CoPS in the news: Carbon cuts

The Kyoto talks in Bali, and the advent of the new Rudd Australian government, highlight the question: what would be the economic cost of reducing Australia's CO2 emissions? CoPS has taken a leading role in this debate, documented in a series of newspaper articles which are listed here.

Carbon trading details count
True cost of carbon cuts
Pitfalls in cost of cutting emissions
Big emission cuts are affordable, study finds
Parties skate around climate change costs
'A small price to pay' for cap on greenhouse gas

Carbon trading details count

The Canberra Times, April 8, 2008, by Peter Martin

What if, while the attention of economists was focused on the budget and the upcoming 2020 Summit, the really important economic decisions were taking place elsewhere?

They are taking place as we speak inside the new Department of Climate Change. Within weeks it will reveal the detail of the new emissions trading scheme that will be in force for decades.

From the outside it looks as if the battle has been won. All that's in play are the details. The independent inquiry being conducted by Professor Ross Garnaut supports such a scheme, the inquiry set up by the previous Howard government endorsed such a scheme, and the Rudd Government won an election promising such a scheme.

But the details are the most important thing of all.

Think back to the introduction of the GST.

Would it have mattered much whether the low-income households who stood to suffer the most were compensated?

Think back to the decision to effectively eliminate tariffs on the import of manufactured goods. Would it have mattered much whether motor vehicles were in or out?

Think back to the decision to introduce student loans. Would it have mattered much whether the loans had to be paid back at commercial rates or concessionally through the Tax Office?

Now think forward to mid last year and the emphatic endorsements from big polluters of John Howard's proposed emissions trading scheme. Why were they so keen on it?

Chapter seven of the report of the prime minister's Emissions Trading Taskforce spelled it out.

The firms likely to suffer a "disproportionate loss of value" due to the introduction of pollution permits (in other words, the big polluters) would be given permits for free.

Their competitors the smaller polluters and new energy producers attempting to start up would have to pay.

As a way of buying the support of big polluters for the scheme, it was the best there was. As a way of responsibly handing out public funds, it was a scandal.

As the doyen of Australian economic modellers Professor Peter Dixon of Monash University explained to me at the time, "It's the same as putting a tax on carbon pollution and then instead of doing something useful with the proceeds, like cutting another tax, giving it to the shareholders of the polluting companies."

Coincidentally, the taskforce that recommended the scheme to Howard had on it representatives of those companies.

Peter Coates was the chief executive of Xstrata Coal, Tony Concannon was the head of International Power, Chris Lynch helped run BHP Billiton, John Marlay was chief executive of Alumina Limited.

The taskforce mounted an impressive defence of the handouts, quoting a US study as finding that "giving away allowances won't shield firms or consumers from the price signal".

As it happens, Garnaut agrees about that specific point. But he couldn't disagree more about the implication that it justifies corporate welfare.

A legend among Canberra economists, Garnaut is as dry as they come. While economic adviser to Bob Hawke as prime minister in the 1980s, he persuaded him to smash the system of import protection enjoyed by manufacturers since white settlement and to wind it down to near zero. In an inspired move last year when he was still in opposition, Kevin Rudd asked Garnaut to conduct his own investigation into climate change.

Garnaut's approach was the antithesis of that of the Howard taskforce.

Whereas the Howard committee attempted to design a scheme that would please everyone a camel Garnaut, acting alone, was able to design a sleek machine without a hump.

"The complications in most schemes are about free allocation of permits," he told me after his interim report was issued last month. "You need very elaborate processes to give things away."

And he says there is no point in giving things away (except for trade-exposed firms such as aluminum producers, which would get support for the limited time that they ran the risk of being undercut by producers overseas).

He agrees that giving away permits to electricity generators and the like wouldn't shield anyone from price signals. He says they will bank the value of the permits and put up their prices anyway.

It is what happened in Europe.

As his report says, "most of the costs of the permits used in the domestic economy, including for electricity generation and automotive fuel, will be passed through to households. This will be the case whether permits are auctioned, or allocated for free."

As he sees it, there is no point in handing permits worth billions to the worst of the existing polluters. There are better uses for the money.

His problem is that the former secretariat for Howard's taskforce now forms the nucleus of Rudd's new Department of Climate Change. It is likely to be sympathetic to the camel of a scheme it came up with to appease existing polluters.

The Government's decision is due in July.

Garnaut is worried that if the Howard scheme gets the go-ahead and the existing polluters are enriched, there won't be enough money left from the sale of the permits to compensate the people who will really need it.

