Nov 20, 2007 - 3:00am
Economic analysis by CSIRO, ABARE1 and the Australian Business Roundtable on Climate Change2 shows that early action on climate change is affordable. However, the policy settings put in place by governments will largely determine whether Australia's response to climate change effectively manages the economic impacts of climate change and ensures a smooth transition to a low carbon economy. Broadly there are three tests of this:
This Climate Institute Economic Management and Climate Change scorecard builds on previous qualitative and quantitative assessments by the Institute and asks the question:
Managing Climate Costs: Does the policy mix put Australia on a pathway to reduce greenhouse pollution to levels that are consistent with avoiding dangerous climate change impacts? Approaches which do not achieve significant emission reductions are merely an imposition on business and the community without any major climate change benefit.
Least Cost Solutions: Does the policy mix promote least cost approaches?
Low Carbon Infrastructure: Does the policy mix provide the flexibility to actively manage major economic risks?
"Do the policies of the major parties actively manage the economic impacts of climate change and ensure a transition to a low carbon economy at least cost?"
Managing Climate Costs
Recent droughts illustrate the potential damage of the hotter, drier and generally more arid climate that CSIRO projects for many parts of Australia.3Droughts in 1982-1983, 1991-1995 and 2002-2003 cost $US$2.3 billion, US$3.8 billion and US$7.6 billion, respectively.4 Many parts of Australia are now entering their eleventh year of below average rainfall with substantial economic, social and environmental impacts.
There is an emerging consensus that increases in global temperatures above 2oC (above pre-industrial levels) risks dangerous climate change.5Climate change above this level risks global and irreversible impacts that will entail significant economic costs. For example, warming above this level risks the functional extinction of the Great Barrier Reef which supports a multibillion dollar tourism industry, and many businesses and communities along the Queensland coast. In the 2004/5 financial year the tourism associated with the Great Barrier Reef was worth US$4.5 billion and provided 63,000 full time (equivalent) jobs. 6
The Stern Review concluded the costs of inaction through climate change impacts are expected to far outweigh the costs of action.7 Estimates by CSIRO indicate that the economic impacts of climate change could be between 5-15% of global GDP, however with policy action this was reduced to around 3%.8
Scientific risk assessments suggest stabilising long-term greenhouse gas concentrations at around 400 parts per million offers the best chance of avoiding a 2oC increase in global temperature.9,10 The Intergovernmental Panel on Climate Change have concluded that in order to limit global temperatures to between 2-2.4oC:11,12
Global emissions need to peak by 2015. Due to the long-lived nature of important greenhouse gases in the atmosphere, if emissions continue to grow beyond this time achieving low levels of greenhouse gas stabilisation in time to avoid significant increases in global temperature will not be possible.
- Developed countries (as a group) need to reduce emissions by more than 25% below 1990 levels by 2020 and more than 80% by 2050.
- Developing countries in East Asia, China, the Middle East and Latin America will need to substantially slow their emissions growth by 2020. Note that slowing emissions growth is different to achieving emission reductions below where they are today. Policies would need to build on these countries' existing domestic policies and would be encouraged by international mechanisms such as the expansion on the international carbon market and "no lose" targets for developing countries.
- The cost of achieving stabilisation at these levels would cost the global economy less than 5.5% by 2050 (or less than 0.12% of annual global economic growth).
Ratification of Kyoto also allows developed countries to use international emissions trading to achieve emission reductions at least cost.
As the International Energy Agency conclude, when governments set targets they need to take account of the asymmetric risks of climate change and the possibility of nasty surprises and catastrophic global impacts.13 Longer term targets need to be more stringent as a result as adjusting policy settings to less ambitious targets at a later date is easier and is likely to involve lower economic impacts than attempting to rapidly reduce emissions in response to a changed policy regime at a later date. This point is critical not only from the perspective of avoiding dangerous climate change, but also has critical implications for business investment. For example, governments may decide stabilising concentrations at 550 ppm is more politically palatable, however, if in 15 years time the emergence of new scientific information or new climate impacts forced re-evaluation of this goal and government's moved towards a 450 ppm target, emissions would have to drop very sharply.
