|
|
|
 |
|
|
Targets and proposals |
% change from 1990 |
% change from 1990 per capita |
per capita emissions (tonnes of CO2e) |
|
Australia |
-3 to -24 |
-30 to -45 |
15 to 12 |
|
European Union |
-20 to -30 |
-25 to -34 |
8 to 7 |
|
United Kingdom |
-34 |
-42 |
7 |
|
US (2009 budget proposal) |
-1 |
-27 |
11 |
|
US (Waxman bill[44]) |
-4 |
-29 |
11 |
|
Canada (Government target) |
+24 |
-8 |
12 |
|
Canada (House bill C-311[45]) |
-25 |
-44 |
7 |
|
Germany |
-40 |
-41 |
9 |
|
Netherlands |
-30 |
-39 |
8 |
|
Norway |
-30 |
-43 |
4 |
|
Switzerland |
-20 to -30 |
-32 to -40 |
4 |
Sources: Secretariat calculations based on White Paper, p 3-3; Garnaut Report, p 177; Department of Climate Change Fact Sheet – Emissions, target and global goal; 'Economic cost as an indicator for comparable effort'; 'A new era of responsibility: renewing America's promise' (US 2009 Budget), p 21; UK Budget 2009: Building a low-carbon economy- implementing the Climate Change Act 2008. Per capita percentage changes are calculated from the previous column based on population projections in United Nations, World Population Prospects and then the numbers in the final column calculated by applying these per capita percentage changes to 1990 per capita emissions (including land use change and forestry) from the United Nations Framework Convention on Climate Change; http://esa.un.org/unpp.
2.48 As discussed above, the scientific evidence suggests that the global concentration of greenhouse gases needs to be kept to 450 ppm to avoid the dire consequences following from increases in average temperatures of over two degrees. The majority of submitters argued that Australia should therefore make an offer consistent with its fair share of a global effort to the world stabilising concentrations at 450 ppm. As Professor Garnaut says:
...to make an unrealistically low offer in the international negotiations is to negate the prime purpose of our own mitigation, which is to facilitate the emergence of an effective agreement.[46]
2.49 Australia currently has per capita emissions well above the global average and many submissions regard it as neither fair nor realistic to expect the world to accept this remaining the case forever.
2.50 The Garnaut Review assumes the world agrees to eliminate these differences in per capita emissions (or emissions entitlements) gradually over the period to 2050 (in a process know as 'contract and converge'). Under this arrangement, Professor Garnaut's calculation is that Australia's contribution would be about a 25 per cent reduction in emissions from 1990 levels.[47] This calculation was not challenged by any witness or submission.
2.51 This conditional target is still Professor Garnaut's preferred position:
...the ETS...would be substantially better than nothing if the upper limit to emissions reductions were raised to 25 per cent of 2000 levels by 2020 on condition that other countries had made commitments that added up to an agreement to hold and to reduce greenhouse gas concentrations in the atmosphere to 450 parts per million.[48]
2.52 Whether there would be global agreement to this timetable for convergence has been questioned:
I think the fairest way to do it would be along a contraction and convergence scenario where you converge at around 2030. I think 2050 is the sort of thing that the developing world is not going to accept.[49]
So contraction and convergence models as proposed internationally for well over a decade and most recently by Professor Garnaut’s review are going to be a key part of the debate. One of the issues, of course, is: when does convergence happen? When is a fair time at which we all arrive at some global per capita level of emissions? If you look at it as an entitlement issue with trading between larger emitters and lower emitters in the early stages, there is nothing to stop that happening in a very early phase. You do not need to wait until 2050 to do that, and we may see increasing global pressure for that to occur.[50]
2.53 Professor Garnaut's approach was endorsed by other witnesses:
Everybody has to be in the boat, as Garnaut has said. But you cannot get people into the boat in our judgement unless...you have as your objective an equitable per capita policy that over time delivers some kind of social equity in terms of per capita emissions. If not, you are in effect saying to people in India and elsewhere, ‘Your job is to ride your bike and cook on cow dung for another 50 years while we enjoy getting around in the big cars.’ We just think that is unsustainable.[51]
2.54 The logic of limiting the Australian offer to a maximum reduction of 15 per cent, as proposed in the White Paper, had been questioned by a number of witnesses, many of whom argued for the 25 per cent target the Government subsequently adopted:
...we think it is absolutely critical that Australia puts on the table at least a 25 per cent target in the upper end of its range as part of a global effort so it signals that it is actually willing to play its fair share in an effective global agreement.[52]
...it is terrific that the 25 per cent target is on the table—it means that Australia need not now go into negotiations as something of a wrecker...[53]
The main problem with the CPRS is that the targets bear no relationship to the problem that is trying to be solved...the selection of targets in the CPRS is entirely disconnected from the scientific problem of reducing greenhouse gas emissions.[54]
If you look at the ways some of the other countries such as China and India are positioning themselves, if we are taking a half-arsed approach in Australia it is going to make a global agreement that much harder.[55]
...the stronger target of 25 per cent does move Australia into an international climate position that is reasonable to negotiate a successful outcome for an agreement for 450 ppm or less at the critical negotiations in Copenhagen later this year.[56]
I think the biggest single problem with the CPRS as announced is that that conditional agreement—the amount we say we will do if everybody else joins in—is much below what we need to stabilise the climate. The Garnaut estimate of a 25 per cent reduction by 2020, I think, was at the very low end of the reduction that is needed.[57]
