Australia: Floating The Carbon Dollar Part 1: The Garnaut Climate Change Review Interim Report

Last Updated: 10 April 2008
Article by Brendan Bateman

Key Points

  • The Commonwealth and States' chief adviser on climate change has warned that time is fast running out to address the potentially catastrophic effects of climate change.
  • And that is in Australia's interest to take immediate and aggressive action to mitigate and reduce global emission of greenhouse gases.

The softening up process has begun to get the Australian community ready for the implementation of tough measures to address the risks posed by climate change. The Interim Report released on 21 February 2008 by the Garnaut Climate Change Review is an important step in adjusting Australian community expectations of what steps are required to mitigate the possible disastrous consequences of climate change.

The Garnaut Climate Change Review, headed up by Professor Ross Garnaut, was commissioned by the Australian State and Territory governments on 30 April 2007 to examine the impacts of climate change on the Australian economy, and recommend medium to long term policies and policy frameworks to improve the prospects for sustainable prosperity. Professor Garnaut was the Senior Economic Advisor to the Federal Government between 1983-1985 and was instrumental in the significant decision to float the Australian dollar.

With the election of the Rudd Labor Government in November 2007, the Commonwealth Government has now endorsed the review currently being undertaken by Professor Garnaut. Indeed, the new Government has repeatedly expressed its intention to rely extensively on the report of Professor Garnaut for the purposes of setting greenhouse gas emission targets as well as in designing and implementing appropriate policies.

A draft report of the Garnaut Review is due to be released in June 2008 with a final report to be published by the end of September 2008. While the terms of reference of the Garnaut Review suggest that interim draft reports on particular issues may be released for the purpose of public consultation, the Interim Report provides what is described as "a flavour of early findings from the work at the review".

Having regard to some of the early findings contained in the Interim Report, it is clear that it is very much intended to adjust expectations and prepare the Australian community, including business, for the need to take immediate and potentially aggressive action to implement policies to decarbonise the Australian economy.

It's Worse Than Predicted

The Interim Report commences the "softening up process" by detailing why previous studies of the likely impacts of climate change (including those by the Intergovernmental Panel on Climate Change - IPCC) have underestimated the risk of climate change such that the world is now moving towards higher risks of dangerous climate change more rapidly than had previously been understood. This, the Interim Report concludes, makes mitigation more urgent and more costly.

The principal concern arises from the unexpectedly high growth of the world economy combined with unexpectedly high energy intensity of that growth coupled with a continual reliance on high emission fossil fuels as sources of energy. In 2000, the IPCC released a special report on emission scenarios. That report considered a number of scenarios for emission trajectories to assist in analysing the potential impacts of climate change. One of those scenarios assumed the continuation of strong global economic growth and strong continuing dependence on fossil fuel for energy such that it had the highest continuing emissions growth across all IPCC scenarios. This scenario was considered to be "extreme". The Interim Report, however, concludes that emissions have been growing even faster in recent years than under that "extreme" scenario. Between 1990 and 1999, global emissions of C02 grew at only 1.1 percent a year on average. Between 2002 and 2006 however, they increased 3.1 percent per year. The Interim Report predicts that global emissions are likely to continue growing rapidly without effective mitigation measures.

If there was any further need to shake the Australian community out of complacency about the urgent need to address climate change, the Interim Report also briefly touches on observed climate change impacts, and recent studies which have suggested that the climate system may be responding more quickly than climate models have previously indicated. Increases in global mean surface temperature, and sea level are tracking at the high end of IPCC predictions. These observed impacts are the result of historic emissions so that the consequences of the unexpectedly high level of emissions in more recent years will be felt in future decades.

As the Interim Report states:

"These more realistic growth trajectories bring forward in time the critical points for high risks of dangerous climate change. Time is running out".

Overshooting The Target

It is generally considered that C02 in the atmosphere needs to stabilise at around 450 parts per million (ppm) in order to have a 50 percent chance of limiting the global average increase in temperature to approximately two degrees. A two degree increase is generally considered the point at which climate change impacts become "dangerous" and potentially irreversible.