As the investments in long-term infrastructure would have already taken place this could lead to the premature retirement of capital and stranded assets to meet the new policy regime. Extending the analogy above, such a change would require the dismantling and transformation of two-thirds of the world's energy system within 30 years.14 Overall, this would lead to higher costs than would exist if a lower target had been established at an earlier date.
Setting a national emissions trajectory consistent with avoiding a 2oC in global temperature would therefore be a prudent risk management strategy, avoid investment in long-lived carbon intensive capital stock, and give government's the maximum amount flexibility in achieving longer-term emission reductions.
The Intergovernmental Panel on Climate Change also identified that some adaption to climate change is required. 15 In Australia, the IPCC identified water resources, coastal communities and natural environments as being particularly vulnerable. A national strategy and substantial funding will be required to overcome the barriers to adaption and maximise the benefits it will bring. Indicatively they also suggest that global warming of more than 2-3oC would exceed the adaptive capacity of most sectors.
Least Cost Solutions
Setting a price on greenhouse pollution such as though an emission trading scheme is the simplest and best measure to encourage business to invest in emission reductions. Setting a price would allow the market to find the most cost-effective technologies, provide incentives for innovation and create a level-playing field for business and consumers.
Developing a single national market-based price signal will help remove policy uncertainty that is currently delaying major energy sector infrastructure investment. It would also reduce the current cost to the economy of multiple policies in different government jurisdictions.
The key decision in an emission trading scheme is what level of greenhouse pollution the Government will allow, i.e. - the "cap" or target. Until this level is known business cannot make an informed decision about investments in new infrastructure or capital assets that will have a greenhouse gas liability associated with them. In the face of these risks, companies will therefore tend to delay investment. As the International Energy Agency conclude: 16
"It is therefore possible that there could be a period with very little new investment in the lead-up to the start of a new policy if key parameters such as tax rates or emissions caps are not announced well in advance."
The development of a domestic emission trading scheme that is internationally compatible and does not artificially limit linkages with existing and emerging schemes will also offer business the opportunity to seek least cost emission reductions overseas.
Every day Australian businesses, cities and communities use vast amounts of energy unnecessarily. The Government's 2004 Energy White Paper reported that many businesses and households can save 10-30% on their energy costs without reducing productivity or comfort levels.17 Achieving this could deliver $5-$15 billion in energy savings annually.
Australia compares poorly to other OECD countries in the uptake of energy efficiency. Australia's technical energy efficiency improvement between 1990-2004 has been around a third of the average amongst other IEA assessed OECD countries.18 Over the period, Australian energy efficiency improved at an average annual rate of 0.3%, while the average in other IEA countries was 0.9% per year
Australia should set a National Energy Efficiency Target and implement mandatory measures to lift Australia to world class energy saving standards by 2015.
A comprehensive policy programme to bring Australia up to OECD average technical energy efficiency improvement by 2015 would involve stronger mandated energy standards for buildings and appliances, rapidly replacing electric hot water heating with either solar hot water or efficient gas systems, expanding and strengthening incentives for distributed energy systems such as solar PV, an energy efficiency retrofit program for houses and commercial buildings, introducing world class fuel efficiency standards for all passenger vehicles, and removing many elements in the tax system that hamper the use of alternative fuels and broader transport options.
Independent modelling commissioned by The Climate Institute estimated that meeting a National Energy Efficiency Target that saw Australia meet OECD standards by 2015 would reduce the electricity sectors' cost of achieving an 80% reduction in emissions by nearly 50% or about $12 billion to 2050.19
Low Carbon Infrastructure
Low emission technology deployment
The accelerated deployment of clean energy technologies is likely to drive reductions in business and technology costs that will make long-term reductions in greenhouse emissions cheaper. For example, as Australian companies and industries adopt clean technologies they will find ways to reduce costs through economies of scale, more efficient business models and learning how to better integrate new technologies into the current energy system.20 This benefits all of society as energy costs are lower than they would have been without this market based experience.
Recent modelling commissioned by The Climate Institute showed that a strong national Clean Energy Target lowered the cost of achieving an 80% reduction in electricity emissions by around $1.5 billion to 2050.21
Currently businesses have little incentive to deploy clean technologies on a large scale, thereby increasing the cost to Australia of reducing emissions in the longer-term. This market failure is unlikely to be addressed by emissions trading alone and this will delay the deployment of low emission technologies in Australia.