2.55 The view of some eminent scientists is that more ambitious targets are required, in some cases because they interpret the latest scientific results as indicating that 450 ppm poses unacceptable risks:
The best estimate for the level of global emission reductions is between 50 and 85 per cent global emission reductions based on the IPCC assessments by 2050 and an equal per capita approach globally would suggest 90 per cent to 97 per cent emissions reductions for Australia by 2050...if you want to achieve a 450 parts per million CO2 stabilisation target. At 450 parts per million we still have a 50 per cent risk of exceeding two degrees of warming...In 2020 emission reductions for developed countries should be between 25 per cent and 40 per cent.[58]
If you aim for a target of 450 parts per million, as we said in our submission that would require at least a 25 per cent 2020 target for Australia.[59]
...there seems to be a disjunct in what has been put forward in the Government’s White Paper. The Government emphasised in its White Paper that it would like to pursue a 450 parts per million CO2-e outcome and it has put forward an emissions target range that seems to be inconsistent with achieving that ppm outcome. If the Government wants to achieve a 450 part million CO2 outcome, the bare minimum to which Australia can commit is at least 30 per cent.[60]
2.56 These considerations led some environmentalists to regard even the 25 per cent offer as inadequate:
If such a strong agreement were met then we think that Australia’s contribution should be significantly higher than 25 per cent, probably in the order of 50 per cent reductions by 2020 if the global deal resulted in the conditions that have been stipulated by the government being met for a 25 per cent reduction.[61]
...we really need domestic reduction targets of closer to 40 to 50 per cent by 2020 if we are going to make the contribution that is needed to meet that level of ambition that the climate science is saying we need.[62]
The vision of young people is that they will be able to live in a climate that is somewhat similar to the one their parents and their grandparents lived in. The current targets...will not ensure this...Even at the upper range of the government’s target, at 25 per cent, there is a 50 per cent chance of the temperature increase going above two degrees and having significantly adverse consequences for Australia.[63]
2.57 A study by McKinseys consultants concludes that a 30 per cent target would be easily affordable for Australia:
A significant reduction in Australian GHG emissions is achievable—30 percent below 1990 levels by 2020 and 60 percent by 2030 without major technological breakthroughs or lifestyle changes. These reductions can be achieved using existing approaches and by deploying mature or rapidly developing technologies to improve the carbon efficiency of our economy. They require significant changes to the way we operate in key sectors, for example, changes in our power mix, but can be achieved without major impact on consumption patterns or quality of life. Reducing emissions is affordable—with an average annual gross cost of approximately A$290 per household to reduce emissions in 2020 to 30 percent below 1990 levels. This compares to an expected increase in annual household income of over A$20,000 in the same time period.[64]
2.58 Reverend Costello and Dr Pearman questioned the Government's (previous) conditional target on ethical grounds:
It is not fair because the targets do not represent Australia taking its fair share of the burden, let alone taking leadership on the issue.[65]
We are a relatively wealthy country and we cannot sit back and expect all countries to take an equal share in this. All of that together says to me that we should have a 30 per cent reduction by 2020.[66]
2.59 As noted above, while Australia 'only' emits 1½ per cent of global emissions, it is one of the world's highest per capita emitters. Furthermore, these calculations only include emissions in Australia. If Australia were regarded as 'responsible' for the emissions when our exports are used, on the grounds that we are benefiting from these emissions, Australia would be regarded as an even higher emitter. World Vision Australia provided an example of these calculations to bolster the case for Australia adopting a stricter target:
With respect to our coal exports alone, we exported 252 million tonnes of coal last year, and from that you get approximately 740 million tonnes of CO2. If that was a country by itself, its emissions would rank higher than Canada’s and slightly below Germany’s. If you add that to our domestic emissions, we would rank slightly below India in terms of our contribution to the problem.[67]
2.60 On the other hand, there were some witnesses who regarded even the unconditional 5 per cent reduction as a tough target:
We do not believe that negative five is a small ask. It is a big ask for Australian industry. It will require us to reduce emissions by around 20 per cent on what they otherwise would have been by 2020. So it is not an insignificant ask and it will have consequences.[68]
...the minus five per cent target, which represents a 25 per cent reduction in emissions relative to expected trends and a 34 per cent reduction relative to per capita emissions, is some three to four times stronger than those proposed by other, wealthier countries such as the USA and countries of the EU, as measured by an impact on gross national product. AIGN advocates that Australians shoulder a fair share of the global burden—no more and no less.[69]
2.61 There were industry witnesses who feared for the future if this target is pursued – or at least pursued under the CPRS as currently formulated (see Chapter 4):
...there will be less production, less exports and less regional employment from both of our [meat and dairy] industries,...[70]
I am absolutely sure that we will see [cement] plants progressively shutting down prematurely in Australia.[71]
