It’s the first day of winter and, ironically, the political theme of the day is global warming. The Prime Minister today is expected to release a report from his handpicked, carbon-emissions task force.

The report is widely expected to agree with the PM’s stated beliefs on climate change – “climate-change realism” – in that it will recommend a cautionary approach to implementing Greenhouse gas targets and an emissions trading scheme.

One such cautious approach, as proclaimed by the Business Council of Australia, was for a three-tiered system of Greenhouse gas emissions targets. According to the BCA, this system would involve long-term, intermediate and ‘gateway’ targets, so as to “make sure action to respond to climate change is credible and achievable while maintaining Australia’s competitive advantage.”

At the Minerals Council’s annual parliamentary dinner, attended by Henry on Tuesday evening, the Prime Minister’s views were closely aligned with the BCA’s. He argued that we must “prepare for a low-emissions future while preserving Australia’s competitive advantages”, and that if we move to emissions trading it will include a long-term emissions target, but this will be soundly based, not “plucked out of the air.”

Henry editor’s suggestion, written this time last year, was for action to be taken based on Pascal’s Wager, that is: The consequences if we worry and take action about global warming will be minor if we are wrong. If we do not take action and we are wrong, the consequences will be devastating.

Of course, economically speaking, the important question is how these targets will be reached – carbon tax, or carbon trading scheme? This is a complicated economic question, but a particularly interesting one.

Of course, many intelligent economists argue that a carbon-trading scheme must have a safety-valve mechanism that limits the prices from rising and falling too far and, therefore, is not much different from a carbon tax anyway.

Of course, if we choose a trading scheme, another important question is how will the debacle that occurred in the early days of the European system be avoided. Interested parties would be aware that the permit price increased to its peak level in April 2006 of €30 per tonne CO2, but came crashing down in May 2006 to under €10/tonne when it became clear that many countries had given their industries such generous emission caps that there was no need for them to reduce emissions. Much needs to be done so that this situation can be avoided here in Oz.

Also, one of the more important questions is about enforcement – exactly how will major emitters be audited? If emitters are self-reporting, there is an obvious incentive to cheat the system, which will cause it to fall apart. On the other hand, if the world chooses a centralised body, then what will be the compliance costs?

Contact Henry if you have any inspired suggestions on how such a system could be made to work. 

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