive greater reductions than imposed regulatory constraints from governments, who will never command the knowledge and information that covers the range of these decisions. We've made a start in Europe, we've made some mistakes in Europe that could be learned from, but we have a working system the people are investing in. Private capital is starting to flow. Because of the Kyoto protocol, because of the EU emissions trading scheme and because of the potential schemes that exist in the United States, possibly Canada in the future, Japan, possibly Australia, private capital, which is abundant, is ready to invest in emission reductions. And the ultimate objective is to align the public interest of reducing emissions with the private interest of wealth maximization. We've started to do that, we can keep going. And that's where one can be positive about a future that otherwise looks very stark. Part two MICHAEL HOLMES: I'd like to bring Paula in here. We've got a very knowledgeable audience here, who know how carbon trading works. But walk me though, as a layman, how this works, particularly in the United States, which of course is not adhering to the Kyoto Protocol (click here for page explaining Kyoto Protocol). 
PAULA DIPERNA: Well, I'll be glad to do that. In principle, a cap can be set on entities that produce emissions -- in the case of Chicago Climate Exchange (click here for home page) these can be cities, they can be industrial companies and so on. But anyone who emits agrees to a cap, whether voluntary or mandatory, as in Europe, if they exceed their cuts [in emissions] they may sell the value of the additional cuts into the market; that is the most simple explanation. And if you don't make the cuts, you have to buy the value of those unmade cuts from others in the market who have made the reductions. So a cap is a kind of umbrella, and right now there are two umbrellas in the world. One is over the European Union, which is the European Union Emissions Trading Scheme (click here for page explaining the scheme), which was a child of the Kyoto Protocol, and the Chicago Climate Exchange, which is a functioning cap and trade within the United States right now. MICHAEL HOLMES: Could you explain to me -- is a cap a reduction, or are we just shuffling pollution round here? Is there a real effect of reduction? PAULA DIPERNA: I think the cap is the key. Without the cap, offsets may be moving things around. If you have the cap, you are required to be achieving reductions. I suppose you can say that for the moment, in the absence of a global umbrella, there's certainly a bit of leakage around the two umbrellas. It's a global gas. James made a reference to sulfur dioxide (click here for page explaining sulfur dioxide, I think, without mentioning it, but in the United States we have had a lot of success in reducing SO2 emissions through a cap and trade system. That was a simple pollutant -- you put it up one place, it came down another, and you could stop it. A global pollutant is more complicated. But if you had a global cap, with a few exceptions of the imperfections that are bound to be in any system, you would not have any leakage, and you would have a firm cap on all emissions that are being created. In the meantime you have the two umbrellas, and everyone under those umbrellas is legally obliged to comply. Part three MICHAEL ELLIOTT: Martijn, give us some sense of how much interest there is in the private sector. You're a lawyer with one of the world's biggest -- if not the biggest -- international law practices, so you must see clients who are interested in partaking of these schemes. Why are they? Why are they interested, what do they come to you on advice on, and give us some scale of the degree of interest. 