The most immediate and significant impact of increasing the costs and risks of developing LNG [liquefied natural gas] in Australia is that it will threaten the industry's competitiveness...[72]
Under the current scheme half of Rio Tinto’s open-cut coal mines would be likely to close by around 2020.[73]
2.62 Some industry witnesses pointed out that they had already made significant investments to reduce emissions and that further reductions in emissions intensity were limited by the laws of physics:
In integrated steel works such as Whyalla or Port Kembla, direct emissions from the use of carbon as a chemical reductant comprise about 80 per cent of emissions...Both companies’ Australian blast furnaces are efficient by world standards in their reducing agent consumption. Energy costs such as coal have always been a focus of the industry and significant work has been ongoing to reduce these costs over a long period of time. There is very little ability to further reduce these direct emissions without a breakthrough in technology.[74]
...since 1990, per tonne of product, we have seen a reduction of 25 per cent of CO2...The reason for that reduction is primarily through large technological change.[75]
If you look at the aluminium industry overall over the last 50 years we have reduced direct CO2 emissions by 50 per cent without a carbon price...[but] in terms of process gains, efficiency gains and business gains we have reached a plateau.[76]
ALOA’s members have been active in reducing greenhouse gas emissions from their operations over the last two decades. In fact, the waste sector is the only sector under the CPRS that has actually recorded reductions in greenhouse gases in this period. Since 1990, the sector has reduced its overall emissions by 12.6 per cent.[77]
...60 per cent of lime’s emissions are in fact through the use of the raw material limestone and do not come from an energy basis...as such, there is no real opportunity for the lime industry to address that 60 per cent emissions base.[78]
2.63 The Department of Climate Change's special envoy agreed with the following characterisation of the argument for the targets in the White Paper:
...we have got to make up for the fact that at the Kyoto agreement we were allowed an increase. Some people argue that, therefore, we have not done our fair share and we need a stronger target. But, in fact, that makes our trajectory harder to turn around and that is part of the justification for our target.[79]
2.64 Some have questioned whether Australia's actions will make a difference to international agreements:
With only one per cent of world GDP, we are neither prominent among world nations nor particularly influential within world councils. And while Australia has many well-qualified scientists, few of these are considered to be world authorities on climate change. Accordingly, it is pure hubris for Australia to attempt to take the lead in abatement activity.[80]
2.65 Professor Garnaut, a former ambassador to China, commented:
That position is ignorant of the realities of Australian diplomacy. I know from my work on the review that views developed in Australia are very much respected in some of the developing countries that are going to be very important for the outcome. I have had lengthy discussions at ministerial level in Indonesia that confirm that. The Indonesian government sees Australia as a partner in its efforts to do something about climate change...In China we have access with ideas and we can play a very important role in helping to define a global regime that helps solve the problem and secures our interests in the process. I know from close interaction with those three countries, for a start, that what we say, so long as it is consistent with what we do, can have a significant influence on the outcome.[81]
2.66 Mr Don Henry, Executive Director of the Australian Conservation Foundation, believes that Australia can be influential:
Australia can be influential in encouraging key nations, such as China and the US—and, in our region, Indonesia and India—to strive for a strong global outcome at Copenhagen...[82]
2.67 He gave as an example of past influence:
Australia played a very strong and very positive role in getting a global agreement for the reduction of ozone depleting substances.[83]
2.68 Other witnesses argued that Australia should at least try to exert influence, and setting a good example was an important means of doing so:
It is hard to see a scenario where Australia helps to achieve a strong global deal by offering to do very little in Australia.[84]
...while we are not a superpower, we are an influential player in climate change negotiations. Since the EU negotiates as one block, there is only the EU, the US, Japan, Canada and Australia—they are the five significant developed countries in this.[85]
2.69 There is also an ethical dimension, articulated by environmental philosopher Professor Albrecht, and supported by other witnesses:
...Australia’s obligation as a relatively rich, very wealthy, industrialised and well educated country is to take the lead on greenhouse gas reductions and to set standards that will deliver a safe and predictable world to future generations...we in Australia are privileged by virtue of the wealth that we have generated through our natural resources...That is precisely the kind of society that has to provide leadership to the rest of the world on all of these major globally significant issues...[86]
...there is a strong economic and ethical argument for richer countries such as Australia, the USA and the European Union to take the lead on reduction commitments.[87]
2.70 Reverend Costello views it as not just a matter of international justice but inter‑generational justice:
Our generation, which has been the highest spending, worst saving generation in human history...has had the benefit of not pricing the carbon. For our generation to actually be locked in the counsel of despair, I have to say, as an Australian, is a failure of leadership.[88]
2.71 In the event of no agreement being reached at Copenhagen, as noted above, the Government has said that Australia's target would be a 5 per cent reduction from 2000 emissions by 2020.
