One year has passed since I released the final draft of the Climate Change Review. In the lead-up to Copenhagen, this is a timely opportunity to reflect on developments in the consideration of this diabolical policy problem and where it is all going now.
It’s relevant that my final report was presented to the Australian Prime Minister on the morning of the biggest ever points fall on the New York Stock Exchange. The discussion of the review has been against the backdrop of the Great Crash of 2008 and the recession that followed.
The Great Crash had three sorts of effects on the climate change challenge.
First, it temporarily and briefly stopped the growth in global emissions, but by an amount that is not material in the sweep of history.
Secondly, the unemployed resources, the unemployed capital and labour that were a consequence of the great recession, lowered the cost of investment in structural change. It made this a relatively cheap time to invest in the new technologies. Many countries including the United States and China made a major place for investment in emissions reducing structural change in their stimulus packages and the total effect of this on the world scale was considerable.
Thirdly, the political economy of mitigation became more difficult. Because it is a time of rising unemployment globally, demands by established industries for support for resistance to structural change are on the rise.
Overall, the elections of new governments committed to stronger mitigation in the US and Japan, the strengthening of old governments in India and Indonesia, and strong community support for action has prevented a general international retreat on mitigation in the year since the Great Crash.
The approaches of the review to the science, and the uncertainty surrounding it, have been influential. The review accepted the views of mainstream science “on a balance of probabilities”. There is a chance that it is wrong. But it is just a chance. To heed instead the views of the small minority of genuine sceptics in the relevant scientific communities would be to hide from reality. It would be imprudent beyond the normal limits of human irrationality.
Substantial support has been generated for the idea put forward in the review, that Australia’s national interest is in a strong global agreement, with Australia’s part being to reduce emissions entitlements by 25% from 2000 levels by 2020 and 90% by 2050. The Government and Opposition have accepted the review’s approach to conditional and unconditional targets for 2020. A year ago the 60% reduction target from 2000 levels by 2050 was seen as a stretch target, but now mainstream discussion is about how far beyond that we have to go. The Prime Minister has indicated willingness to seek a mandate at the next election to tighten old 2050 targets from 60% to larger reduction.
Some environmental groups have wanted stronger mitigation with more ambitious goals than 450 parts per million, but I’m not sure those views come to grips with the awful reality that any path to anything more ambitious than 450 must first secure 450 parts per million with some overshooting and then go lower. There is a danger that the best has become the enemy of the good, and the friend of the bad.
The review’s approach to compensation for low-income households has been widely accepted by the government and has not been controversial, but compensation to businesses has followed different lines.
The absence of principle in payments to trade-exposed industries for the temporary period in transition to effective global mitigation has led to arbitrary distribution, probably to over-allocation on average, to the absence of an expectation of, or process for, early phasing out as others move to stronger mitigation and to the ugliest “money politics” we have seen for a generation.
It’s a pity that there’s been so much focus on what are essentially transitional arrangements. We would have a more fruitful discussion if we focused on how the mitigation system would work once an effective global agreement was in place with all major economies taking part.
There has been relatively little fiscal allocation for innovation in low-emissions technologies; the pre-emption of permit revenue for other uses is one of the reasons why.
The ambits of the government’s response have focused on carbon capture and storage technologies.
The initiative that the Australian government took in global leadership on carbon capture and storage (CCS) is a valuable one. There’s been criticism of the support for CCS technologies, mainly from green groups because it’s seen as supporting an old industry, the coal industry. CCS research investments are thoroughly justified. The problem is not the support for CCS, but the absence of support for innovation in other technologies in which Australia has comparative advantage in research, a large economic interest, and which are potentially transformative for the global mitigation effort. Bio-sequestration is the most obvious of these.
Much of the debate has not been about the targets, the objectives or the need for mitigation, but has been about the instrument that Australia should use in reducing greenhouse gas emissions. There’s been a tendency to compare an ideal carbon tax with a flawed emissions trading scheme (ETS). In truth, the political economy of implementing a clean carbon tax would be as difficult as a clean ETS. One senior business figure who favours a carbon tax has said to me that there is much controversy about giving free permits to favoured businesses, and it would be much more straightforward to give special support for a favoured industry under a carbon tax: under the traditions of the Australian tax system, he said, if you want to favour some industry you just exempt it from the tax and people don’t notice it very much.
The international regime proposed by the review has held up well to the international discussion. There’s been a fair bit of discussion of it in India, China and Indonesia, and this is to a considerable extent focused on the date at which convergence to equal per capita entitlements should occur. It’s also focused on the parameters of support of developed countries support for new technologies and adaptation.
Further, there’s growing acceptance in China that the review’s formula for Chinese participation in a global regime is consistent with attainable Chinese policy objectives.
While the ETS as proposed by the government has many weaknesses, it’s likely that changes to facilitate support in the Australian Senate would exacerbate rather than ameliorate weaknesses. One main exception to what I’ve just said would be if stronger measures were introduced to support innovation related to bio-sequestration. Another would be if it were possible to introduce explicit arrangements to phase out assistance to trade exposed industries as other countries strengthen their mitigation efforts.
But such good changes are much less likely than exacerbation of distortions in response from business interests. From that perspective I hope that the ETS can be passed into law quickly and with no further distortion, if necessary through a joint sitting of the House of Representatives and the Senate.
