WARMING COULD COST LESS THAN EMISSIONS CUTS
26 August 2008 Michael Stutchbury
THE climate change debate is exiting its phony phase. The political debate confronts Ross Garnaut's diabolical dilemma for a carbon-intensive growth economy such as Australia's: that delivering big cuts in carbon emissions to insure against the costs of a warmer planet requires sacrifice from people who vote governments in and out of office.
The phony phase of the debate was most intense during last year's election campaign, when Kevin Rudd encouraged the idea that Labor would provide working families with relief on petrol prices and also bring in a carbon trading scheme by 2010. But the phoniness extends to the Government's green paper, which proposes to protect motorists from a carbon impost until 2013.
The embargo on lifting petrol prices is bipartisan, a political prisoner's dilemma. Neither the Government nor the Opposition is yet prepared to ask voters to pay for some of the pollution bill from a Chinese industrialisation that has put big-screen televisions in all their lounge rooms. Crisis? What crisis? The imperative to dull the pain of price signals that are supposed to drive the move to a less carbon-hungry world mocks the cap-and-trade emissions trading scheme embraced by politicians as a least-cost solution to the problem.
Business Council of Australia president Greg Gailey calls the petrol exception "incredibly stupid". And the BCA has highlighted the design weakness of the standard ETS for a carbon-wired commodity exporting economy such as Australia's. That's the risk of carbon leakage of emissions-intensive, trade-exposed (EITE) industries offshore - with no global reduction in emissions - if Australia introduces an ETS ahead of competitor nations.
The added bind for Rudd is that he wants to quickly show that Australia is pulling its weight so he can help broker a global solution that ropes in the essential participation of the US (the most indulgent big emitter), China (the Olympic superpower that wants to be treated as a greenhouse developing nation) and India (the world trade deal spoiler).
The Government's green paper offers monetary compensation for EITE industries. But the BCA paper argues that there won't be enough money available from auctioning permits to compensate exposed industries and to protect households from the pain of higher petrol costs and the like. Its proposed solution is to go slow on the trajectory for reducing emissions and to make the ETS kick off as a small carbon tax rather than a fully fledged trading scheme. Australia would have an ETS in place but it would be left to run idle until a global deal could be reached.
Of course, it is far from certain that a genuine global deal will be reached. And the ramifications of the BCA report electrified the weekend's Australian Davos Connections annual leadership retreat on Hayman Island, with BBC World News presenter Nik Gowing holding up headlines from The Australian ("Carbon plan a 'company killer"') to dramatise the stakes. These leadership retreats have been a key forum in the past several years for developing business consensus in favour of pushing government - the Howard government, that is - into an ETS-style response to climate change. This time, the BCA backed an ETS, yet its analysis rejected Rudd's proposed version. Gailey argued that the chances of getting the proposed ETS through the Senate, particularly in an election year, were "probably zero", calling the politics of greenhouse grisly. "This is an issue that really does need a bipartisan approach," he said.
Rudd used his opening night address to affirm support for an ETS as the "most market-sensitive, market-flexible and market-realistic way of handling the challenge" as well as to remind business that it would have to wear significant costs.
Yet Rudd and Treasurer Wayne Swan were careful not to impugn the BCA's motives. Swan called its report a "very important piece of work".
The clean energy supporters were less generous, reflecting the splintering of business interests and consensus. Greg Bourne, the head of environmental group WWF and a former oil company executive, was scathing of the BCA's motives and methodologies. Its commissioned report had looked at only a small number of carbon leakage losers, he claimed, not the ETS winners in new, green industries. The study found that three of the 14 anonymous businesses studied would shut down. But did that include all of BHP Billiton or a small division of a smaller company?
The clean energy advocates demanded a much steeper trajectory for reducing carbon emissions than the BCA and the resource lobby propose and the Rudd Government will accept. They argued that a combination of technological fixes and regulation, from smart power metering to mandatory renewable energy targets, could achieve deep cuts in emissions at low cost. This optimism pointed to the big falls in household water consumption during drought in southeast Queensland and even compliance with increasingly tighter smoking bans.
Bourne suggested that a technology push combined with the market pull of an ETS could deliver steep emission reductions at low economic and political cost.
"It is always easier and cheaper to change than you think," he said.
The economists tended to reject this technological optimism, suggesting that the required structural changes would be more fundamental, while the regulatory interventions, such as mandatory renewable targets, would simply make it more costly for the ETS to complete the job.
Among the economists, National Institute of Economic and Industry Research's director Peter Brain was both a climate and an economic pessimist, suggesting that the International Panel on Climate Change would soon increase its estimates of global warming damage, including higher sea levels. That would require much more severe targets for carbon reduction. "It's pretty dire," he said.
Brain's alarming code-red emission cuts of up to 80 per cent by 2040 came with an estimated $1 trillion Australian price tag, divided equally between investment in renewables, industry adaptation and other carbon-reducing infrastructure. His modelling estimated that during the 25 years from 2015 this bill would halve the forecast annual growth in per capita living standards of 1.5-2.0 per cent. That's an order of magnitude that could wipe out the gains from a decade or more of economic reforms.
Given the political system is a long way from accepting this amount of economic pain, the most intriguing signpost at the Hayman Island retreat came from Warwick McKibbin, the Australian National University professor whose internationally recognised economic model will underpin Treasury estimates of the costs of cutting carbon emissions.
McKibbin pointed to the little-acknowledged estimate in Ross Garnaut's report that the cost of doing nothing to combat climate change could add up to 2 per cent to 3 per cent of gross domestic product in 100 years or so. The question was whether the forthcoming official estimates of the cost of cutting emissions by a suggested amount would be much less than the cost of doing nothing; that is, of accepting climate change. "It is not as clear-cut as this audience is suggesting," McKibbin said.
While the Rudd Government is unlikely to start playing down the threat of global warming, it will want to dampen expectations about how quickly and deeply Australia should try to cut its carbon emissions, at least until the rest of the world is on board.
Copyright 2008 News Ltd.
The Australian
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