2.72 One view is that the Australian unconditional target should be the same as the conditional offer.
If doing something is the right thing to do, it remains the right thing to do whether or not others are doing it too.[89]
2.73 Professor John Quiggin of the University of Queensland said:
... if the rest of the world does not do anything, we are in grave straits. The question is really a political one. We have to make an offer that is sufficient to be in earnest and good faith but sufficiently short of what we are going to do in an agreement. We are indicating the weight we place on an international agreement. That is to some extent a tactical question.[90]
2.74 As Australia is only directly responsible for around 1½ per cent of global greenhouse emissions, if its actions have absolutely no influence on the rest of the world, the impact will be correspondingly moderate.
2.75 It is sometimes claimed that Australian actions in these circumstances would have no impact. A number of witnesses believe this is an exaggeration:
Australia’s emissions are at least 1.4 to 1.5 per cent of the global emissions as well, which may sound insignificant, but when you are dealing with a non-linear system, every bit matters. It is simply not the case that a relatively small amount of emissions necessarily has no effect on the climate. That can push us over the limit and over thresholds.[91]
... a 20 per cent cut in Australian emissions by 2020 will cut projected global emissions by 0.2 per cent.[92]
To a certain extent, the response of the climate system will be proportional to the emissions and over small ranges. If the emissions turn out to be 1½ per cent smaller than they would be otherwise because Australia reduced its emissions, say, to zero, that would have a significant effect on the climate. I do not like people saying that there will not be any effect. There will be an effect.[93]
2.76 One witness noted that if every country with smaller emissions than Australia also took the attitude that it was not worth acting, this would represent about a third of global emissions that continue to grow.[94]
2.77 Another argument is that a failure at Copenhagen does not end the process. Environmentalists argued that it remains important for Australia to set an example.
I think that Australia should lead because as an energy intensive nation we have a good opportunity to show that a country can become smarter and more efficient and retain its prosperity by using new energy sources.[95]
2.78 There have been claims that in the absence of a comprehensive global agreement at Copenhagen that Australia will be acting alone. However, most witnesses acknowledged this was not the case:
We recognise that Australia is not alone in proposing to take action to address climate change...[96]
We are not acting alone. The developed world is moving on this issue. The United States is now taking steps to introduce emission trading schemes. Japan and New Zealand are doing so and Europe already has one.[97]
...my view is that other countries over time will come on board, establishing various different ways of pricing carbon within their own economies...The trend that we have seen is that there are carbon prices out there in the world. In various places there are voluntary trading schemes, the European scheme of course, and a couple of regional schemes in the US that are proposed to start shortly.[98]
2.79 A number of witnesses pointed to advantages in Australia acting before all other (advanced) economies have agreed to act:
One obvious big benefit would be to avoid having new investments that later turn out to be inappropriate in a low carbon world.[99]
From a strategic point of view in terms of industry, it is actually about adopting the practices, growing the skill base and understanding this process that will be global in my view within less than a decade, and I think probably less than five years.[100]
If the Australian government and Australian industry embrace this as an opportunity to play our part, then Australians will benefit from the jobs and the technology that we will develop. If our national policy settings focus on resisting change, we will allow other nations to get a head start on us that we may never recover from.[101]
2.80 It is argued that there is a need to encourage industry restructuring regardless of whether most countries in the world move quickly or slowly:
I think the aluminium industry is a case in point. The question is how we develop industry restructuring to assist them to actually take advantage of Australia’s huge resources of renewable energy. One way we may fail to do that is if we offer them free trading permits to allow them to continue to emit.[102]
2.81 On this view, if Australia waits it risks a poor outcome:
...those countries that locked themselves in to a high-carbon future would be economic losers in the future—because the world will change.[103]
2.82 Another disadvantage of inaction raised was the risk of facing carbon tariffs:
The EU in the context of cement is already talking about imposing border taxes on non-compliant countries, countries which do not sign up to the general terms available to people. So I think a developed country which just says, ‘Look, we can’t do this and we won’t do it,’ is also taking a very substantial risk with its trade.[104]
2.83 Deciding an appropriate emissions target for Australia requires an assessment of the economic costs involved, which can be informed by economic modelling.
