A Critical Conversation on Climate Change ... - Green Choices

160 development dialogue september 2006 – carbon tradingCarbon Off sets and the Ghost of Frank KnightFrank H. Knight(1885–1972), a Universityof Chicagoeconomist recognisedas one of thedeepest thinkers in20 th century US socialscience, is famousfor his distinction betweenrisk and uncertainty.351 Although hecould never have anticipated all the ways itcould be applied, Knight’s 1921 distinctionhelps explain why it’s confused to put anyfaith in a market for emissions credits generatedby carbon-saving projects.Risk, in Knight’s sense, refers to situationsin which the probability of somethinggoing wrong is well-known. An exampleis the fl ip of a coin. There is a 50–50chance of its being either heads or tails. Ifyou gamble on heads, you risk losing yourmoney if it turns out to be tails. But youknow exactly what the odds are.Uncertainty is different. Here, you know allthe things that can go wrong, but can’t calculatethe probability of a harmful result.For example, scientists know that the useof antibiotics in animal feed induces resistanceto antibiotics in humans, but can’tbe sure what the probabilities are that anyparticular antibiotic will become uselessover the next 10 years.Still worse, as Knight’s successors suchas Poul Harremoës and colleagues havepointed out, 352 are situations of ignorance.Here you don’t even know all the thingsthat might go wrong, much less the probabilityof their causing harm. For example,before 1974, no one knew that CFCs couldcause ozone layer damage. Obviously, thisignorance would have invalidated any attempt,at the time, to calculate the probabilityof ozone depletion. 353 Here, as withuncertainty, talk of ‘margins of error’ is inappropriate.In situations of indeterminacy, finally, theprobability of a result cannot be calculatedbecause it is not a matter of prediction, butof decision. For example, it might be ‘implausible’for subsidies for fossil fuel extractionto be removed within five years, butyou can’t assign a numerical probability tothis result, because whether it happens ornot depends on politics. In fact, trying toassign a probability to this outcome can itselfaffect the likelihood of the outcome.In such contexts, the exercise of predictioncan undermine itself.Problems posed by risk, uncertainty, ignoranceand indeterminacy each call for differentkinds of precaution. Risk fits easilyinto economic thinking, because it can bemeasured easily. Uncertainty, ignoranceand indeterminacy, however, call for amore precautionary and flexible, and lessnumerical, approach. 354Take the carbon credits to be generatedby tree plantations. If these credits werethreatened by nothing more than risk, calculatingtechniques associated with insuranceor discounting would be enough tocreate a viable commodity. You could insurecarbon credits from a plantation just asyou take out fire insurance for a building.If you knew the margin of error associatedwith a carbon calculation, you could playit safe by applying a discount factor.