Carbon Pollution Reduction Scheme (CPRS) – Main Event or a Side Show?
I’m writing this article while working in Western Australia – the home of the black swan. Black Swans are common here, to the extent that most people here would consider white swans to be an incredibly rare thing.
Nicholas Taleb recently popularised the idea of a black swan as an event which someone didn’t see coming. He now has a best seller on the idea, asking questions like:
- Why don’t we anticipate big disruptions?
- Why didn’t we see subprime coming?
- What’s the next big disruption?
These days I spend most of my thinking time on these sorts of questions and keeping an eye out for black swans, elephants in the room and 800 pound gorillas. We tend to call them emerging risks, emerging conditions or discontinuities, depending on where we’re applying the thinking at the time. The thing they have in common is they are disruptive at a significant scale, which creates disruptions for some and opportunities for others.
Condition change - a price on carbon
In Australia, our version of an emission trading scheme (ETS) is taking shape, and is being branded as the CPRS. This CPRS is not to be confused with the Canadian Public Relations Society – it’s the Carbon Pollution Reduction Scheme – which is useful branding in case we forget why the scheme was introduced as an industry builds around it.
Industry is now intensely focused on the CPRS. And why not? It’s in the media, it’s in black and white, it’s tangible and its proposed to be implemented in the next few years. Companies can do financial modelling to work out the day 1 winners and losers, and industry lobbyists can have a field day arguing for free permits and to keep their cost base as close to the status quo as possible. They can also complain about competitive disadvantage caused by paying for carbon created, and being caught off guard by not anticipating the conditions that they now find themselves in. The demands for taxpayer-funded compensation begin.
At a presentation a few months ago, one of Australia’s leading risk experts pointed out that while an ETS and carbon accounting were important, there were bigger things afoot. He explained some of the consequences of climate change – increased frequency of severe weather events, issues with rainfall and water security and the like. He took pains to emphasise the bigger picture beyond this regulatory change.
Needless to say that I was a little surprised during the Q&A at the end of the presentation to find that nearly all questions from the audience revolved around carbon accounting and emissions trading. Had no-one been listening? Had the message failed to sink in? Why was this? Or to bastardise Taleb’s language, why were the swans still invisible even when shining a big spotlight on them?
The event in question was attended by senior public sector auditors and risk professionals – the sort of people we count on to ask such questions. I thought about why people gravitated to the accounting, reporting and compliance aspects rather than to the elephant in the room and I guess its human nature - it’s black and white, it’s tangible, it’s measurable and it requires a response in the short term. In other words this part of the issue is more tame than wicked, unlike the bigger problems that governments and their advisors are now attempting to tackle.
So what is the real elephant in the room you may well ask. Well, as I see it there is no longer just one elephant – the ones I see tend to travel in herds.
We’ve already mentioned climate change – there’s plenty of literature on that - more intense and frequent weather related events, sea level rise etc. etc. If you analyse search metrics on the web you’ll see the term’s popularity rise to a highly mainstream top of mind topic. This doesn’t mean people can see it clearly or are operationalising around it, (if fact it seems that many aren’t), but at least it means that they aware of a big lurking presence. This is a good start.
But there are others as well. A few spring to mind:
- Oil shock: The modelling is not yet public but there are indications that fuel prices could go up in the order of 5-10% under a CPRS. This seems like a significant jump, and for many industries this will be, but this needs to be taken in context. If popular opinion among energy forecasters is correct, then we are looking at a doubling, tripling of fuel prices or even more over the next 10 years. Within this context, a 5-10% carbon impost is not the main act – in fact it’s potentially a sideshow at best.
- Reverse globalisation: The industrial revolution and the way we use air travel are driven by cheap energy. If energy prices jump what does this mean to complex supply chains that source lowest cost inputs from around the world? Will countries with cheap labour still be able to compete effectively in global markets in the absence of cheap freight? Was all this effort in establishing free trade agreements for nought? What does this mean to distribution of wealth and currency markets? What knock on effects will these have?