2.84 Treasury's modelling was released in October 2008, and was described by the Treasurer and Minister for Climate Change as 'one of the largest and most complex economic modelling projects ever undertaken in Australia'.[105] The work drew on a range of models with differing characteristics.[106] The key conclusions reached are:
...early global action is less expensive than later action; that a market-based approach allows robust economic growth into the future even as emissions fall; and that many of Australia’s industries will maintain or improve their competitiveness under an international agreement...[107]
2.85 The impacts on real income of differing emissions scenarios are illustrated in Chart 2.5. The key quantitative conclusion is that:
From 2010 to 2050, Australia’s real GNP per capita grows at an average annual rate of 1.1 per cent in the policy scenarios, compared to 1.2 per cent in the reference scenario.[108]
Chart 2.5: Treasury modelling
Source: Treasury (2008, p xii).
2.86 There has been criticism that the Treasury modelling does not refer to the latest specification of the CPRS. The modelling refers to the ETS envisaged in the Green Paper and so does not incorporate the changes made in the White Paper. There have since been further changes to the CPRS announced by the Government on 4 May.
2.87 Ms Meghan Quinn, who led the Treasury's modelling team, explained:
The main differences between the analysis that was undertaken in the modelling and the White Paper announcements were around the emission‑intensive trade-exposed sectors. It is the case that the arrangements in the white paper were altered such that more transition assistance was provided to emission intensive trade exposed compared with the Green Paper proposals.[109]
In general, the aggregate economic costs as a result of the changes between the Green Paper and the White Paper would not be expected to be very large at all, but there would be different distributional implications for both households and for sectors.[110]
2.88 On the specific issue of carbon leakage, the modifications to the scheme have been in the direction of reducing the imposts on large emitters, so revised modelling would presumably show smaller leakage effects.
2.89 The Treasury modelling compares the consequences of a few variants of the CPRS with 'business as usual'. It does not model some of the alternative schemes (discussed further in Chapter 3) such as a standard carbon tax, Carmody's consumption-based approach or the 'baseline-and-credit'/'intensity' approach, or indeed a purer version of cap-and-trade:
...the claim in the White Paper that the CPRS will achieve abatement at lowest possible cost...is nowhere tested or demonstrated...It is fundamentally important that the abatement measures we adopt are in fact least cost, because that will mean we can afford to do more. I would like to see some explicit modelling to test that claim—that is, to test whether it really is the least possible cost of abatement.[111]
I would love Treasury to model a consumption based approach.[112]
... the standard benchmark that economists would use to assess low cost abatement would be to simulate an emissions trading scheme with full auctioning where that auction revenue is used to lower other distorting taxes...That simulation has not been done...[113]
2.90 To some extent the models used by Treasury may not be well-suited to this task. They are able to track through the system the consequences of a price being established for carbon, but are probably indifferent to the means by which the price is set. Some modelling at the level of individual companies may be needed to tease out the differences between baseline-and-credit and cap-and-trade systems.
2.91 There has been criticism that Treasury has not modelled a 'worst case scenario' where Australia acts well in advance of competitors:
What we do not see at the moment is an analysis, if you like, of the risks to Australia of different countries not imposing their own carbon price.[114]
The Treasury did not even model what would happen if Australia acted on its own.[115]
Given the nature of the collective action problem and the historical record of slow, partial and fragmented action, it is difficult to conceive why Treasury did not model and publicly release at least one policy scenario where comprehensive and coordinated global action fails to develop in the next decade.[116]
2.92 Treasury has responded that such a scenario would be very unlikely, especially given that many countries are already implementing an ETS.[117] Furthermore, Treasury has defended the assumption by arguing that:
To assume otherwise — that is, to presume that the world’s major emitters will not act at any time to decisively reduce greenhouse gas emissions — is to presume that the world will gradually succumb to potentially catastrophic damage to the global environment...The prehistoric peoples of Easter Island took this path, and paid the price (Collapse, Jared Diamond, 2005). We would do well not to follow their lead. Another logical possibility is that majority scientific opinion is simply misguided and will turn out to be a fad. However, to invoke such a possibility as a basis for deciding on public policy seems to me extraordinarily foolhardy.[118]
2.93 Indeed, Treasury argues that their modelling already covers very pessimistic scenarios:
...it was judged that having China take on no targets until 2015, despite currently doing quite a lot in the greenhouse gas space to reduce emissions, we are being more pessimistic than current government policies out to 2015. Then from 2015, China’s emissions allocation continues to grow until 2030, which was judged to be realistic. Similarly, India does not do anything at all in the greenhouse gas space until 2020 and then its emissions allocation continues to grow until 2040. Other developing low income countries do not do anything until 2025.[119]
2.94 This progressive adoption of carbon pricing was viewed as too optimistic a programme by some witnesses:
It is going to be an extremely long time before we have a comprehensive international scheme. Firstly, the negotiations are incredibly difficult and it is extremely unlikely that countries will sign up on the sort of timetable that is assumed, for example, in the Treasury modelling assumptions.[120]
2.95 Treasury has also been criticised for not redoing the modelling to use a baseline incorporating the impact of the global financial crisis. Ms Quinn explained that they had not been asked by the Government to do such modelling:
We have not been asked to examine in detail the implications of the GFC [Global Financial Crisis] through the suite of economic models that we used for the report.[121]
2.96 Moreover, Treasury felt that revising the modelling in the light of the crisis would not substantially change the results:
...the long-term economic consequences for Australia of placing a price on emissions is largely unaffected by cyclical variations in output.[122]
...we do not believe that short-term cyclical influences on the Australian or global economy necessarily have a significant implication for the medium- and long-term impacts of emissions pricing on the Australian economy. That still stands true.[123]
2.97 Professor Garnaut provided some support to this view:
...the global financial crisis and recession does not materially affect the costs of mitigation...[124]
2.98 The deterioration in economic prospects is illustrated by Chart 2.6. This shows the growth of global real GDP since 1950 (the upper line) and two forecasts—the current International Monetary Fund projections and that made a year ago.[125] (The lower line in the chart shows the path of global CO2 emissions; the lines diverge when the mid-1970s oil crisis led to increased interest in energy efficiency.)
