On 30 October 2008, the Rudd Government released the report by Treasury entitled 'Australia's Low Pollution Future: The Economics of Climate Change Mitigation' (Report).
The purpose of the Report was to analyse and model the medium to long term economic impacts of policies to reduce greenhouse gas emissions, in particular the Carbon Pollution Reduction Scheme (CPRS). The modelling did not address the economic impacts of climate change itself or assess the benefits of reducing climate change risks through mitigation.
Unsurprisingly, the Report has received a great deal of attention and criticism; in particular, in relation to its reliance on carbon capture and storage as a viable technology and because of the fact that it did not take in account the current global financial crisis (or indeed any short term economic fluctuations).
The modelling in the Report is based on five alternative scenarios; a business as usual scenario (Reference Scenario); two scenarios arising out of the Garnaut Climate Change Review whereby the national emission targets are based on the per capita allocation approach developed by the Review (Garnaut Scenarios); and two scenarios examining the costs associated with the CPRS (CPRS Scenarios).
The Garnaut Scenarios are based on the assumption that an emissions trading scheme covering all emissions sources commences in 2013 which allows full international trade in permits. The Garnaut Scenarios also assume unified international action from 2013. On that basis, there is no shielding of emission-intensive trade-exposed (EITE) sectors because emissions trading is assumed to commence in all countries at that time. The Garnaut Scenarios do not include any other mitigation policies (such as a renewable energy target (RET)) as these are assumed to have ceased with the commencement of the trading scheme.
In contrast, the CPRS Scenarios are broadly based on the Carbon Pollution Reduction Scheme Green Paper, which assumes:
- an unlimited banking of permits;
- that agriculture is not covered by the CPRS until 2015;
- a shielding of EITE through the allocation of free permits until 2020;
- fuel excise changes to offset the impact of the CPRS on transport fuels; and
- contained international trading of permits until 2020.
The CPRS Scenarios also take place against the background of a multi-staged international approach to an emissions trading scheme in which developed countries set targets and participate in international emissions trading from 2010. Developing countries gradually join the scheme with full international coverage from 2025. These scenarios also assume a RET of 45,000 GWh per year by 2020.
The Garnaut and the CPRS Scenarios (together referred to in this paper as the Alternative Scenarios) are further divided in the following ways:
- Garnaut -10 – assumes that Australia's emission reduction targets are 10% below 2000 levels by 2020 and 80% below by 2050 for stabilisation at 550 ppm;
- Garnaut -25 – assumes that Australia's emission reduction targets are 25% below 2000 levels by 2020 and 90% below by 2050 for stabilisation at 450 ppm;
- CPRS -5 – assumes that Australia's emission reduction targets are 5% below 2000 levels by 2020 and 60% below by 2050 for stabilisation at 550 ppm; and
- CPRS -15 - assumes that Australia's emission reduction targets are 15% below 2000 levels by 2020 and 60% below by 2050 for stabilisation at 510 ppm.
To put these figures in context, the concentration of greenhouse gases in the atmosphere was approximately 280 ppm before the Industrial Revolution and currently sits at 430 ppm. Without mitigation policies, these levels are expected to rise to 1,560 ppm by 2100.
General economic impacts
In summary, the Report finds that there are advantages to Australia taking early mitigation action, in particular, in lower long-term costs, if emissions pricing expands gradually across the world. The Report concludes that delaying mitigation action will increase climate change risks, lock in more emission-intensive industry and infrastructure and defer cost reductions in low emissions technologies. Therefore, when carbon constraints are eventually introduced, economies that delay taking action face greater costs, because greater emission reductions are required in a shorter time to achieve the same environmental outcome and global investment is redirected to early movers.
In particular, the modelling found that:
- From 2010 to 2050, real GNP per capita grows at an average annual rate of 1.1% in the Alternative Scenarios, compared to 1.2% in the Reference Scenario;
- By 2020, real GNP per capita is around 9% above current levels, compared to 11% in the Reference Scenario;
- By 2020, real GNP per capita is around 55-57% above current levels, compared to 66% in the Reference Scenario;
- Emissions pricing produces a one-off rise in the consumer price index (CPI) of 1-1.5% for emission prices in the CPRS Scenarios, with minimal implications for ongoing inflation;
- Stabilisation at 550 ppm requires an initial starting price of A$23/tCO2-e;
- The starting price is 40% higher for a stabilisation at 510ppm and 110% higher for a stabilisation at 450ppm.
According to the Report, pricing emissions drives a structural shift in the economy from emission-intensive goods, technologies and processes toward low-emission ones. As a result, growth will slow for such sectors as coal, gas, iron and steel and livestock, while low and negative-emission sectors such as forestry and renewable energy accelerates.
The modelling assumes that carbon capture and storage is a viable technology and, on that basis, Australia's coal output grows relative to current levels. However, if this technology is not viable, the Report concedes that coal output will fall from current levels.
The CPRS Scenarios explore the risk of carbon leakage and cost of shielding of EITEs because of the assumption that carbon constraints will occur in Australia earlier than in other regions. The Report concludes that, even where the shielding proposed under the CPRS is removed, emissions and output from EITEs in non-participating regions do not increase. This seems to suggest that emission prices in these scenarios are not high enough to induce significant industry relocation. The Report states that noticeable impacts only occur at much higher emission prices – roughly double the price of the CPRS -5 Scenario.
All Alternative Scenarios may lead to the early retirement of some conventional fossil fuel (coal-fired) plants and stimulate the construction of substantial new generating capacity. By 2050, renewable energy sources account for at least 40% of electricity generation across all scenarios, compared to just 5% in the Reference Scenario.
The Report finds that emission pricing will have the greatest impact on emission-intensive goods, such as electricity, gas and other household fuels with an increase in electricity prices of 17-24% and in gas prices of 11-15%. The Report confirms the Government's previous commitment to assist households adjust to the CPRS by increasing benefit payments and other assistance to low- and middle-income households through the tax and payment system and to offset the impact on emission-intensive petroleum fuel products through cuts in fuel taxes.
In summary, the Report concludes that early mitigation could ensure economic development supports prospects for long-term growth and allows individuals and businesses to plan their adjustment pathways and better manage changes in skills acquisition and capital stocks.
In related news, Climate Change Minister, Penny Wong, has announced that the Rudd Government's CPRS White Paper will be released on 15 December 2008 together with the Government's medium term emissions target range. However, the much anticipated exposure draft of the legislation will now not be released until early 2009.
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