In the absence of a significant carbon price, the introduction of a transitional market based mechanism to ensure all new electricity load is met by clean or renewable energy is required. This would equate to around a 25% of generation target by 2020. The objectives of such a policy is to reduce the long-term cost of emission reductions, overcome current market failures that are barriers to clean energy deployment and increase our flexibility in meeting long-term emission constraints.
Low emission technology research, development and demonstration
Technologies such as carbon capture and storage and hot rocks geothermal have yet to be demonstrated on a commercial scale, and advanced solar concentrating technologies are currently significantly more expensive than other technologies. To achieve long-term reductions and increase the country's flexibility in the advent that any of the new technologies prove commercially unviable, a broad, balanced and expanded research, development and demonstration program is needed. Australian governments and industry have already embarked on this course and this is to be congratulated. Progress now needs to be accelerated, balance between the funding of fossil fuel and non-fossil fuel technologies assured, funds increased, barriers to large investments in high risk demonstration projects removed, and incentives provided for projects that will build national clean energy infrastructure.22
CSIRO (2006), The heat is on, Report from the Energy Futures Forum, CSIRO, Canberra.
2 Australian Business Roundtable on Climate Change (2006), The Business Case for Early Action, Australian Business Roundtable on Climate Change; Allen Consulting Group (2006), Deep Cuts in Greenhouse Emissions: Economics, Social and Environmental Impacts for Australia. Report to the Business Roundtable on Climate Change, The Allen Consulting Group, Melbourne.
3 CSIRO, Australia Bureau of Meteorology (2007), Climate change in Australia, CSIRO, Melbourne.
4 Hennessy, Fitzharris, Bates, et al. (2007), Australia and New Zealand, in Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, UK.
5 Preston, Jones (2006), Climate Change Impacts on Australia and the Benefits of Early Action to Reduce Global Greenhouse Gas Emissions. A consultancy report for the Australian Business Roundtable on Climate Change. CSIRO, Melbourne.
6 Hennessy, Fitzharris, Bates, et al. (2007), Australia and New Zealand, in Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, UK.
7 Stern (2006), STERN REVIEW: The Economics of Climate Change. Cambridge University Press, UK.
8 CSIRO (2006), The heat is on, Report from the Energy Futures Forum, CSIRO, Canberra.
9 Meinshausen (2006), What Does a 2°C Target Mean for Greenhouse Gas Concentrations? A Brief Analysis Based on Multi-Gas Emission Pathways and Several Climate Sensitivity Uncertainty Estimates, in, Avoiding Dangerous Climate Change, Cambridge University Press, UK.
10 Given current concentrations and the inertia in the global energy system, greenhouse concentrations will overshoot these levels before falling and ultimately stabilising at safe levels. However, the more the ultimate stabilisation level is overshot and the longer concentrations stay above these levels, the greater the chance 2oC will be exceeded.
11 IPCC (2007), Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.
12 Gupta, Tirpak, Burger, et al. (2007), Policies, Instruments and Co-operative Arrangements, in Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.
13 International Energy Agency (2007), Climate policy uncertainty and investment risk, IEA, Paris, France.
14 Grubb (1997), Technologies, energy systems and the timing of CO2 emissions abatement: An overview of economic issues, Energy Policy: 25 159-172.
15 Hennessy, Fitzharris, Bates, et al. (2007), Australia and New Zealand, in Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, UK.
16 International Energy Agency (2007), Climate policy uncertainty and investment risk, IEA, Paris, France.
17 Department of the Prime Minister and Cabinet (2004), Securing Australia's Energy Future, Government of Australia, Canberra.
18 Climate Institute (2007), National Energy Efficiency Targets, Policy Brief, Climate Institute, Sydney.
19 Climate Institute (2007), Making the Switch: Australian Clean Energy Policies. Preliminary Research Report - May 2007. The Climate Institute, Sydney.
20 McLennan Magasanik Associates, The Centre of Policy Studies (2007), Increasing Australia's Low Emission Electricity Generation - An Analysis of Emissions Trading and a Complementary Measure, Report to Renewable Energy Generators of Australia, Renewable Energy Generators of Australia, Melbourne.
