The climate change proponents are clear on the matter. We need a “price” on carbon so the market can set about fixing the problem. Great. More derivatives. Exactly what we don’t need and yet another excuse to avoid the difficult job of governing. Consider what happened when there was a “price” on risk, perfected in the 1970s by Fischer Black and Myron Scholes.
Did this lead to the reduction of risk?
Hardly, it led to the opposite. Myron Scholes was a principal of Long Term Capital Management, which nearly destroyed the global financial system in 1998. No lessons were learned and we eventually ended up with the GFC, which is still not over.
The analogy between the pricing of risk and the pricing of carbon is not a tight one. The pricing of risk cannot remove risk, it can only shift it to another place. Theoretically, carbon emissions could be greatly removed, or at least reduced, by making them expensive enough. But there is a critical similarity, which leads me to my pessimism. Both are working from within the system to change how the system behaves. They are endogenous not exogenous, as it were. Which is why they will not work. Because what is needed is governance, something outside the system acting on it to make it change in the right way.
It is such government that is so hopelessly lacking, both in the financial sphere and the climate debate. In the wake of the GFC all the government-driven solutions have been attempts to fix things from within. That is why the stock of derivatives remains twice the capital stock of the world, and why a second crisis is inevitable at some point.
The same is looking likely with the climate change problem. Rather than concentrating on what matters — the collective intent required to change our industrial systems so that they do not pollute, which will require new technologies and new systems — we have degenerated into arguments about models. How accurate are the scientists’ models? How accurate are the economists’ models? The problem is pushed from being a human problem, from how new choices can be made, to being considered a technical problem. Something that can only be fixed by those who understand the technicalities of markets and climate systems.
Leaving aside the obvious fact that no-one understands either adequately — how can scientists, in all seriousness, claim to predict, using their linear computer models, something as non-linear and complex as the climate; it is surely an enormous exercise in collective hubris — it is not a technical problem. It is a matter of collective will. And government in the West have given up on trying to influence that, for about half a century. This is brilliantly documented by Adam Curtis in his superb series “The Power of Nightmares” and “Pandora’s Box”.
Politicians, having failed to inspire with vision, now win elections using fear. They have given up governing and instead concentrate on market research into people’s fear. What better example of the grubby results than the treatment of asylum seekers in Australia? As Malcolm Fraser pointed out last night, the grubby political race to beat up on refugees treats most of us voters with contempt. And that contempt is now the order of the day from governments. The human element — matters like responsibility, will, collective morality — are pushed to the side in favour of technocracy.
It need not be this way. In the 1990s the councillors of the city of Woking decided to go against the tide and do some governing. Using 1990s technology, the city decoupled from the grid and reduced emissions by more than 70 per cent and reduced power costs by changing the systems and using tri-generation (capturing emissions and re-using them for heating and cooling). It is not being applied in London and Sydney and could be applied in any urban environment.
The crucial element is not the technology or the price or the tax arrangements or the trading mechanics. It is government and leadership. A willingness to insist that the current system is too polluting and to change the system. People may argue about the climate change forecasts but they do not argue about pollution. Virtually everyone agrees that current industrial systems are unsustainable and pollution must be progressively removed.
The technologies are available, for example BlueGen, but government has to lead. Instead governments are passing it off to “the market” and “regulators”, thus avoiding responsibility. There will be no “picking winners” either, because “why would government ever be able to do anything right?”
It will not work. The operators of the centralised power grids have an enormous vested interest in keeping things as they are and will go to great lengths to stop innovation. Disappointingly, China is building cities that are on the twentieth century, centralised, model of power generation rather than a twenty first, distributive, structure.
How is it likely to end? Probably some series of natural disasters that eventually force us to change our systems. At least in the meantime investment bankers can make lots of money out of carbon trading.