Economic effects

Economic effects

It is difficult to be specific about the economic effects of climate change, including on gross domestic product (GDP), because no one really knows what they will be. There have been attempts to model the effects, but the results differ depending on the assumptions the models are built on. This is particularly true at the country and regional level.

It has been argued that Australia will be particularly affected by climate change. This follows because the economy is relatively energy-intensive, and energy-intensive industries will locate where energy is relatively low-cost. Measures to reduce emissions could therefore have a particularly large effect on the economy.

The effects will also depend on the policies that Australia adopts, in particular, whether Australia adopts unilateral measures or participates in a comprehensive global emissions reduction scheme. Unlike international trade in goods and services where it can make sense for Australia to liberalise its trade barriers unilaterally, unilateral action by Australia to reduce emissions may not be the best option. Unilateral measures could see a contraction of energy-intensive industries or their movement offshore or a combination of both. On the other hand, new less carbon-intensive industries could develop with potential for exports. Participation in a global scheme would reduce the potential for damage to the economy because the incentive for industries to move elsewhere would be smaller than under a unilateral approach—although the incentive for industries to move to non-participating countries would remain. A global system of emissions trading which includes, for example, the OECD countries would reduce the problems associated with 'free riding' behaviour whereby one country or group of countries adopts emission trading but other major emitters do not.

It has been proposed that one way of dealing with free-rider problems would be to impose tariffs on imports from non-participating countries. There are several objections to this. Perhaps the main objection is that this would be tantamount to protection by the back door and the policies of the major Australian political parties have been to reduce protection.

The role of markets
Markets will play an important role in reducing emissions, irrespective of whether Australia's approach is unilateral or multilateral, and whether the mechanism used to reduce emissions is a carbon tax or an emissions trading scheme. As the prices of carbon-intensive goods and services rise relative to those of other goods, there will be two major effects. The first will be to reduce the consumption of these goods and services and substitute them with less energy-intensive goods and services. For example, consumers might respond to a rise in the price of petrol by buying more fuel-efficient cars—as has happened in the past.

The second effect is to create incentives for producers to find ways to produce less carbon-intensive goods and services and to undertake research and development of new technologies. Within this framework, businesses will choose the least-cost options to reduce emissions—whether geothermal or coal with carbon capture, etc. Inevitably, there will be successes and failures. A risk is that governments will be tempted to 'pick winners', that is, favour particular technologies. For example, mandating targets for the production of electricity from renewable resources is a form of 'protection' for industries such as wind power. But it is uncertain how important wind power will be in the long-term reduction of emissions. It is possible that the capital used in wind power might be better used in, say, developing geothermal energy sources. This highlights the need for on-going assessments of the costs and benefits of such policies.

Costs and benefits
The Productivity Commission in its submission to the Prime Ministerial Task Group on Emissions Trading in March 2007 noted there is uncertainty about the economic effects of climate change, particularly:

  • the costs and benefits of business-as-usual emissions
  • the benefits (in avoided damage costs) of abatement action
  • the costs and benefits of adaptation and
  • the nature and likelihood of future technological change (for both abatement and adaptation).
Ultimately, Australia's mitigation costs will be influenced by the extent of Australia's contribution to the global target and the policy measures implemented.

These uncertainties highlight the need to assess the costs and benefits of alternative proposals.

The Climate Institute, in its September 2007 report Investment lifecycle impact project—climate change policy, researched the effect of two climate policy scenarios—delayed and early action—on long term savings and superannuation. The report examines the implications for both the holders of superannuation funds and the superannuation trustees.

The US Government Accountability Office (GAO), in the context of reducing greenhouse gas emissions by emissions regulation, was asked to obtain expert opinion on policy options to address climate change in the United States. The May 2008 report, Climate change—expert opinion on the economics of policy options to address climate change, found that a market-based mechanism to establish a price on greenhouse gas emissions, coupled with government investment in research and development of new low-emissions technologies, was the preferred policy option. The most important factors identified by the panel of experts were cost effectiveness and political feasibility.

However, it is also important to note that while mitigation has some costs, there are also substantial costs associated with inaction.

Further reading:

H Ahammad, A Matysek, BS Fisher, R Curtotti, A Gurney, G Jakeman, E Heyhoe and D Gunasekera, Economic impact of climate change policy: the role of technology and economic instruments, abare research report 06.7, Australian Bureau of Agricultural and Resource Economics (ABARE), Canberra, July 2006

Australian Greenhouse Office (AGO), Economic issues relevant to costing climate change impacts, Commonwealth of Australia, Canberra, 2004.

O Deschenes and M Greenstone, The economic impacts of climate change: evidence from agricultural profits and random fluctuations in weather, Massachusetts Institute of Technology Department of Economics Research Paper no. 04-26, 1 July 2004.

E Niermi, An overview of potential economic costs to Washington of a business-as-usual approach to climate change, Program on Climate Economics, Climate Leadership Initiative, Institute for a Sustainable Environment, University of Oregon, 17 February 2009.

R Roson, Modelling the economic impact of climate change, EEE working paper series no. 9, July 2003.

RSJ Tol, The economic impact of climate change, ESRI working paper no. 255, September 2008.



11 September, 2009

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