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The government back-flip on an “election-promise”[1] not to introduce a Carbon Tax, a number of important economic issues should be considered.  The most obvious “who’s going to pay and how” arguments will no doubt see considerable air time so I won’t cover these here.  Instead let’s consider the seemingly more taboo topic of the Climate Change debate itself and the danger this may sideline other environmental issues.

I’ve been warned by many to stay away from this topic given the almost religious zeal attributable to this debate, but then controversy is the point of this newsletter!  So in the interest of full upfront disclosure let me outline my “position” upfront.  I am essentially an analyst and risk management specialist; I seek to understand not just the how of things, but the possible impacts and costs of one action versus another.  With respect to this debate therefore, if you must label me I’m probably best described as an “Anthropogenic climate sceptic”.

Despite anything herein which may seem contrary, the purpose of this article is to consider the economic impact.  Not in the way Professor Garnaut has done[2] (he is slightly more qualified in that space than I!), but from a more pure, fundamental perspective.  Quite simply, every action has a cost, not only of that action, but of that which now cannot be taken.  We can only spend a dollar once and therefore it is important to always consider not only what we get, but what we must miss out on.

In short, I remain unconvinced as many significantly more learned than I remain so and to the best of my research ability, I am unable to determine with any degree of certainty

  • Whether the world is actually getting “warmer”[3]
  • That CO2 is the most significant contributor to warming
  • (perhaps most important of all) that increasing CO2 is predominately as a result of human activity

The debate seems far from settled

Whilst there seems to be a “general consensus” that the science of climate change is and has been settled for some time, it doesn’t take much research effort to cast considerable doubt on this claim.  Apart from the more general “all science is best guess theory” argument there is clearly considerable uncertainty as to the validity the vast majority of data used to form these views.

Much of the “evidence” presented by both sides of the debate comes from a range of measures and samples with either relatively short periods[4] or varied methods or instruments with a variety of margins of error.  The result of all this is essentially data which is open to significant statistical variation being used to provide “absolute certainty”.

Why is this important?

Well, mostly I believe it’s an economic issue.  For virtually all of our existence humans have treated their environment as a resource we can use and abuse for our greatest current desires.  Whilst population was relatively small we could get away with this to a degree but as the world’s population increases the world becomes a smaller place. Not only does this mean more relative damage, but more impact in our own backyard.

Whilst in many respects we are better environmental citizens, this is at least in part due to the fact that we are increasingly witness to the environmental impact of our decisions.

Thoughts to consider

  • The sheer complexity – Climate involves literally every conceivable science in a hugely complex interactive system, even more complex than the human brain.  Do we really think we have enough reliable, accurate information to even pretend to know how all this works?  Even if we know with absolute certainty CO2 is the culprit, do we really know how this affects everything else?
  • Arrogance – is it a little bit too “human” to think we can control nature, either deliberately or accidentally.  Sure we can have an impact, at least locally in the short-term, but are we really that powerful, or do we just overestimate our abilities and importance?
  • Cost of Action? We can hypothesise all we like about the dangers of not acting, however it seems extremely unlikely the world will end soon due to humans releasing CO2 back into the atmosphere.  Perhaps a more important issue is how much we are willing to pay for this “insurance” versus other more obvious environmental problems

The Greatest Moral Dilemma of our Time?

Even if Kevin Rudd’s claim turns out, in the fullness of time, to be accurate, what is the likelihood that this issue will so significantly dwarf all other environment issues as to justify such a spend?  We will only ever commit a limited amount of our economic resources to one particular cause.  The more we are forced to “spend” on one issue, the less we have to spend on other, perhaps equally important issues[5].

Perhaps the greatest danger of a Carbon Tax is that it is yet another example of Governments “picking winners”.  Deciding that Carbon is the demon that must be slain at all costs, exposes us to the many unseen consequences of this decision, without due consideration of these opportunity costs.

Despite considerable research, I have no idea whether Global Warming is a reality, how much we contribute to the process and what the likely impact will be.  Whilst we may improve our understanding over time, our understanding of scientific disciplines centuries old continues to evolve and therefore shouldn’t we approach any “new science” with caution and an open mind?

We know the tendency to overstate the potential “doomsday” scenario is a powerful motivator, hence the continued success of Hollywood “disaster” movies.  We should be careful however, not to invest too heavily in any one environmental challenge, not because it’s unimportant, but because they all are and there’s only so much to go around. Rather than picking winners, perhaps our leaders should drive debate and assist in aligning incentives.

At its best a Carbon Tax may well assist in providing a sound incentive to better and more sustainable energy production and may have other significant environmental benefits.  A more balanced approach perhaps should include a range of environmental issues rather than simply picking winners and losers based on the politics of the day.

Strong leadership is required to help shape debate and continue to refine our approach to all the challenges we face, not just as a country but as a species.  The only certainty is Global Warming won’t be the only challenge we face, so let’s make sure we don’t put all our economic eggs in the one environmental basket.

 

[1] Whilst the opposition are calling this a “lie”, it’s probably more akin to a “non-core” promise or “unscripted” one?!
[2] A common misconception of Professor Garnaut’s work is that it supports Climate Change.  In fact his work largely accepts that the science is settled and looks at the economic issues which might arise as a result as Global Warming.
[3] It’s not easy to even get a definition of what this means, but for the purposes of the debate, let’s consider warmer to mean more energy, which should ultimately result in higher average global temperatures.
[4] 50 years may be a long time to you and me, but is statistically insignificant in the life of the planet
[5] I won’t list the possible environmental issues here, suffice to say there are plenty!

Matt Battye

CEO, Financial Adviser

Analysing what can seem to be like complex issues, Matt is effective in using analogies to better explain scenarios and truths to the rest of us. This is what Matt enjoys – educating clients on the truths and debunking the commonly held (wrong) view.

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