This essay is adapted from a public lecture given at the ANU on 14 September. Listen to the podcast here.
This whole treatise in my view is about CO2 reductions and punishment; not about real solutions and rewards. It is more about managing the status quo and less about creating a new status quo. The real solutions I am thinking of are those technologies offering “free energy” that have emerged regularly over the last 60 years and mysteriously disappeared soon after. You know… cold fusion, geothermal power, tidal energy, zero-point energy, hydrogen etc. Discredited you say? Maybe? But when did science give up at a first attempt?
My take on the Garnaut Report is that it is more about extracting additional taxes through an ETS, ideally managed by the banks, than it is about solving the problem of dirty energy over the next ten years. These taxes would be extracted ultimately from the long suffering public in much the same way as the GST because we all happen to be locked into a petroleum based economy for another half century. If this problem were real, surely we would have already started the move to new energy with no questions asked!
I am compelled to assume that the people who want this punishment regime in place aren’t all that interested in solutions but very sympathetic to new taxation opportunities.
The reason our politicians are in the main moving towards a “tax” on carbon through a trading system is not that they do not believe that climate change and it’s associated impacts are real. The problem is that they have swallowed the story of modern economists that the only approach to solving any problem is through an open market system. Hence, a carbon trading scheme.
Provide the market, they believe, and the innovators will move in. Theoretically this sounds great. The problem is that it only works providing that the open market is free of powerful encumbants who corrupt the market place by influencing politicians in order to maintain the status quo. The other problem is that unless the market participants can underpin research by being big, being highly profitable and able to absorb large R&D risks then no innovation will occur.
As we have seen the powerful encumbants in the energy and mining sectors in Australia have played the political game superbly. Ross Garnaut admits this with his notion that we must avoid any more distortion of our ETS. The politicisation of the ETRS is complete.
The idea that innovation can only be carried out in the presence of a competitive market is of course patently false. Many of the fundamental innovations that has propelled the technology of modern western societies has been developed through government funding of major universities, major undertakings such as the US space program and the development of modern weapons. These innovastions were all underwritten by the tax payer. There were significant innovations from the private sector, however the companies were generally very large and in monopolistic/ologopolistic markets where high levels of retained earnings brought about by the lack of competition were enjoyed. The transistor was developed in the AT&T Bell labs laboratories, before AT&T got broken up into the mini Bells is a typical example.
Highely competitive markets where costs are driven down, do not have players with sufficent retained earnings to do expensive research and innovation. These companies are good at optimising existing technology to suit the market place and reduce costs, but they rarely produce fundamental innovation on a large scale.
The carbon problem is huge. It requires leaps in technology and implementation of such technologies on an unprecedented scale in a very short time. Using the open market, with carbon trading is like trying to move the elephant by pushing it’s rear with a piece string. A rather futile exercise.
Of course the argument is that Governments never pick winners. The problem is that they aren’t picking anything, they are being told by the encumbants what the winners are. CCS is the big winner here. Why? Because we get very rich selling coal. That’s hardly letting the market decide.
The space program analogy is a good one, or a war effort, or even the snowy mountains scheme. All of these were massive projects which would have not gotten to square one in private hands, and they are all far less daunting than the kind of transformation required to acheive a decarbonised economy. However, if you are going to play the market game, then the least you can do is actually provide a market signal. The supposed price on carbon seems destined to fall on anyone except those actually producing CO2. That seems doomed to undermine any stimulus the coal and power industries might feel for innovation. As for not picking winners; governments can and have but not if they choose on the basis of the political status quo. No-one would pick clean coal as a technological winner without having the coal industries survival as a pre-requisite.
I disagree with you a bit Altakoi; only in that I think the impact that moving to a lower carbon economy will have is HUGELY overstated. Granted, it will affect some industries (but I agree, not nearly as much as it should) but to the individual the actual impacts of a trading scheme are pretty minimal.
Without the Government assistance, the main impact on households will be more expensive electricity. Then, this embedded energy will also add to the price of goods that use electricity to be produced and this cost too will be passed on to consumers. Lets say it’s a 50% increase in the cost of electricity (most estimates are less than that), this is only 25% to the consumer, since actual energy use is only half of most electricity bills.
Also, Robert, the technology exists, it really does. Anyone who tells you different doesn’t know the full story. The technology for a near-zero carbon energy sector exists and is mature. Problem is, it’s more expensive. My point in these 2 paragraphs is not that it is a small task, just that the difficulty is not cost to individuals, nor the technicalities, but getting an international agreement.
This is entirely a problem of politics. No country wants to act alone (particularly democracies) for fear of giving the impression that they’ve ceded some sort of advantage to their ‘competing countries’. As Garnaut said; it’s the classic Prisoners Dilemna. If everyone agreed to act at once, there would be virtually no reason not too.
Certainly its a classic ‘first mover’ problem and I agree that a lot can be done within existing technology. I am just aware that the frantic end of the scientific evidence suggests we have to more or less completely cease emitting CO2 pretty fast – cuts in the range of 70% per capita by 2050. This makes the retooling of the power grid, housing, transport etc a huge exercise. Perhaps the apt analogy to war is not the difficulty of the task but the fact that ‘winning’ has to become the number one absolute priority below which everything else is secondary. That, as y0u say, is a political issue.