Professor Garnaut's supplementary report dealing with emissions reductions targets and trajectories ("Supplementary Report") was released on 5 September. The release of this report was foreshadowed in the Garnaut Climate Change Review draft report, which was published on 4 July (to view our legal update Examining the "diabolical" policy problem click here). The Supplementary Report proposes that Australia should commit to an emissions reduction trajectory based on 550ppm1 CO2-e, which equates to a 10% reduction of 2000 levels by 2020 and an 80% reduction by 2050.
The questions to be answered
The following questions are posed in the Supplementary Report:
- Is it possible to secure effective international action to reduce the risks of dangerous climate change to acceptable levels, presuming that Australia would play its proportionate part in the global effort?
- If so, what targets and trajectories to emissions reduction would produce the best possible outcome for Australia, and what would be an appropriate Australian contribution to the global effort?
- What should Australia do in the interim, if it takes time to secure effective international action?
Mitigation scenarios
The modelling undertaken by the Garnaut Review team considers the following emissions reduction scenarios:
- 450 ppm (with overshooting) stabilisation by 2100;
- 550 ppm stabilisation by 2100; and
- no mitigation.
Associated predicted temperature increases for each scenario are 2°C, 2.5°C and 5.6°C by the end of the century. In terms of the cost of such impacts, for the no mitigation scenario, the cost impacts would be 8% of GDP, 10% of GNP and 12% of wages, by the end of the century. In contrast, the costs of mitigation under a 550 stabilisation strategy would amount to just over 0.1% of GNP growth up to 2050. The modelling shows a likely increase in GNP growth in the second half of the century, based on a 550 strategy.
The 450 scenario shows an impact of just less than 1% of GNP, and ultimately Garnaut concludes that the benefits are great enough that Australia should commit to a goal of stabilising emissions at 450ppm. The main benefit is the insurance value that the lower strategy would provide (given the uncertainties in actual climate change prediction), but non-market impacts (e.g. mass bleaching of the Great Barrier Reef rather than its destruction) are also a relevant factor.
International agreement
The Supplementary Report suggests that the appropriate approach to a global solution is to base emissions trajectories on a 'per capita' allocation of emissions rights. Garnaut states:
"The focus on per capita allocations is legitimate. Indeed, it provides the only possible basis for an international agreement that includes developing countries..."
It proposes that all developed countries and China should adopt binding emissions targets, but individual countries should be allowed to determine the best policies to achieve these targets (e.g. emissions trading, carbon tax, regulation, etc). Developing countries would adopt a one-sided target, such that they could sell permits internationally, but not have an obligation to purchase permits to ensure compliance. The least developed countries would not be expected to take on emissions reduction targets, but would be expected to implement agreed policies for trade-exposed emissions-intensive industries. Garnaut also considers that the high-income countries should commit to funding research, development and commercialisation of low-emissions technology, and adaptation, in developing countries.
Garnaut expresses the view that if there is no comprehensive global agreement covering both developed and developing countries in the next few years, with major developing countries taking on a commitment to reduce emissions below 'business as usual', then the prospects for reducing the risks of dangerous climate change to acceptable levels will be diminished.
The ad hoc mitigation world
Garnaut also considers what approach should be taken by Australia, in the event that global agreement is unable to be reached. Given Australia's contribution to global emissions (around 1.5%), if Australia were to act alone, such actions would have little impact on atmospheric concentrations and would risk imposing costs on the Australian economy, with no worthwhile economic benefit.
If no comprehensive agreement is able to be reached at the Copenhagen meeting due to take place in December 2009, but the developed countries have agreed a successor agreement to the Kyoto Protocol (labelled by Garnaut as the "Copenhagen Compromise"), Garnaut suggests that Australia should pursue an interim target of 5% emissions reduction from 2000 levels by 2020.
Australia's emissions trading scheme
Garnaut confirms the position set out in his Draft Report and Discussion Paper on the Emissions Trading Scheme (to view our legal update Garnaut releases Discussion Paper on Emissions Trading Scheme click here) that it is desirable for Australia's emissions trading scheme to commence in 2010. He views the period between 2010 and 2012, when the Kyoto Protocol ends, as being a transition period and proposes that permits within the scheme should be sold at a fixed price. A price per permit (each permit will equate to 1 tonne of CO2-e) of $20 is suggested, rising each year by 4% plus CPI. (This price is consistent with future trades which have already taken place; see our update on Carbon Contracting).
Adopting this approach, which the Draft Report described as a "legitimate second-best", is now seen by Garnaut as necessary to avoid unproductive interaction between the early period of a new trading system and Australia's participation in the global negotiations, as well as providing more certainty to underpin the suggested compensation approach for the trade-exposed emissions-intensive sector.
In the event that no international agreement is reached by the developed countries at Copenhagen, Garnaut suggests that the fixed price of permits used during the transitional period will need to continue.
Approach to trade-exposed emissions-intensive industries
Garnaut notes that there is a distinction between compensation and providing assistance to address the situation where Australia's global competitors do not have the same carbon cost imposed on their products. He proposes that the appropriate approach to the trade-exposed sector should be based on the following policy:
"For every unit of production, eligible firms receive a credit against their permit obligations equivalent to the expected uplift in world product prices that would eventuate if our trading competitors had policies similar to our own."
Acknowledging that a threshold should be set, he sets out the following parameters:
- Only products likely to increase in price by a percentage greater than a low threshold would attract credits under the scheme;
- Eligible producers would receive credits for that part of the expected price increase, in excess of the threshold;
- The eligible firm could only receive credits sufficient to cover its permit obligations in any compliance period.
For example, if the threshold was set at 3%, the price for a particular product was $1000 and the imposition of a global carbon price would result in the world price being $1090 (i.e. 9% increase) for that product, the firm would receive credits against its permit obligation valued at $60 per unit of domestic production (i.e. 9% less the 3% threshold).
What next?
Garnaut's Final Report is due to be released on 30 September. This will be followed in October by detailed economic modelling analysis, currently being undertaken by Treasury. The Government will consider both Garnaut's Final Report and this economic modelling in determining the final design of the proposed Carbon Pollution Reduction Scheme, and the emissions reduction target proposed for 2020.
Footnotes
1 Ppm means parts per million.
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