The work of the Garnaut Review, which includes simulating scenarios for stabilising emissions at various levels, concluded that only urgent, large and effective global policy change leaves any hope of holding atmospheric concentrations at 450 ppm or even 550 ppm levels. Indeed, in all likelihood, temporary overshooting of targets may be unavoidable and this in itself poses great dangers. Overshooting increases the risk of irreversible climate change impacts occurring. The prospect of achieving a peak of global emissions in the very near future followed by record falls is also not feasible given the long lead times and lifetimes of energy sector investments as well as the huge momentum of emissions growth that is currently being experienced, particularly in developing countries.

Is An International Agreement A Pipe Dream?

The Interim Report identifies a number of areas where broad international agreement is required if there is to be effective international action to address the risk of climate change:

  • setting limits on global emissions - this may involve a global "budget" that represents the total volume of greenhouse gases that can be emitted over time to achieve a specific atmospheric concentration. This has an advantage in that it highlights the importance of total emissions, rather than emissions at any point in time. Interim targets are also necessary to guide and assess global progress. They are also important in making choices about the path to stabilisation;
  • allocating the budget among countries - the reality is that no satisfactory international agreement has been reached at this time which requires all countries (including developing countries) to commit to targets or budgets. Notwithstanding this, the Interim Report concludes that only an international agreement on distributing the abatement obligation across all countries has any chance of achieving the depth, speed and breadth of action that is now required. This will require the adoption of allocation principles based on equity. To be considered fair, the Interim Report concludes that such principles will need to give weight to equal per capita emission rights. To be practical, they will need to allow long periods for adjustment towards such positions. The Interim Report contends that it is in Australia's interest to agree to a per capita emission rights; and
  • contraction and convergence - that is, setting budgets initially equal to each country's current emissions and then, moving over time, to equal per capita emission budgets while at the same time driving down the overall global emissions budget. This is intended to address both the necessity to start from the status quo with a recognition of developing countries' claims to equitable allocation of rights to the atmosphere. This is likely to be a significant and difficult issue to resolve as this would require developing countries to accept binding targets, transparent monitoring and complimentary polices.

The Interim Report acknowledges that the world is a long way from an effective international framework to address the above areas with only a few countries having proposed national targets and fewer still having adopted a framework to implement them. Further still, there could be no adequate and global mitigation unless the major developing countries soon become part of the global mitigation.

The prospect of reaching an international agreement is still a long way off given the numerous competing interest. Indeed, it may never occur. While it may be possible for some of the difficult issues to be resolved over time, time is running out to take strong and effective action to avoid the high risks of dangerous climate change.

The Interim Report provides a compelling illustration of the point. On current levels of growth (over 6 percent per year between 2000 and 2006) for emissions from combustion of fossil fuels, developing country emissions alone will exceed the illustrative 450 ppm CO2-e stabilisation trajectory before 2020, and the 550 ppm stabilisation trajectory before 2025. It is therefore essential that the post-Kyoto framework involve commitments by both developed and developing countries to emission budgets.

Unilateral commitments and regional agreements are more likely to be successful in facilitating immediate mitigation measures than if the world waited for a post-Kyoto framework to be agreed upon. The making of unilateral commitments and the negotiation of regional and multilateral agreements in parallel will make for a messy process, but the reality is that this is probably the only option left. Adopting some common guiding principles however should provide some measure of compatibility.

Implications For Australia

Whatever global budget is chosen by Australia, as part of any negotiations, it is clear that there will be a requirement for large cuts in the Australian emissions budget, as part of an effective international agreement. The Interim Report states that under the 450 ppm and 550 ppm CO2-e stabilisation scenarios, Australia's absolute emissions would have to be roughly 90 percent and 70 percent respectively below 2000 levels in 2050 (assuming per capita emissions would converge by 2050).

