Price on carbon is a low-cost way to meet emission targets

Age
16 June 2011, Page: 17

The public discussion in recent months has narrowed the range of serious debate about greenhouse gas mitigation in Australia. It is a while since any but the fringe dwellers of Australian public policy debate have denied that there is a warming trend. Nor is there now much serious denial that there is a substantial human contribution to that trend.

The excellent Productivity Commission report has settled the question of whether other countries are taking action to reduce the risks of dangerous climate change. It has also played a significant role in what is now a decisive victory for carbon pricing over regulatory intervention in the battle of ideas. Carbon pricing happens to be the low cost way to meet national targets, but if some countries want to shoot themselves in the foot by doing things in an expensive way, they are free to do so.

But in this world, in which each country is reducing emissions in its own way, how do we work out what is a fair contribution from each? The Productivity Commission was not asked, and did not seek, to answer that question. A few commentators who sought to draw an implication that the commission's report contradicted my statement that Australia was a laggard were wide of the mark.

My 2011 review update proposes that Australia should not seek to be a leader in global emissions reductions. We are too far behind many countries for that to be a realistic aspiration. I suggest we aim to be in the middle of the developed countries, so long as developing countries broadly contribute their fair shares.

To determine the middle for developed countries and a reasonable contribution from developing countries, we need some clearly defined principles for allocation. I have proposed a "modified contraction and convergence" formula that would require gradual movement from current levels of emissions per person to equal emissions per person in the middle of the century.

This formula is consistent with emerging international approaches. It is likely to draw widespread international support so long as it is backed by measures for adaptation and mitigation in lower income developing countries. Its provision for larger entitlements with population growth makes it as good for Australia as plausible alternatives. The allocation relates to entitlements that can be traded among countries.

Australia stands out for the modesty of our ambition, with our bipartisan unconditional target of reducing emissions by 5% by 2020. We also stand out for how much our emissions are increasing relative to our modest unconditional target. The Department of Climate Change and Energy Efficiency estimates that, with all the existing policies in place the mandatory renewable energy target, solar programs and other measures our emissions will grow by 24% by 2020.

Since those estimates were made on 2020 emissions under current policies we've had several gas liquefaction projects announced that would take that number higher still. If the world were to take effective action towards the agreed objective of holding temperature increases to about 2° above pre industrial levels, our fair share under the review's formula would require reductions of emissions by 25% by 2020 and 90% by 2050. Our share would be lower for less ambitious global action.

Could you compare effort in other ways, for example by looking at carbon prices across countries? All countries do not have carbon pricing, so we cannot compare actual carbon prices. The Productivity Commission report demonstrates that it is impractical to compare "implicit" carbon prices. It's hard to calculate because there are so many different policies.

It's also difficult because policies that reduce emissions often have many motives. The Productivity Commission describes how China has reduced emissions greatly from where they would have been through its forced closure of small, environmentally and economically wasteful power generators, and replaced them with technologically superior plants. This is called the "Large Substitute for Small" scheme.

The commission excludes actions under this scheme because they are profitable and so should have been taken independently of concern for climate change. It is only this exclusion that allows the judgment that Australia's effort in the electricity sector is comparable with China's: include it, and our effort is much smaller than China's.

Similarly, the commission excludes energy efficiency measures because they should be undertaken without concern for climate change policy. Yet in many countries, including China, climate change has been a central reason for raising the priority of energy efficiency. There's another complication of using price to measure comparable effort. You can do things that are expensive but that do little to reduce emissions. If you count the cost of a program then it might put its up fairly high in terms of effort but in terms of the effect on emissions it's fairly low.

Photovoltaic electricity has a great future but policies we have used to promote it in Australia are exceptionally expensive. Again, what matters is the effect on emissions. We don't want to give countries credit through implicit pricing for a lot of expensive action that's not reducing emissions.

What matters is the reduction in emissions. This drives us back to looking at what is really happening to emissions against some standard for allocating the emissions reduction task among countries. By this standard, Australia is a laggard. Carbon pricing and support for innovation in new technologies will allow Australia to catch up without putting prosperity at risk.

Ross Garnaut is author of the Garnaut Review 2011: Australia in the Global Response to Climate Change.