Howard's taskforce as good as confirmed this.

It recommended that households "not be shielded".

Garnaut sees things differently. He argues that as an environmental reform, the emissions trading scheme should not unintentionally "have large and arbitrary effects on the distribution of income".

He says low-income households in particular will have strong claims for compensation from the price increases imposed by the scheme. His report says firms seeking compensation should "have to establish the priority of their claims against those of households".

Within weeks we will know whether either Garnaut or the existing polluters has won. The effects will be with us for decades.

True cost of carbon cuts

The Age, December 13, 2007, by Adam Morton

If Kevin Rudd immediately signed Australia up for the sort of medium-term carbon emissions cuts - 25% to 40% - that the UN wants the developed world to take on by 2020, what effect would it have?

Here is one scenario. The first step would be a market-determined carbon price, most likely through selling emissions permits to business.

Economists say the carbon price would need to be about $30 a tonne to have an immediate impact.

This would double electricity bills, with the rising cost spilling over into consumer goods. Fuel prices would jump significantly.

Based on estimates from the Australian Greenhouse Office, pricing carbon at about $30 a tonne would boost costs by about 2.5 percentage points - a year's worth of inflation.

Melbourne University Professor John Freebairn says the rise in cost to the consumer is not enormous, but adds: "It will make it that much tougher for people on poverty lines unless they get compensation, and you would expect wage earners to want a compensating wage increase or a tax cut".

The good news is that the Government, armed with whatever business is paying for carbon, would suddenly find itself in a position to put some money back into people's pockets. Meanwhile, business will have an incentive to undertake the expensive process of converting its coal-fired power plants into gas-fired stations. Sound easy?

Professor Freebairn says cutting emissions so deeply would also require adopting more fuel-efficient cars, greening old buildings at considerable expense and turning down our air-conditioners.

According to Monash University's Centre of Policy Studies, we could cut emissions by 30% by 2050 in relative comfort without turning to nuclear power. Anything sooner would involve greater cost.

In this shorter time frame, just setting a price would not be enough to cut emissions as deeply as proposed by the UN. It would also involve the Government convincing the public that their own inaction would ultimately be more expensive.

Pitfalls in cost of cutting emissions

The Australian, December 13, 2007, by David Uren

Economic modelling showing greenhouse gas emissions could be slashed over the next 40 years with little damage to the economy hinges on some big assumptions.

New technology has to be invented to power cars and generate electricity, the rest of the world has to join in, and the cost of phasing out high emission industries is assumed to be negligible.

Computer models of both the Australian and the world economy show greenhouse emissions could be halved by 2050 with only a relatively small fall in the GDP.

The Stern report, commissioned by the British Government, said world GDP would only be 1 per cent smaller by 2050 than if no action were taken.

It estimated that cuts of this dimension would be required if the level of carbon in the atmosphere was to be stabilised over the next century.

An assessment by the Australian Bureau of Agricultural and Resource Economics shows that a 40 per cent cut in greenhouse gas emissions would reduce the Australian GDP by 2.5 per cent by 2050. Emission targets cost Australia more than the world economy on average because we have an energy-intensive economy.

However Ross Garnaut, who is reviewing the Stern report for the Rudd Government, says these changes for both Australia and the world are very small relative to the expected growth in the economy. "A 3 per cent GDP impact at 2050 would mean that Australia's GDP would treble by 2051 rather than 2050," Professor Garnaut says.

A number of climate change advocacy groups have commissioned their own modelling of the cost of meeting emissions targets, producing results broadly in line with ABARE's estimates.

Modelling by the well-regarded Monash University Centre for Policy Studies on behalf of the Climate Institute found cutting developed country emissions by 60 per cent and total world emissions by 50 per cent by 2050 would cost 2.8 per cent of GDP.

The Business Roundtable for Climate Change, which includes the Australian Conservation Foundation and six large businesses including Westpac, BP Australia and Origin Energy, came up with a larger cost of 6 per cent of GDP, but said this could readily be covered by embracing reform in other areas of the economy.

However the report stressed that like all such studies, it depended upon an assumption that technologies for generating energy with low emissions became cost efficient.

"At present, most greenhouse-friendly technologies are not cost competitive," it said.

Technological change in electricity generation has been very slow, with little change in the fundamental method of coal-fired generation in a century.

Rod Sims, a director of consultants Port Jackson Partners who has advised the Business Council of Australia on climate change, says it may prove impossible to reduce emissions in many parts of the economy.