Much in the same way that the European Union set a target of 20 percent reduction of CO2-e levels by 2020 with a commitment to 30 percent conditional upon a broader international agreement on reductions being achieved, the Interim Report suggests that it is in Australia's strategic interests to set an initial target within a broad Kyoto framework and a tougher carbon budget if effective global action can be agreed.

The Interim Report also identifies an opportunity for Australia to enter into regional partnerships with its neighbours, in particular Indonesia and Papua New Guinea, to co-operate on climate change mitigation. In particular, there is an opportunity for substantial reductions in emissions relatively fast if policies to reduce deforestation are pursued in both those countries. This would be to Australia's advantage in that it could purchase freed up emissions permits and so be able to achieve reductions of emissions at a lower cost.

An Ideal Domestic Mitigation Strategy

The Interim Report identifies the following as key components of a domestic mitigation strategy:

  • a price on emissions primarily through the implementation of an emissions trading scheme (ETS) which carries with it an emissions budget;
  • correction of market failures across three areas, namely, research, development and innovation, demand side energy use, and the provision of network infrastructure; and
  • robust governance arrangements to regulate and provide confidence in the carbon permit market created by an ETS.

Simply establishing a price on emissions does not generate optimal technological change. The Interim Report identifies the importance of developing low emissions technology for the energy sector as central to assist in Australia's transition to an emissions constrained future. This requires government intervention in the form of policies to assist innovation.

The Centrepiece Of Mitigation Efforts

The Interim Report identifies an ETS as the centrepiece of a domestic mitigation strategy. The Interim Report endorses many of the design features proposed by the Prime Minister's Task Group on Emissions Trading (May 2007) including:

  • broad sectoral coverage;
  • a role for domestic and international offsets; and
  • linkages with other emissions trading schemes.

The fact that the Interim Report does not endorse expressly other design elements of the PM's Task Group Report is significant. In particular, there is no express support for the proposal to include a "safety valve" in any proposed ETS. A safety valve would set a ceiling on the price of permits to ensure that the cost of complying with the scheme did not become excessive or prohibitive.

Another design element which is expressly not endorsed by the Interim Report concerns the proposal for the free allocation of permits to firms facing a disproportionate loss in asset value as a result of the introduction of the ETS. The PM's Task Group Report proposed that there would be a one-off free allocation to those firms. The obvious candidate for such an allocation would include electricity generators. The Final Framework Report of the National Emissions Trading Task Force also included such a proposal as part of its ETS design.

The Interim Report however raises questions as to whether it makes good public policy to compensate industries for the effect of government reforms and the risk that this would set a dangerous precedent. Further, the experience of the EU ETS demonstrated how free allocation of permits to the non-traded sector (such as electricity generators) effected a transfer of wealth in the form of increased profits for those sectors through higher energy prices.

Another sector which may benefit from free allocations under the PM's Task Group Report is the trade exposed emission intensive industries (TEEIIs) sector. Free allocations are intended to ensure that they remain competitive with international competitors not subject to comparable carbon constraints. TEEIIs include non-ferrous metal making, iron and steel making and cement. The new Federal Government has committed to providing a mechanism to support Australia's TEEIIs so that they would not be disadvantaged by the introduction of an ETS. Consistent with the new government's policy, the Interim Report supports such a mechanism.

Also receiving the support of the Interim Report is provision for the banking and borrowing permits under the ETS, as this would be another mechanism to minimise the cost of mitigation.

A discussion paper was released by the Garnaut Climate Change Review in March which examines the design features of an ETS for Australia. We report on that discussion paper here.


The Interim Report concludes that Australia would be a be loser - possibly the biggest loser among developed countries - from unmitigated climate change. At the same time, Australia enjoys opportunities to do well as a result of the implementation of ambitious, comprehensive mitigation measures.

Recent science, however, suggests that ambitions for mitigation will need to rise way beyond those embodied in the Bali road map if the high probabilities of damaging climate change are to be avoided. As a consequence, the Interim Report has commenced a softening up process to adjust expectations within the Australian community, including the business community, as well as create the political goodwill necessary to implement ambitious, comprehensive and long term policies for climate change mitigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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