In taking the initial pain on CPRS in Australia, we need to remember that in other markets there was also an outcry by business before their emission trading schemes were introduced. In the years that followed, some argue that the carbon price fell dramatically because cutting carbon was far easier than initially anticipated. The carbon cap was possibly too low and some commentators believe this resulted in many years delay before reaching a sustainable carbon price and a lost opportunity for the environment that will never be regained.
Within this context one has to wonder whether the current bemoaning by some companies and industry groups about the CPRS is really about business disruption or just a clamour for free permits, and for protectionism of obsolete assets and ways of working.
Short term lobbying on the CPRS will generate short term winners and losers and perhaps will help some companies until their CEOs cash in their options.
The medium and long term winners will be those organisations and individuals with a deep understanding of emerging conditions and whole systems at a micro, macro and mega scale. Those entities that understand that you can’t lobby or cartel a changing condition will be the ones on the journey towards resilience and ongoing prosperity, and the ones which create long term shareholder value.
This is one in a series of articles which aims to highlight and explain aspects of key emerging risks through application of the Resilient Futures thinking model and process. The Resilient Futures team and process help individuals and organisations to understand immediate and emergent conditions at the mirco, macro and mega scales, from a whole-of-systems perspective. This can be a powerful approach to thinking about emergent risk at a strategic scale. Click here for more articles on emerging risk.
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August 25th, 2008 at 7:47 am
Great article this morning by Ross Gittins, Economics Editor of the Sydney Morning Herald which amplifies a number of the points contained in this article: http://business.smh.com.au/business/carbon-trading-big-business-vote-of-no-confidence-in-itself-20080824-41eb.html
August 25th, 2008 at 9:24 am
Todd,
Here I am running around Albert Park Lake yesterday afternoon (24.58 for 4.7km - very happy!) and all I could think of was black swans.
As much I would like to attribute my thinking to your post which I read about a half hour before I went out … alas I cannot.
The black swans were real - hundreds of them in the Lake and on its shore. Most of them were tagged for current and future research purposes.
And it was THAT which really got me thinking about what is a black swan.
Are we as a society so fixated on measuring - CPRS for instance - that we forget that there are some things that we can never measure and hence never seek to have the perception of control.
Are some issues / concepts so big that there are indeed unmanageable?
If so - what impact does that have on our understanding of risk within companies, economies and societies?
Tom
August 27th, 2008 at 2:06 pm
Hi Tom,
These are really good points and questions. The way we tackle this in our methodology is to distinguish between “tame” and “wicked” problems. There is an enormous body of thinking in this, but the punchline is that mitigation works well for tame problems, but is less suited to wicked problems and adaptation is required.
In the climate change debate in Australia you’ll see mention of mitigation vs adaptation which hints at some of this thinking.
I believe that we’ll be putting some of this thinking on the website as a whitepaper, article, video or all of the above in the coming weeks.
Todd
Practice Leader - Risk
September 2nd, 2008 at 12:19 pm
Tom raises a good question: “Are some issues / concepts so big that they are indeed unmanageable?”
Todd’s response provides a framing of how to address complex issues and concepts through using the metaphor of ‘tame’ (simple) and ‘wicked’ (complex) to distinguish the relative nature of problems in realtion to surrounding conditions. That is, given the conditions surrounding this problem - should we treat it as a relatively simple problem, or should we treat it as a complex problem? One approach will seek to control the inputs and outputs, the other is more flexible, adaptive and dynamic in its use of inputs and expectation of outputs. And, as Todd says, we will have more on the site about this soon.
I would also add another dimension to Tom’s question - that the concept of management is a highly risky framework when thinking about these issues. Hence when approaching issues like global warming as managable or unmanageable - you are immediatley taking a HUGE risk.
Global warming is a very wicked problem and opportunity. Having a management frame of reference will exacerbate not only the problem, but may severely restrict emergent, organic innovation as it chaotically endevors to adapt current socio/economic structures (eg. businesses, communities, products, services, values etc) to a limited managed outcome - rather than a free-form, dynamic outcome that just happens as a response to a multitude of players getting stuck into the problem/opportunity, and having a new paradigm emerge - rather than trying to manage and problem solve an old paradigm that doesn’t work. Just think of how many businesses fall into the ‘management and problem solving trap’ when they conditions change and their business model fails to deliver value at the expected rate (eg. Microsoft) - only to have a break-away group develop something relatively new (Google) and steal the march.
