- While the final report answers some outstanding questions, its real impact will come from how much of it is implemented by the Government - and by how much and how quickly.
The (by now familiar) mixed reviews greeted the final Report of the Garnaut Climate Change Review which was released yesterday. If the reactions were familiar, so was much of the final Report's content which already appeared in the interim report (February 2008), ETS discussion paper (March 2008), draft report (July 2008) and supplementary report (September 2008).
Buried in the Report however were some new recommendations and more detailed modelling. As a result, the Report now gives a more comprehensive vision of climate change mitigation and adaptation, and makes some important policy proposals that will help the private sector and ordinary Australians adjust.
In this edition we'll look at what's new in the Report, and some of the key challenges for the Government and industry in the years ahead.
It's never too late
Analysis undertaken in the Report confirms findings in the interim report that the path on which the international community embarked at Kyoto and most recently at Bali to address climate change was based on assumptions that significantly underestimated the effects of climate change. More recent studies show that the world is close to or has already exceeded atmospheric carbon dioxide levels of 450 parts per million - widely accepted as the point at which the risk of dangerous climate change becomes high and potentially irreversible. This has been partly the result of higher than predicted emissions intensive growth, particularly in developing countries like China. Mitigation efforts that were once thought reasonable are now inadequate and, to a large extent, the international community is too late with effective mitigation to avoid significant damage from climate change.
The world is therefore faced with a fateful decision - the failure to mitigate climate change will lead to consequences that will haunt humanity until the end of time, as Garnaut puts it. The conclusion of an effective global agreement at Copenhagen next year for a post-2013 emissions reduction framework has therefore never been more important. If it is to be effective, however, it must commit all major economies including China to mitigation targets which are stronger and occur earlier than previously considered necessary.
As stated in the draft report, Australia is a loser, if not the biggest loser, among developed countries from climate change and therefore it is in Australia's self interest to encourage the international community to adopt ambitious emission reduction targets. While the Report's initial recommendation is that Australia should lobby for a 450 ppm target by 2050, realism and sheer practicality suggest that there are better prospects of achieving international agreement on a target of 550 ppm. Even at this level, the Report concludes that the Great Barrier Reef will be largely destroyed and 12 percent of all species will be at risk of extinction.
Garnaut reiterates his previously expressed opinion that any global agreement will need to be based on the principles of "contraction" and "convergence" - that is, developed countries take on greater levels of mitigation initially, moving gradually to a per capita basis by 2050 among all major economies.
An international agreement at Copenhagen on emissions limits for major economies is not a sufficient response to the risk of dangerous climate change. The Report therefore recommends, among other things, that:
- developing countries which are not among the major economies should be required to take on one-sided targets which seek to keep emissions below business as usual levels;
- the international community needs to pursue sectoral agreements, if necessary through the framework of the World Trade Organisation, to minimise the risk of "carbon leakage" from the main trade-exposed emissions-intensive industries within those economies that take on carbon constraints; and
- commitments to fund the development of low-emissions technology must also be made by the major economies to ensure a minimum and adequate level of funding for research, development and commercialisation of such technologies. Of the $100bn p.a. that the Report recommends that should be committed internationally to such a fund, Australia's share would be $2.8bn pa.
While a global agreement to reduce emissions has become even more urgent, the inevitability of serious and dangerous climate change impacts from historical emissions, places increased emphasis on the need for effective adaptation policies to deal with the likely substantial climate change impacts through the rest of this century. This includes impacts on water and food supply, and the consequential impacts on local and regional communities and, in some cases, nations.
Whether there is a comprehensive agreement reached at Copenhagen is identified by the Report as the biggest risk to economic outcomes in the transition to a low-carbon economy, a risk which it describes as more than a small risk. The challenge in the next 12 months is to remove the inherent weakness in the framework of international negotiations established at Kyoto and continued at Bali which does not require developing countries such as China to make a contribution to the international mitigation effort.
Modelling the impact
One of the critical pieces of information missing from much of the debate so far has been economic modelling for Australia of climate change impacts (assuming a business as usual baseline), and scenarios assuming various levels of carbon constraint. It is through this that it is possible to compare the reduced risks of climate change with the costs of mitigation.
