Climate change targets are achievable - and may have economic benefits

Australian
Wednesday 12/3/2008 Page: 40

IN the past 12 months climate change has been a major political, economic and some would say moral issue. For all the debate, the central question is relatively clear what can we do in Australia to reduce the output of greenhouse gases without sacrificing our quality of life in the short term? While quality of life comprises many things, for the purpose of this discussion we'll constrain ourselves to maintaining a healthy economy.

To answer this question, a fact base is needed for appropriate choices to be made, myths dispelled and emotions cooled, and to enable all of us government, business and consumers to understand how we can reduce greenhouse gas emissions.

With the release of Professor Ross Garnaut's Climate Change Review interim report to Government, the science around climate change is starting to look more pessimistic. This suggests dramatic change is required. Recently released McKinsey research An Australian Cost Curve for Greenhouse Gas Reduction suggests that the economics, on the other hand, appear more optimistic. This indicates that the dramatic change required may not be as costly as first thought.

McKinsey has developed an overview of the costs to the economy (a cost curve) of reducing greenhouse gases in Australia, which analyses more than 100 opportunities to reduce emissions and their associated costs, and answers three questions: what reductions can be achieved (a lot); how much will it cost (surprisingly little); and what are the most effective levers to achieve it (a small number in the hands of government, business and consumers).

According to our analysis, a 30 per cent reduction in emissions (below 1990 levels) by 2020 and 60 per cent by 2030 can be achieved without major technological breakthroughs or significant changes in lifestyle. Assuming efficient policies are implemented, we estimate the cost of meeting these targets to be approximately $290 per household per year for 2020 and $590 in 2030 for the economy as a whole.

Although the marginal cost of the required reduction would be $65 per tonne of carbon dioxide, 25 per cent of total reductions in 2020 actually have a positive economic gain, not a cost. Wind power, geothermal options or reforestation cost money, but there are options, such as efficient lighting and insulation, where the cost of implementation is less than the value of the energy savings they will achieve. As impressive as these numbers are, it is important to point out that they are net numbers for the economy as a whole. As not all savings will be passed on to consumers and differences may appear between cost and price increases, actual costs to households will differ.

Amid the dire comments about climate change, these forecasts can appear very optimistic. However, there are three aspects that put these numbers into context. First, no single reduction opportunity or technology can be pursued in isolation if targets are to be met. To make it achievable and affordable, a portfolio of opportunities needs to be pursued simultaneously. Second, early action is critical delays will result in increased costs and make meeting targets more difficult. Third, opportunities that will save money, such as in the building sector and energy efficiency, need to be pursued as vigorously as those that cost money, like the move to clean coal or solar power.

Although reducing greenhouse gases without substantially sacrificing economic growth is achievable, no one is saying it will be easy. These challenges and costs will need to be shared across business, government and consumers. For government, setting a greenhouse gas reduction target is an important first step in providing much-needed certainty for business.

While setting a target alone will not result in carbon reductions. it will enable companies to understand the magnitude and timing of change, allowing them to prioritise reduction strategies. Given that timing is critical, the government should clarify the details of a national emissions reduction scheme and implement it as early as possible.

The federal government has signalled its intention to create an emissions trading scheme. To speed up the process we should take a "learn as we go", rather than a "wait and see" approach towards its implementation. The design of the system should aim to give business appropriate certainty about the price of carbon and ensure a significant reduction in greenhouse gas emissions.

Governments also need to provide the regulatory framework to ensure the right incentives are in place for business and individuals to pursue economic gains in energy efficiency areas like insulation and building construction. The public sector can also contribute to fast-tracking promising technologies to be cost-competitive. Business has a big role to play, beyond complying with relevant new regulation. In the past 12 months, many Australian companies have attempted to quantity their contribution to greenhouse gas emissions.

Once this is done, companies need to move beyond just offsets to genuinely improving energy efficiency to significantly reduce overall emissions. Opportunities will come within businesses but also by collaborating across the whole value chain. Actions to reduce emissions can also unlock new, profitable opportunities. Business can also make a valuable contribution to the policy debate. Some companies feel uncomfortable about this form of advocacy, but this debate has real potential to shape Australia's economic landscape. Undoubtedly a mix of short to long-term actions; offsets, efficiency gains and new growth opportunities; response and advocacy will be required.

Although at this stage of the climate change debate, many people are looking to government, under the right frameworks, market solutions could and should emerge. The capital markets have always been critical in driving innovation, job creation and economic prosperity by reallocating resources away from old, less productive forms of activity towards new and better opportunities. Around the world we are seeing innovation and investment in a lowcarbon environment, and the establishment of financial instruments, institutions, principles and capabilities that are playing a larger role in shaping our future.

Undoubtedly new facts both scientific and economic will emerge before this debate is over. The facts we have now suggest that governments need to be bold and swift; business needs to be responsive to community and profit needs; and consumers need to think twice about the quantity and nature of their consumption.

Adam Lewis is managing partner of Mckinsey & Company, Australia and NZ