SA: Should this be viewed as an insurance or risk management problem?

NS: It is a risk management problem. You are trying to reduce the risk, which you have some ability to quantify. You reduce the risk by emitting less and that's costing you about 1 percent of GDP. Simple decision theory tells us that's a good way to go. If the risks turn out to be less than we thought, we spent 1 percent of GDP, we have cleaner lives and save biodiversity. If, on the other hand, risks turn out to be as much or more than we think now and we do nothing, we will get ourselves into a position where it's almost impossible to reverse the damages.

SA: We are reducing risks in future at some cost today. What is the value of the well-being of future generations compared with that of the present generation?

NS: I would give equal status to people born 20 years from now as to people born now, just as I would give equal status to people born now and people born 20 years ago. That's the issue of pure time discounting—how much you discount something simply because it's in the future. Why should I give a much higher weight to somebody born 35 years ago than a person born now? With pure time discounting of, say, 2 percent, you'd be giving half the weight to somebody born now as someone born 35 years ago. You would be discriminating by date of birth. That's a fundamental ethical question. I see no ethical justification for it. Giving lower weights to increases in consumption to richer people, now or in the future, is a different question; that kind of weighting should indeed be part of the analysis.

SA: What is an appropriate policy solution then?

NS: A trading scheme should be a big part of this process for the obvious reason that you need a price for carbon dioxide, given that this is an externality [uncosted in normal markets]. There's considerable benefit from the price coming from this kind of market. You can focus on overall quantitative reduction targets and let the market find the price that will deliver those reduction targets. It also enables financial flows to developing countries, which gives them incentives to come in and participate. It's crucial to have them involved. They feel that the rich countries are largely responsible for the difficult situation we find ourselves in. I think they're right.

We will need to demonstrate new technology, combat deforestation and embedded in all that would be a very big emphasis on energy efficiency. In the short to medium term, it's energy efficiency and combating deforestation that are the best ways to get quick results. Going forward longer term, it's better technology.

There are also areas of the economy where you decide to do things by taxes. In Europe we have high taxes on petrol. I think a combination of regulations and standards, taxes, and cap and trade is a good solution, provided they don't overlap too much and confuse each other, as they can do. Over a good portion of the economy, some kind of cap and trade is important. It keeps the focus on an overall quantity, which is the key variable, and allows for some incentives.

SA: Is something like the Kyoto Protocol, which imposes a global cap-and-trade regime, a good solution?

NS: The idea that we all have to get together and think through targets together, and [that] we have to look at the adding up of all the countries' targets must be right because this is a global issue. You need some kind of forum to talk that through because this is a global issue. In those kinds of ways the Kyoto format or something like it is crucial.

SA: What is the appropriate price for carbon?