The Report provides the first results of economic modelling done by the Review in conjunction with Treasury. It describes the modelling undertaken as highly complex and a technically "path-breaking" process.
The first step is to calculate the cost to the economy of the no-mitigation scenario. The Report concludes that the impacts of unmitigated climate change are much greater than previously predicted, including by the Stern Review. It estimates an impact of approximately 9 percent of GNP whereas Stern found a reduction in global GDP per capita of only 2.9 percent taking into account a larger number of cost categories than the Report. Overall, the Report states that it considers its estimates of the costs of climate change to be conservative.
The next step in the process is to compare the costs of the no-mitigation scenario with the costs/benefits of taking mitigation action. The modelling concludes that, assuming an emissions target of 550 ppm by 2050 and a contraction-convergence framework, mitigation generated benefits that exceeded the costs of climate change. A target of 450 ppm generated larger net benefits.
While initially the imposition of targets negatively impacted on average annual GNP rates from 2013 to 2020 by approximately 0.2 percent (assuming a 550 ppm target) and 0.3 percent (assuming a 450 ppm target), the Report concludes that these initial costs are small and the costs of mitigation fall over time, so that by 2050, the reduction is 0.1 percent on both scenarios. By 2100, the average growth rate for GNP increases by 0.1 percent on both scenarios compared to the no-mitigation scenario. Importantly, the modelling does not factor in what is described as Type 3 (insurance value) and Type 4 (non-market values) costs and the Report opines that these will outweigh any short-term loss in the present value of median climate change GNP.
The Report also compares the cost to Australia of the 450 ppm and 550 ppm scenarios and calculates the net present value of these costs. It concludes that the difference between these scenarios is 0.7 - 0.9 percent of discounted GNP, depending on the discount rate adopted. As the difference is less than 1 percent, the Report advocates that the additional cost of a 450 ppm target is worth paying to avoid the risk of reaching "tipping points" of climate change, where marginal increases in temperature can significantly increase the probability of catastrophic climate change events occurring, such as large-scale melting of the Greenland ice sheet.
The modelling assumes a "technology backstop" for each target scenario, representing the point in time that the cost of abatement provides incentive for technological breakthrough (such as clean coal technology). This effectively puts a ceiling on the price of carbon. Modelling was also undertaken on an "enhanced technology" breakthrough scenario which assumed a more optimistic outlook for technological development. The modelling concluded that Australia achieves greater levels of mitigation so that the cost of mitigation is reduced by more than 50 percent in the period 2050-2100.
The Report therefore concludes that the cost of action are less than the costs of inaction. Those costs, however, are not evenly spread across the economy and the Report provides some detail on where the contribution to the mitigation effort will be made. Electricity generation and transport are identified as the largest contributors to mitigation, primarily due to their high direct exposure to emissions pricing. Modelling suggests that the electricity sector will be largely decarbonised by 2050, even on the 550 ppm scenario.
Working from 450 and 550 ppm, the Report concludes that Australia's emission reduction targets will be 25 percent and 10 percent based on 2000 levels respectively by 2020. By 2050, those reduction targets will be 90 percent and 80 percent respectively. The Australian Government has, however, already committed to a reduction target of 60 percent by 2050 based on 2000 levels. Taking this as the scenario absent any international agreement, the Report concludes that the 2020 target should be 5 percent.
Centrepiece of domestic mitigation
An emissions trading scheme continues to be the centrepiece of Australia's domestic emissions mitigation policy. The Report reiterates many of the design features of an ETS originally advanced in the ETS discussion paper and the draft report, and in this respect departs from many of the key design elements of the Government's recently announced Carbon Pollution Reduction Scheme. We compared the details of Garnaut's proposed ETS with the CPRS here.
While contrary to the original recommendations in the ETS discussion paper, Garnaut recently supported a transitional period during scheme start up (2010-2012) where prices of permits would be fixed at $20, increasing by 4 percent plus CPI each year. The Report also criticises some of the design elements of the CPRS announced by the Government's Green Paper in July, in particular the proposed assistance to the stationary energy sector and petrol excise offset. In respect of the latter, the Report is critical of the Government's proposal not to allow emission restraint to be fully influenced by the increases in transport fuel prices, warning that this creates arguments for other exclusions, quickly leading to a plethora of market-distorting interventions. As the Report notes, a carbon tax would be better than a heavily compromised ETS.
