Australia to have leading role in carbon mitigation

Canberra Times
30/11/2007 Page: 15

Natural gas, coal and renewables provide plenty of clout, Ross Garnaut writes.

What should Australia aim for as the world discusses a global emissions target? Australia is likely to be damaged more than any other developed country by climate change. Our environment is dry and highly variable already, and this will be exacerbated with climate change, with the effect on agriculture and water supplies being particularly pronounced. Australia is well placed to be part of an effective global mitigation effort. We have exceptionally rich resources for solar, geothermal and wind energy.

Our large livestock industries are less emissions-intensive than our competitors in Europe, north-east Asia and North America. We have large resources of high quality (that is, low emissions per unit of energy) coal, which means our share of the global coal supply would rise under an effective global mitigation regime.

We have large deposits of natural gas and uranium, the exports of which would increase in a world of major and effective mitigation. We have an exceptional endowment of favourable sites for Carbon Capture and Storage, most being favourably located in relation to the coal-using industrial centres of the south-east.

And we have an exceptional human resource base in engineering, management and finance related to the resources sector, which places its well for competitive participation in innovation in the emerging low emission energy industries. All of these Australian strengths facilitate, and render less costly, domestic mitigation. To date, Australians have been encouraged to concentrate on an unhappy part of the reality - that mitigation is a risk for Australia due to the disproportionate importance of our trade-exposed, exceptionally emissions-intensive industries.

Without an adequate international framework, domestic action may lead to movement of these industries overseas, reducing the value of Australia's economic output and in the worst of circumstances perversely affecting global emissions The solution is to ensure the exceptionally emissions-intensive trade-exposed industries -metals smelting, steel, cement and a small number of others - are subject to similar disciplines in major producing economies, comparable in effect to the application of the general mitigation regimes being applied by major economies.

Australia can move to secure its interests in a number of ways. First, ratification of Kyoto will strengthen our voice in global discussion, starting in Bali. Second, leadership could be shown by supporting incentives for reducing emissions from deforestation; on the need for an ambitious global budget; and on principles for allocation of the budget. Third, Australia can ensure its own mitigation regime fits productively into a feasible international regime. Our emissions targets should be consistent with a global budget for allocating rights among the countries of the world.

Fourth, Australia has a vital interest in the development of new clean energy technologies. It has an especially strong interest in Carbon Capture and Storage from coal. It shares this interest with other economies, including in the European Union and China, which provides a strong basis for international cooperation.

Finally, Australia's adoption of an efficient mitigation approach, carefully designed to encourage others to move towards effective contributions to global mitigation, can play a big international role. At the centre of a mitigation strategy is the setting of a price on emissions, paid by anyone who emits greenhouse gases.

If the price is established at the right level, there is no need for other policy treasures to tip the balance of private decisions on supply and use of fossil fuels towards low-emissions technologies. There are two ways of setting an emissions price. One is through a carbon tax. The other is to set a limit on carbon emissions, to allocate permits up to that limit, and to let the market set the carbon price. An emissions trading system (ETS) and a carbon tax are both market based approaches to confining emissions within a specified budget.

There are two important advantages of an efficient ETS. First, allowed to do its job without political adjustment, it can be relied upon to constrain emissions within the specified total budget. Second, it sets the current and future prices directly, without bureaucratic clairvoyance about the continuously changing influences on the supply and demand side for emissions permits. The task is to establish in Australia a well-designed and credible ETS. Finally, it is worth differentiating between the price of carbon and its cost to the economy.

The cost to the economy is not, as some have suggested, the carbon price set for emission permits. The "price" is not the cost - this has been a fallacy of the Australian discussion to date. The cost to the economy is the expenditure on substitutes net of existing higher costs imposed through mandatory schemes.

So if the price of emission permits is not all a cost to the economy, where does it go? Most, especially in the early period, is likely to be passed through to households. If the scarcity value of the permits is collected passed back to households in appropriate ways, there is no negative income effect on them. The redistribution of income may be large - including redistribution away from low-income households. Without appropriate policy responses, the redistribution of income will lead to political resist-, nice to economically and environmentally efficient carbon prices.

Professor Garnaut is Professor of Economics at the Australian National University's research school of economics. He is currently reviewing the economic impact of climate change on Australia for Prime Minister-elect Kevin Rudd, with a view to informing future government policy. This is an edited extract of his S.T. Lee lecture yesterday at the ANU.