Chart 2.6: World real GDP and CO2 emissions
Sources: Chart generated by Secretariat based on data from IMF, World Economic Outlook; A Maddison, The World Economy: Historical Statistics, OECD, 2003; World Resources Institute, CAIT database.
2.99 The Treasury modelling has been criticised for applying a full employment closure rule in the long run. This implies that the lack of impact on unemployment of introducing an ETS is an assumption rather than a result of the modelling.
2.100 Mr David Pearce of the Centre for International Economics, who has reviewed the Treasury modelling, was not critical of this for the long-term analysis:
I think it is an appropriate closure in the long run, and these particular models are good at long-run analysis...[126]
2.101 Ms Quinn, who led the Treasury modelling team, explained that they used three models, one of which has the labour market adjusting rapidly and two of which have a more gradual adjustment. Models assuming a rapid adjustment in employment reflect a slowing in output in lower real wage growth rather than a rise in unemployment.[127]
2.102 The Treasury modelling focuses on the long-run consequences; on the position of the economy once it has settled down into a new, lower-emission, equilibrium. It has less to say about the impact during the adjustment phase:
The economic modelling solves each year of the scenario, so there are results for 2010, 2011, 2012 and 2013...Chapter 2 of the report outlines some of the limitations of the economic models that we have available to us. They do not necessarily capture all the transition elements and in some cases they are too fast in terms of their adjustment. They are typically, in our judgement, better for looking at after the first few years...What is important to look at for these economic models for these types of questions are averages and time frames.[128]
2.103 Mrs Heather Ridout of the Australian Industry Group emphasised to the committee that more attention should be paid to the difficulties of transition:
... some people think that we will get in the Tardis booth in 2010 and get out in 2020 and everything will be hunky-dory... The Treasury’s modelling acknowledged that they could not fully capture those transition costs...I go back to what I said after the Treasury modelling came out: it is not easy to capture the transition costs and we are not in a Dr Who Tardis box.[129]
2.104 This aspect of the modelling was criticised by Dr Brian Fisher, director of Concept Economics:
...you can see that there are no transaction costs and there are no transition costs represented in that modelling...It simply is not realistic.[130]
2.105 Dr Fisher is therefore critical of the modest costs of introducing a carbon price in the Treasury modelling:
...that is what every piece of modelling will say to you if you do it in this particular way, that does not pick up the costs of taking people in regional Australia, getting them better jobs, putting them someplace else, retraining them and dealing with the fact that our energy intensive emissions associated with the aluminium industry, the alumina refining industry and so on effectively are no longer competitive in the world.[131]
2.106 Mr Pearce commented:
The transitional analysis is not easy to do. The frameworks that we use generally take a long-term perspective, but it can be addressed. It is important to do so and to walk in with our eyes open about what the transitional consequences are. The fact that there are transitional costs is not a reason not to proceed with the policy, because mitigation has costs but those costs will hopefully be offset by benefits in the future.[132]
2.107 The Treasury modellers presented results disaggregated by state and by industry. There was a call that Treasury should have done modelling at a finer degree of disaggregation:
We had hoped the Treasury modelling exercise might have addressed the impact of higher energy prices on a sectoral, firm or regional level.[133]
We were hoping for some more detail in that information regarding the impact on particular industry segments across each of the states and so on.[134]
I believe there needs to be more extensive modelling so that we can assess the effects of an ETS scheme...I think drilling down into the detail is a component that I see missing so far...[135]
2.108 Frontier Economics prepared a report for the NSW Government, which contained results at a regional level. Unfortunately the NSW Government has not publicly released this report, although it has been discussed in the media.