MARTIJN WILDER: I think what is interesting is that the interest of clients has changed over the years, and is also jurisdiction based. With a lot of environmental issues, it's often the scientists who find the issues, such as the ozone layer (click here for a page explaining the ozone layer), and law and policy makes come in and start regulating with rules to control the problem, as we saw with the hole over the ozone layer. The same with climate change -- we have these international agreements that have emerged over time. What we saw originally early on, in the absence of any significant international agreements or legislation requiring action, the very early movers were the public sector, like the World Bank (click here for World Bank home page) and some of the other international agencies. This was particularly because it was high risk, and nobody really knew whether Kyoto would get up, whether the assets they would acquire would ever have value. And then over time, the private sector slowly started to come in. What we've seen is that most of the clients who come to us are either governments who want to draft laws, or people like the World Bank who are undertaking projects. But I think internationally, I would say that probably in the last three or four years there were some very early movers in the market, people like EcoSecurities (click here for home page), people who invested heavily in carbon reduction policies in developing countries. That business grew over time, and in the last year they have gone onto the London AIM market (click here for AIM home page) and listed for a lot of money to take their business to the next level. In addition to that, we've seen in the past few years a lot of banks also coming to this space, where institutions invest in a fund so that the fund can buy carbon and trade it, and turn a profit. Of course, some companies have been established to specialize in this space. So, we have a range of clients and people who are interested who must comply, because they have a legal obligation such as under the European trading scheme and have a legal target to meet. But there are a lot of companies who have decided that this is a market in which there are real opportunities they can develop; they can develop solar technology, they can trade offsets internationally. A lot of Australian companies now realize that internationally their business is going to shift, with significant sums of capital going to the carbon market. So a lot of these companies are in part playing catch up, but also wanting to prepare themselves for what's coming. These are the sorts of dynamics that we've been seeing. Part four MICHAEL HOLMES: Warwick, give us the big picture about what the likely impact is going to be economically and otherwise if we don't get our act together. I thought it was interesting with [UK Prime Minister] Tony Blair yesterday, it was like he had an epiphany, that this is serious. It surprised me a bit but is probably encouraging to people who want to get things done. What happens if we don't act? Not just economically, also weather-wise: are there going to be climate refugees? How bad is it? 
WARWICK MCKIBBIN: You can't really answer that question with any degree of certainty. And that's the key feature of the climate change problem, that every aspect of it has cascading degrees of uncertainty: How the climate will respond to changes in carbon emissions; what will carbon emissions be in 50 years; what will concentrations be; where will be the weather events; what will be the distribution across time and across countries. So we can't really answer that question. The Stern Review (click here for Principal Voices story about the Stern Review) made an attempt, and it made a very extreme attempt -- it took the most extreme possible assumptions and came up with a catastrophe scenario. Now the scary part is that that has some likelihood of being forthcoming. But it's also a very small likelihood, and that's what makes climate change such a difficult problem -- you may have a very small probability of a major catastrophe, or it may be that we are going to adapt, and adaptation is going to be just as important as mitigation in terms of policy responses, and it may be that we don't have to shell out several times GDP to solve the problem. So that's the key characteristic of climate change: How do you manage the risk, how do you create incentives, and that's where market-based mechanisms are a key part of the risk management strategy. They shouldn't be designed to achieve a specific outcome at a specific date, and that's where I think the cap and trade approach needs to be modified -- it is not a threshold solution, it is quite unique, and we need to design special systems based on markets, and R & D and other government interventions to get us from where we are to where we want to be at the minimum cost to society. MICHAEL HOLMES: In terms of reduction in an economic sense, Blair said that for every one pound invested now it will save five pounds in the future -- so does it make good economic sense to be investing heavily now, just on an economic basis? WARWICK MCKIBBIN: Again, it just depends on one key assumption, and it's quite technical, the issue of how you discount the future (click here for a page explaining the economic process of discounting). And that was the key assumption in the Stern Review -- if you treat 100 years equally to the present then there is a very powerful case today to take action now, because if the costs are upfront and the benefits are 100 years from now and you put them together without discounting that's a good investment. But if you discount the future, then the cost being upfront makes it very difficult to justify large action today. That's where the technical debate is being held, and it has not been resolved. 