Agriculture, for example, generates 16 per cent of Australia's emissions, with livestock generating most of this. Another 6 per cent comes from forestry and changes in land use, while emissions that occur when excavating land, such as mining, are a further 6 per cent. In industries such as steel-making, which accounts for about 3 per cent of Australian emissions, there is no viable alternative to the use of coking coal, and shutting the industry would only lead to it being transferred elsewhere in the world.

Mr Sims said that to achieve a 30 per cent cut in emissions nationally may require a 50 per cent cut in areas like transport and electricity generation.

Big emission cuts are affordable, study finds

The Age, December 3, 2007, by Michelle Grattan

Making very deep cuts in Australia's greenhouse emissions would be affordable and compatible with continued growth in national income, employment and living standards, according to modelling commissioned by the Climate Institute.

The Monash University Centre for Policy Studies modelled cuts of 40%, 60% and 100% in net emissions from 1990 levels by 2050.

The incoming Labor Government is committed to a target of a 60% cut on 2000 levels by 2050.

The modelling shows that if Australia reversed its rising pollution by 2012, reduced emissions by 20% by 2020 and became carbon neutral by 2050 growth would slow, but only marginally.

GDP in 2050 would be 4.2% lower than if nothing was done, while the economy would grow at an annual average of 2.8% between the base year of 2005 and 2050 compared with 2.9% if no action was taken.

While energy prices would increase, they would fall from some 6% of average income to 4% by 2050.

A 60% reduction in net emissions would mean GDP was 2.8% lower by 2050 than it would have been with no action. Consumption per person would be little affected.

The Climate Institute's chief executive John Connor said decisive Australian leadership would be a prudent investment and avoid the economic risks associated with playing catchup in the emerging global clean energy economy.

Parties skate around climate change costs

The West Australian, 21st November 2007, by Ross Gittins

Scientists behind the latest United Nations report on climate change say slowing and reversing global warming is the defining challenge of our age and there's not a moment to lose. I think many, probably most, voters would agree with that. And yet climate change has had surprisingly little attention in this election campaign.

There are various reasons. One is John Howard's belated me-too on the need for a carbon emissions trading scheme, which largely eliminated the differences between the major parties. For a greater sense of urgency we're left with the Greens which may be significant if the Greens gain the balance of power in the Senate.

So the Prime Minister deliberately neutralised climate change as an issue. Even so, both sides have failed to nominate targets for the reduction of emissions by 2020 and say they can't until after the election.

Ah. And why might that be? It's not hard to work out. As we've been reminded all too well in recent days, modern campaigns are aimed not at people who want serious debate about serious issues, but at those who take little interest in politics except to ask, what's in it for me and mine?

Both sides feed these easily manipulated souls on scares and bribes. Modern campaigns are about politicians playing Santa with our money. Apart from their dire warnings about the evil intent of their opponents, the only news they bear is good. Ask not what you can do for your country, ask what your country can do for you.

Even where the pollies aren't actually promising to do anything, they're still terribly solicitous. Kevin Rudd has made much of people's discontent over high petrol prices and Mr Howard makes sympathetic noises. Higher petrol prices? How terrible.

Do you see now why getting down to cases on climate change just doesn't fit? Reducing greenhouse gas emissions means reducing consumption of fossil fuels by making them more expensive. So let's skate around climate change, even though the Opposition Leader says this election should be about having a plan for the future and Mr Howard wants us to focus almost exclusively on the management of the economy.

There could be no issue more important to our future and none more thoroughly economic. Anything we do to cut emissions will have an economic cost on consumers and, potentially, on export industries such as steel and aluminium. Anything other countries do to reduce their emissions will reduce the demand for our coal exports. These are the reasons Mr Howard has been so relaxed about the threat of global warming for most of the past decade.

There's one small problem with this obsession with the economic costs of halting global warming - it conveniently ignores the much greater economic cost of not halting it. It's the public's growing recognition of that cost prompted by Al Gore, the report of British economist Nicholas Stern, the reports of the UN's Intergovernmental Panel on Climate Change, our own observation of the plight of the Murray-Darling and our fear that the present drought may be a sign of warming that has galvanised public opinion and forced Mr Howard to change his tune so radically. Don't say democracy never works.

The scientists say global warming will hit Australia harder than other developed countries. Droughts will constrain water supplies and farming over wide areas, more than 90 per cent of the Great Barrier Reef will be damaged by heat stress every year, 3000 to 5000 more people will die in heatwaves each year and 80 per cent of the Kakadu wetlands will be lost to the rise in the sea level.