2.109 Ms Quinn doubted whether modelling at a regional level would be sufficiently robust to aid in analysis of the CPRS:
...we did not use the regional component of the MMRF [Monash Multi Regional Forecasting] model in the Treasury modelling because we did not think it was robust enough. The results coming out of it were nonsensical... Unfortunately the data sets available make it very difficult to do robust analysis at a quantitative level for regional economies.[136]
2.110 Questions were also asked about reconciling Treasury's modelling results with claims of imminent job losses by individual companies. Ms Quinn responded:
Our economic modelling does suggest resources will move between sectors. You have had people say that they will be adversely affected and you have had people say that they will benefit from this scheme. What happens is that there is a shift between industries and that means a movement of capital and labour between industries in response to relative price.[137]
2.111 Treasury have been criticised for not making more detailed results public and having their modelling subject to the kind of 'peer review' that would apply to an academic paper published in a leading journal.
2.112 Mr Pearce cast a critical eye over Treasury's work. He said:
I agree that those models themselves are sound. However, I believe in any modelling analysis it is very important to do a lot of sensitivity analysis to understand the importance of particular parameter choices within those models. That is one of the things that has not been done yet.[138]
2.113 A useful check on Treasury's use of the models was that Frontier Economics, as part of their regional analysis, replicated some of the Treasury modelling:
The modelling results that we produced on one scenario—the one that has been reported most widely—is in fact the same modelling result, as far as we can tell, as that produced by the Treasury.[139]
2.114 The Senate Select Committee on Fuel and Energy commissioned a review from Concept Economics of the Treasury modelling. The author, Dr Brian Fisher, questioned some assumptions in the modelling which he thought 'likely to result in the Treasury modelling seriously underestimating the economy-wide and sectoral challenges associated with particular emissions reductions targets'.[140]
2.115 The Select Committee on Fuel and Energy sought unrestricted access to all the model codes and databases used in the Treasury modelling but it was not provided. The Government referred to the extensive documentation that had been made publicly available and claimed contractual arrangements with external consultants limited the additional information that could be provided.[141]
2.116 Agricultural emissions are not included in the CPRS, at least in the initial years of its operations. However, this does not mean that the rural sector is unaffected. Farmers will face higher prices for electricity. They may also face lower prices for the animals and products they sell to food manufacturers as the manufacturers try to 'pass back' some of the additional cost they face in having to buy permits.
2.117 The committee heard claims that these impacts have not been properly addressed by the Treasury and Australian Bureau of Agricultural and Resource Economics (ABARE) modelling:
As to most of the general equilibrium models that operate at the moment...they do not have the linkage back in terms of cost.[142]
CHAIR—But none of the modelling that I have read through seems to take into account the impact on farm of the CPRS on the processing sector of agriculture... Mr Keogh—No, and the difficulty is that you cannot do that modelling until you know with some degree of certainty what proportion of the processing sector exceeds the 25 kilotonne threshold and therefore is required to pay a price for their emissions.[143]
2.118 Ms Quinn believed these effects were adequately reflected in the modelling:
My understanding is that this analysis is quite comprehensive and...looks at the implications of, and has much more detail on, disaggregating the meat processing and dairy processing from the input side, so that you can get a feel for what is going to happen through the process chain in agriculture.[144]
Can I clarify that the computational general equilibrium models used do link together agriculture and processing industries back and forward, just as occurs in the economy.[145]
2.119 There were more general requests for more detailed modelling of the effects on the farm sector:
The government has done no sectoral modelling around agriculture, other than the broad general equilibrium model.[146]
Recommendation 1
2.120 The committee notes that the Treasury modelling was conducted in economic circumstances that were markedly different to those in which the legislation is proposed to now be introduced. Since the modelling was conducted the global financial crisis has led to a marked deterioration in the short-term economic outlook.
Whilst the CPRS package has been revised on two occasions, the modelling continues to fail to take into account the impact of these changed economic circumstances. The committee considers the modelling undertaken by Treasury to be inadequate and recommends that the Government direct Treasury to undertake further modelling. The further modelling should:
consider in detail the short-term adjustment costs;
respond to criticisms made of Treasury's initial modelling including:
taking into account the deterioration of the Australian economy
the likely effect of the CPRS upon jobs and upon the environment
the absence of any modelling of the impact of the CPRS on regional Australia; and
model other types of schemes that have been proposed as alternatives to CPRS, including:
a conventional baseline-and-credit scheme
an intensity model
a carbon tax
a consumption-based carbon tax, and
the McKibbin hybrid approach.