In the context of an ETS, the Report has also had an opportunity to consider the impact of other policies, in particular, the Mandatory Renewable Energy Target. The Report takes as its starting position that the only useful roles policies additional to an ETS have is to reduce the effect of market failures. In relation to MRET, the Report concludes that once the ETS is fully operational, MRET will not address any market failures (indeed, it could result in some perverse incentives) so that its potentially distorting effects can be phased out. The Report recommends that this is achieved by carrying forward the non-indexed penalty shortfall charge of $40/MWh so that as the price of permits under the ETS increases above a corresponding level of $40-45 per tonne CO2-e, the ETS would become the dominant investment driver with the economic effects of MRET subsumed within the ETS, ultimately phasing out in 2020.
In contrast, the Report provides little analysis of potential transitional arrangements for other schemes such as the NSW Greenhouse Gas Abatement Scheme or the impact that an ETS may have on the voluntary market for emission reductions.
The successful development and deployment of new technologies across sectors will be critical to minimising the costs of adjustment to the ETS and climate change generally. The Report identifies a need for high levels of public expenditure across a range of areas, including:
- climate science;
- the impacts of climate change (nationally, regionally and locally);
- technology responses to changing climatic conditions;
- low-emissions technologies and processes (including energy efficiency); and
- geo-, bio- and soil sequestration.
This need arises particularly in the early research stages (as opposed to the commercialisation stages).
Australia has strong opportunities and interests, in the development of these technologies, including for example carbon capture and storage, soil sequestration, algal biosequestration. The development and commercialisation of these technologies could have exceptional value within Australia due to:
- our reliance on emissions intensive electricity generation;
- our prosperity being reliant in part upon the continuing international demand for our carbon intensive resources; and
- the existence in Australia of a range of geologic formations which may be appropriate for carbon sequestration.
Australia's commitment to research, development and commercialisation of low-emission technologies should be improved, says the Report. Public funding should be increased over five years to $3bn, and a new research committee established.
The Report notes that there may be structural impacts on some regional areas due to impacts on coal and other industries. $1 billion in matched funding for investment in reducing emissions in coal power generation is recommended as a form of structural adjustment assistance. Additionally, the Report recommends private research should automatically receive matching funds where that research has broader external benefits in meeting the abatement and adaptation challenge, to provide necessary support to early movers.
As the burden of adjustment will fall heavily on low-income Australians, due to their higher relative expenditure on emissions-intensive products, the Report suggests two main ways to ameliorate its impact.
The first recommendation, which first appeared in the draft report, is to use the taxation and social security systems to support poorer households.
The second and new recommendation is to help investment in energy-efficient housing, household appliances and transport via green credits to assist in early adjustment of low-income households. This type of transitional assistance is seen as necessary to ensure that the emissions price signal is not blunted and thereby encouraging the shift toward a lower emissions economy, but at the same time provide low income households with upfront capital to purchase and install energy efficient services and appliances. An upfront once-off grant of $1,000 per person per household is proposed in respect of pre-approved items.
Where to now?
The Report recognises the costs that mitigation imposes on all sectors of the economy, and it recommends various ways to share the burden as equitably as possible. The same approach is adopted in the context of any international agreement to achieve reduction of global emissions. Adaptation will become increasingly important and the Report has gone a long way to providing a comprehensive road map for the development of appropriate adaptation strategies.
There is still the matter of implementation. Although the final Report has been the result of consultation both wide and deep, it is not the final word and the Government is not bound to accept any of the recommendations contained in it. Much therefore depends on the Government's response to the Report and we have already witnessed a divergence of opinions on some of the key design elements of an ETS between the Government and Garnaut. We will know more when the Government releases its White Paper and draft legislative package on the design of the CPRS later this year.
The CPRS however only represents part of the policy response to climate change. The targets that Australia sets for itself in the CPRS will be largely determined by the outcome of negotiations leading up to, and hopefully concluding in an agreement at Copenhagen in 2009 which is both practical and credible. If those negotiations fail, then the risk of "global fracture" described by the Report looms large.
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