I am hoping that the CPRS will emerge as NOT a management tool to manage and solve global warming - though, given the current custodians being the government and the big end of town, I suspect it will be used as such.
I am hoping that it provides a break in voluntary and regulatory practice for rabid entrepreneurs to create new and novel ways for wealth creation that are welded together by a socio/economic/ecological foundation that will not focus on only one part - but be the synergy of the whole.
Also knowing that any management model will break down assures me that the above will happen as long as new entrepreneurship gives a BIG shove to the old, calcified bodies running our more entrenched and conservative organizations who fail to see that global warming is a much bigger opportunity than a problem.
If the developed world is to apply the immense market advantage it has in knowledge and creative capability and compete above price with the developing world - global warming (and the like - include oil and water depletion in that) is an opportunity sent from heaven to provide the tired, old and warn out ‘West’ a new lease of sustainable social/economic advantage -and at the same time, save our ecological necks.
Laz
Global Practice Leader
September 30th, 2008 at 7:38 am
Ross Garnaut (Australia’s chief economic advisor on climate change - our equivalent of Nicholas Stern) will provide recommendations on climate change targets. In a news snippet on SMH this morning it looks like the target will be set well below that required to avoid disruptive climate change: http://www.smh.com.au/news/environment/dont-be-deluded-garnaut/2008/09/29/1222650989523.html
If this is the case, the ramfications are very significant. The CPRS will effectively slow us from driving over the cliff, but not actually stop us. In which case CPRS will definitely become a side show rather than the main event.
We’ll be commenting again once we’ve had the opportunity to digest the report, but if you have the time, the Garnaut Report will be available here: http://www.garnautreview.org.au.
September 30th, 2008 at 8:49 am
Having just reviewed an offering by Gwynne Dyer titled “Climate Wars” I await Prof Garnaut’s recommendations with bated breath.
I warn you - Gwynne’s sobering view of the cascading impacts of climate change are somewhere between disaster and the challenge of daring design - especially given that it is written in 2008, and supposedly based on recent data. The book paints a series of five scenarios - from today’s inconsistent view of CC, to an inevitable crisis, to we can fix this, and then back to ……. but probably not in time.
Now - here is the kicker. Gwynne’s ‘ouch, this looks very bad, to we can fix this, but probably not in time’ scenario is clearly based on our inability to mitigate the ‘problem’. In resilient futures thinking we know that such a focus is only half the game, or less. To really embrace such conditions in a resilient futures manner we need to factor in adaptation, and attractors (opportunities for innovation and reward).
Adaptation wasn’t factored into the Stern Report, which was its biggest criticism. Adaptation was factored into the IPCC, and many others - and thankfully, Garnaut.
So, hopefully Garnaut has built into the ETS drivers that quickly generate strong incentives for opportunity seeking entrepreneurs that bind ecological outcomes into our current flawed economic model. After all, that is the whole point of an ETS - to integrate eco asset services (water, air, waste reduction etc) into our current market system so that it is moving toward a whole systems approach (a key principle of RFN thinking).
For me, I really don’t subscribe to Gwynne’s view - though it does serve as a timely ‘hot poker’ if we do nothing, or worse still, invest limited resources relative to the problem, in the wrong process and solutions to address the problem.
My biggest concern is that we use tired, worn out frameworks and processes to try and address complex issues like climate change. The RFN framework and process was designed to provide a much more workable systems approach to these types of problems.
So, when Garnaut calls for adaptation, I hope he and the many people who must implement his recommendations have a process that supports an adaptive approach, and produces resilient outcomes.
September 30th, 2008 at 10:03 am
Geat post. As I see it a large barrier is that many decision makers are locked into concepts of mitigation and static planning without a good understanding of what adaptation is and how to apply it. These are not difficult concepts, but are not mainstream. As such all resilience practitioners have a job to do in helping educate on these concepts, and obviously RFN will put out more open source material (articles, white papers, video etc) on the site.
For those in the risk community, I’m working on a piece on The Real Risks of Business as Usual which will be essential reading for anyone responsible for leadership or governance of an organisation.