2.121 The Garnaut Review modelling was broader than the Treasury modelling, as it also considered some of the costs of not addressing climate change. In particular it covered impacts on primary production, human health, infrastructure, tropical cyclones and international trade.[147] By 2100 real GNP, GDP, consumption and wages are 6-10 per cent lower than they otherwise would be as a result of climate change and the impact is continuing to grow.[148] Adding in the increased risk of absolutely catastrophic outcomes, and the non-market impacts, would raise these estimates considerably. Garnaut notes that other modelling has shown that costs in the 22nd century will be dramatically higher—perhaps approaching 70 per cent of global GDP by 2300.[149]
2.122 Concerning the costs of restricting emissions, the Garnaut modelling closely agrees with the results of the Treasury modelling, about a 0.1 per cent a year reduction in economic growth.
2.123 The net costs of mitigation become negative by 2060 (i.e. GDP growth is stronger with mitigation than under business‑as‑usual). Agriculture is the big winner (as crops are more sensitive to temperature than manufacturing) but by the latter half of the century mining also is doing better.
2.124 The modelling also throws some light on the difference between aiming to stabilise at 450 and 550 ppm. The more ambitious target costs an extra 0.7–0.9 per cent of GDP (in net present value terms). Given the environmental benefits and the insurance value of reducing the risk of catastrophic impacts, Garnaut:
...judges that it is worth paying less than an additional 1 per cent of GNP as a premium in order to achieve a 450 result.[150]
2.125 Garnaut's conclusion is that:
The costs of well-designed mitigation, substantial as they are, would not end economic growth in Australia, its developing country neighbours, or the global economy. Unmitigated climate change probably would.[151]
2.126 He also comments that modelling of large changes to the structure of the economy is likely to overstate the costs of these changes:
Experience shows that once consumers and producers have accepted the inevitability of change, and face predictable incentive structures, they will alter their behaviour to account for the new conditions more efficiently and effectively than previously predicted. This experience suggests that economic models are more likely to underestimate the benefits or overestimate the costs of changes in economic conditions, so long as the change is to stable institutional arrangements and predictable incentives. This bias may be further exacerbated by lack of data about the full costs of climate change impacts and a corresponding downward bias in the estimated benefits of avoided climate change.[152]
2.127 ABARE referred to their recent modelling:
...we had a look at what the Government’s settings are in the CPRS and the policy in the White Paper for the emissions-intensive trade-exposed assistance. Our examination of that showed that it did maintain the competitiveness of the trade exposed agricultural industries...you have very small impacts on the production costs of the agricultural sector...they vary between 0.1 per cent and a little bit under 0.5 per cent.[153]
2.128 As noted above, the cost impact on the agricultural sector is only part of the story. The impact on their prices from the effect of a carbon price on the food manufacturing sector is also relevant, so a whole-economy perspective is needed. Once these linkages are considered in their general equilibrium modelling, ABARE's modelling shows:
In 2020 the carbon price under the CPRS minus five scenario is estimated to be $35 a tonne and also the shielding is in place for the emissions intensive and trade exposed sectors. What you see are small increases in production for beef and sheep meat and dairy cattle, a large increase for grains and small decreases for other animals and other crops.[154]
2.129 Some of the modelling results are dependant on the proportion of food manufacturing plants and abattoirs that are over the threshold to be captured by the scheme, currently 25,000 tonnes.[155] This may vary once the scheme is introduced: the committee heard of a company that was thinking of scaling back its large abattoir and recommissioning a number of smaller ones to stay under the threshold.
2.130 There were also criticisms that the ABARE modelling as it dealt with forestry paid insufficient attention to physical constraints on the available land:
Finally, looking at some of the economic modelling by Treasury and ABARE that addresses just one of these aspects, and that is the Kyoto compliant afforestation... the total forestation area potential, according to their modelling, is about 5.8 million hectares, or about 20 megatonnes per annum on average. CPRS 15 rises to 26 megatonnes or 80 megatonnes per annum, which as I mentioned yesterday, in spatial area represents something like 20 per cent of the Murray-Darling Basin. If you go to Garnaut 25 and adopt a deeper short-term target and a long-term target, the total afforestation area rises dramatically to 40 million hectares...[which] spatially would be 30 to 35 per cent of the Murray- Darling Basin, but that would be spread across the Australian continent...[156]
It is very implausible modelling. The ABARE models are not well constrained physically. Their assumptions about whether the land is going to be suitable for growing trees...I do not think that it is biophysically realistic.[157]
2.131 There is a further discussion of modelling of the rural sector by ABARE and others in Chapter 6.
2.132 Some modelling by Concept Economics commissioned by the Minerals Council of Australia argued that employment in the minerals (including smelting) industry would be 23,500 lower in 2020 if the CPRS was introduced than if it was not introduced.[158]
2.133 Among other organisations to conduct relevant modelling are the CSIRO, Allen Consulting Group and Frontier Economics. They gave comparable results at a national level to the Treasury modelling, although the Frontier Economics study warned that some regions could incur larger than average costs.[159]
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