That's a potential human and social tragedy, but you don't need a PhD to imagine its huge economic cost. It's an excellent reason for us to be willing to pay whatever economic cost we must to take a lead in encouraging effective global action to halt climate change. And for us to get on with it.

On that score, never fear. Once the election is out of the way, whoever wins will start moving rapidly and be a lot more frank about the price tag involved. On this, however, I have bad news and good.

A forthcoming report on economic modelling undertaken by the Centre for Policy Studies at Monash University and others for the Climate Institute estimates the likely rises in energy prices needed to help us achieve a 60 per cent decline in greenhouse gas emissions by 2050. It finds that by 2050, the price of petrol may need to rise 56 per cent more than prices in general. Most of this increase would occur before 2020. The retail price of electricity may need to rise 46 per cent more than prices generally by 2050. And the price of natural gas to households may need to rise 72 per cent above prices generally over the same period.

That's the kind of bad news no pollie has wanted to touch before the election. But here, paradoxically, is the good news: even so, the cost of energy to households is expected to become more affordable over the years, not less.

At present, the cost of the energy it buys, mainly electricity, gas and petrol, accounts for more than 6 per cent of the average household's income. It's projected that, by 2050, this will have fallen to a bit less than 4 per cent.

How is this possible? It's possible because, over the period to 2050, the average household's income is expected to grow by about 155 per cent more than general inflation. And people don't tend to use a lot more energy as their incomes rise over time.

The modelling suggests that, should no action be taken to fight climate change, the share of households' income devoted to buying energy would fall from more than 6 per cent to just 2.5 per cent by 2050. Instead, action to halt climate change would mean it fell only to a bit less than 4 per cent.

That's what the pollies are so afraid of telling us? Courageous, aren't they.

'A small price to pay' for cap on greenhouse gas

The Sydney Morning Herald, April 20, 2007, by Nassim Khadem

A cap on greenhouse gas emissions would cut national growth and on average cost Australia about $5 billion a year every year until 2030, research shows.

But Philip Adams, the director of the Centre for Policy Studies at Monash University, who did the research, said the effect on the economy would be relatively small.

The cost of taking no action on climate change could far outweigh the cost of acting, he said.

Although Professor Adams' research does not assess the impact of inaction, it does examine the economic impact of a sharp reduction in greenhouse gas emissions.

Speaking at the Melbourne Institute's economics forum in Canberra yesterday, Professor Adams said if emissions were capped at 2000 levels, there would be a reduction in gross domestic product of 0.6 per cent in 2030.

But the economy would still grow strongly, even under stringent emissions trading targets.

The research assumes an emissions trading scheme that limits carbon emissions at 2000 levels by 2030 - equivalent to capping pollution from power generators at 176 million tonnes by 2030.

It found with such a cap, the reduction in GDP would translate to a cost of $12 billion in 2030. The average cost would be $5 billion a year, each year, until 2030.

The impact on Victoria's real gross state product would be a 0.9 per cent reduction in 2030.

"So there will be a cost, but that cost would be very, very small relative to the potential damage caused if no policy is put in place," Professor Adams later said.

"And if the Stern report is to be believed, the potential damage (of taking no action on climate change) would be very, very large."

According to the Stern report, climate change could shrink the global economy by one-fifth and push the world into the worst recession since the Great Depression.

Opposition Leader Kevin Rudd has called for a target to cut greenhouse emissions by 60 per cent by 2050. But Prime Minister John Howard has said that setting such a target was unrealistic and would be too big a drain on the economy.

Professor Adams said his research ignored the economic costs of no action on climate change because there was not enough information to quantify it.

Labor Treasury spokesman Wayne Swan said: "What we urgently need, and what (Treasurer) Mr Costello has failed to provide, is detailed analysis of the future costs of inaction for the Australian economy."

Professor Adams said while the cost of an emissions trading scheme would be relatively small, there would be winners and losers in every industry and every state.

He said the largest beneficiaries would be in the renewable energy, forestry and metals and mining industries.

The largest losers would be coal-fired power generators, with a production drop of up to 27 per cent. Electricity distribution and retailing would fall 4 per cent, while coalmining would ease 3 per cent.

The largest winners would be southern Tasmania and greater Hobart thanks to increased forestry activity and a small increase in hydro activity.

Victoria's Western District and the Pilbara in WA would be other big winners because of renewable generation and gas. But in Gippsland, reduced coalmining and coal generation would result in large losses.

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Last modified 14 Dec 2007