Having said that, we should be putting in place institutions and structures and incentives to move down the lowest cost profile until we get more information on a whole range of issues -- climate, sensitivity, emission abatement opportunities, new technologies. So it's not act now or the world will end, it's a risk management strategy, creating institutions and market incentives, and pursuing a very sensible strategy over the next 50 to 100 years. JAMES CAMERON: There's lots of code in these discussions, and if you've been doing this work for a long time you'll pick it up. I've seen a number of debates around cost-benefit analysis, discount rates, technical debates within the world of economics, which in my view allow you to take great care about economic arguments and look very closely at what they can't tell you in order to make rational decisions about the scientific evidence that we have before us. I don't think I am persuaded that there is a serious economic dislocation problem associated with dramatic emission reductions. I just don't see any evidence for that in recent experience. The accidental switch to a lower carbon economy in the UK didn't lead to any lack of growth. Evidence that I have seen for [UK] Treasury predictions for GDP growth in the UK with 60% reductions [in emissions] to 2050 do not lead to any meaningful alteration in growth over that time. So, we reach where we would have been approximately three or four months later in that year, if we give no value whatsoever to technological innovation, if we maintain a constant price for energy and we see no social value associated with the reduction of pollutants in our society. I'm used to a very alarmist economic view about the costs associated with dealing with an imperative, and I'm not impressed by it. However, where I agree very strongly is that because we are learning all the time -- and because, so far, our learning has increased the level of risk -- we should build mechanisms that are also good learning mechanisms, and policy-driven markets are good learning mechanisms. You discover quickly what works and what doesn't work. Private capital flows much more swiftly and more accurately than public capital. Picking technology winners, choosing R & D favorites, raising national flags above particular beneficiaries in your own constituencies doesn't solve the problem. But pricing signals, together with other ways in which one can incentivize private capital to flow, allows this very skilful investment community, the great brains that are established because the rewards are so good, to allocate resources efficiently around the world and will find you reductions. They will find them inexpensively. The beauty about the policy of the market is that once they have found them and we have learned that they are inexpensive -- which is our experience to date -- then more aggressive [emissions reduction] targets can be set, and more demand for reductions generated. I see that as a very important skill that has to be acquired by our decision-makers, that we take this issue out of an environmental or social responsibility or ethical box and put it into mainstream economic analysis, and keep it absolutely at the top of the political agenda so that leadership is judged according to how effective the problem is addressed. Part five 
MICHAEL HOLMES: What about the U.S. political attitude in terms of enforcing reductions? This is a government that said that Kyoto wasn't appropriate because of the damage it would do to the U.S. economy. How do you get a major polluter like the United States to actually enforce rather than just encourage emissions reduction? PAULA DIPERNA: The United States is an evolving enterprise, and with the evolution on this issue, I think anybody who's followed it knows how it has ebbed and flowed. In 1992 I had the privilege of being at the so-called Earth Summit (click here for page about the Earth Summit), and was in the room when the first George Bush signed the framework convention on climate change. Then the United States pulled out of the Kyoto Protocol. But since then I think you will be very impressed to know that everything has happened, from the president [George W. Bush] mentioning in the State of the Union address that climate change is an important issue, six to eight bills pending in Congress, people talking about when, not if, regulation will come. The point about enforcement against encouragement is, again, that this is a beyond compliance problem. Even if the United States commits tomorrow to a mandatory cap and trade, even to the targets we have at the Chicago Climate Exchange, people have to go beyond that for reasons other than compliance; for revenue reasons, for risk mitigation reasons. Targets can never be high enough, because the price can never be high enough, because it's a priceless resource. From the political point of view, what we're looking for is a very visionary approach to this. I think you'll see a movement towards enforcement in the United States, I hope within my lifetime, but I would bet even within the next couple of years. MARTIJN WILDER: One of the things is that at the moment the amount of capital that is mobilizing in the states to go into the climate market is staggering. Although the aggregation of capital is still primarily in London, the amount of money that is coming out the U.S. at the moment to invest in climate projects, to acquire other businesses that have been in the business over the past five years or so, is amazing. A lot of the capital and the interest is from the U.S., particularly the U.S. hedge funds (click here for a page explaining hedge funds), and that's a shift we've seen, say, in the last six to 12 months. MICHAEL HOLMES: Doesn't that reduce the importance of the political angle -- it's going to be a market-driven thing? MARTIJN WILDER: It does in terms of speed, I think. But it's always been this dilemma within the climate market: To a large extent, capital has taken a lead beyond what the regulators have done. And partly, carbon is now a commodity, because it comes in many different forms, different types of carbon and different pricing. And the view is that this is another commodity, there's a market in it, and a lot of money is chasing that market. |
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