TRADING PUTS PRICE ON CARBON

The world's open (and supposedly) free trading market is the only reliable mechanism for determining the least-cost means of reducing emissions.

That's the argument of the popular financial experts consensus.

The consensus says that the world system that "internalises" the otherwise external cost of carbon pollution in heating the Earth's atmosphere.

A carbon price encourages consumers to economize on high-emitting goods and services, induces business to switch to less carbon-intensive production and provides incentives to come up with cleaner technologies.

Imposed by an explicit tax or set by the demand for a shrinking supply of emissions permits, a carbon price "discovers" the information that allows emissions to be reduced least expensively.

But before a price of carbon can be set into place political problems begin with the fact that the size of the pollution externality - the human contribution to global warming - isn't known and the costs of reducing emissions vary greatly between countries, frustrating a global deal.

The economic virtue of a carbon price in pushing up the costs of carbon-intensive production is also its political vice. The expense of reducing emissions is relatively explicit rather than hidden among even more costly government-directed regulations and subsidies.

But before there can be any agreement for a "real" price for carbon the world needs some clear understanding where the world stands with climate change.

After years of confusing, complex and emotional arguments there's still a lot of fog and confusion over various how an Emission Trading Scheme (ETS) works.

Most people don't understand ETS and are more concerned about price rises and job losses.

The points that need to be addressed are as follows:

* Most people want to take action on climate change.

* Governments worldwide have argued that ETS equals action on climate change and to oppose it is to deny climate change and vote for inaction.

* Most people do not understand how ETS works and want more detail.

Governments face a difficult task of starting afresh on convincing the public about ETS and to address valid concerns for their loss of credibility in allowing concessions of extra compensation for the coal and electricity-generation industries and exemption of agriculture from penalties.

Meanwhile officials from nearly 200 countries gathered in Copenhagen for talks aimed at reaching a new global deal on climate change.

World leaders including US President Barack Obama agreed to attend the crucial final days of talks.

Originally a tough binding agreement on carbon cuts did seem a possibility, but by mid-year many world leaders hosed down expectations.

The world is stuck with a political agreement that sets up a timetable for a new international treaty.

A legally binding treaty wasn't on the table.

The truth is that the world's leaders never expected or were able to finish a full agreement at Copenhagen.

The world leaders have agreed to a reduction in greenhouse gases of between 5 and 25 per cent by 2020 but object to any binding levels.

The United Nations had hoped that agreement includes targets for developed countries, and a fund to help poor nations adapt.

But any world agreement will have to resume in six months if a new treaty is to replace the Kyoto protocol, which expires in 2012.

United Nations climate chief Yvo de Boer thinks the summit at least heading in the right direction.

While climate science remains sound the political will is being questioned and there has never been a more contentious issue in international affairs.

One of those watching carefully is the executive director of the UN environment program, Achim Steiner.

The UN official panel on climate change says emissions must be limited to avoid dangerous global temperature rises.

Will Steffen from the Australian National University asserts that not enough is being done to avoid a temperature rise of more than 2 degrees Celsius by the end of the century.

"Bear in mind it takes time to bend those emissions curves, which are still strongly upward," he said.

His assessment is that global greenhouse gases must be cut by at least half by 2050.