21 Climate Institute (2007), Making the Switch: Australian Clean Energy Policies. Preliminary Research Report - May 2007. The Climate Institute, Sydney.
22 Australian Business and Climate Group (2007), Stepping Up, Accelerating Deployment of Low Emission Technology in Australia, Anglo Coal, BP Australia, Deloitte, Mirvac, Rio Tinto, Santos, Swiss Re, Vic Super, Westpac.
i On 30 May, 2007, Kevin Rudd stated at the Annual Fraser Lecture that: "In its most recent report, the IPCC found that the level of greenhouse gases in the atmosphere will need to be kept between 445-490 parts per million, in order to avoid the most dangerous impacts of climate change." Kevin Rudd repeated the "445 - 490" figures in the debate with the Prime Minister. 445 - 490 ppm is a specific band referred to in final IPCC Summary for Policymakers of the Synthesis Report linked to a 2.0 - 2.4oC warming.
ii The Coalition, supports binding targets for developed countries on the condition of that developing countries also take on some form of international obligation.
iii The ALP supports ratification of the Kyoto Protocol which imposes binding targets on developed countries. The ALP also supports future binding targets for developed countries on the condition of that developing countries also take on some form of international obligation.
iv The PM's Task Group on Emissions Trading recognised "credible carbon offset regimes, domestically and internationally" will be a key design feature of the Australian emission trading scheme and the Coalition is promoting activities that may reduce deforestation in developing countries (a $200 million fund). It has also played a key role in the development of the Asia Pacific Partnership on Clean Development and Climate which may help reduce emissions in the long-term.
v Implicit in the ALP's support for the Kyoto Protocol is support for the Clean Development Mechanism which is driving substantial emission reductions in developing countries. The ALP has also committed $15 million to a Clean Energy Export Strategy and up to $20 million Clean Energy Enterprise Connect Centre, both of which are focused on exporting clean technology to the Asia Pacific Region. The ALP has also committed $150 million from Australia's international aid budget to assist Australia's Pacific neighbours prepare for and adapt to the effects of climate change.
vi The Coalition has developed a number of programs aimed at climate change adaptation including the Climate Change Adaptation Skills for Professionals, Adaptation Actions for Local Government, Australian Centre for Climate Change Adaptation, and establishment of a Climate Change Adaptation Research Facility. The Coalitions $10 billion Water Initiative may also strengthen the ability of the Murray Darling Basin and other water ways to respond to climate change.
vii The ALP will invest $60 million to help farmers respond to climate change. They will also will fast track a Climate Change Adaptation Plan for Australia's World Heritage and iconic areas, including the Great Barrier Reef, the Australian Alps and Kakadu National Park. The ALP plan to ensure Australia's disaster mitigation plan guidelines are updated to take into account increased severity of weather and storms. Their coastal policy also plans to help local communities deal with extreme climate-related events and storms. (Note: The ALP's Pacific adaption funds are dealt with under helping developing countries respond to climate change.)
viii While Coalition has indicated it will announce a long-term aspirational goal in 2008, they plan to announce the short-term emission cap in 2010.
ix The ALP has commissioned the Gaurnet Review to explore Australia's role in tackling climate change. The Review will report in June 2008 and this will form the basis for a decision on a short-term (2020) target for Australia.
x This focuses on the domestic emission trading and is distinct from commitments to Kyoto's flexibility mechanisms which are covered in points above.
xi The Coalition has committed to phase out inefficient lighting and continues to implement minimum energy performance standards for appliances and building products. It also has a program to promote efficiency in SMEs and does provides rebates for solar PV on homes.
xii The ALP has committed to phase out of low efficiency (electric) hot water system, give rebates for the installation of solar PV on homes, funding and government purchase plan for lower emission vehicles, introduce minimum energy and emission standards for appliances, accelerate introduction of 1 watt standby energy standard, increase energy efficiency requirements in government owned or leased buildings, provide loans to homes of energy efficiency and other measures, support Coalition policy on phase out inefficient lighting, provide grants for ceiling insulation in rental properties, and introduce measures to reduce emissions from large and SME businesses.
xiii The Coalition has committed to 30,000 GWh Clean Energy Target which would equate to around 15% of generation in 2020.
xiv The ALP have committed to 45,000 GWh Mandatory Renewable Energy Target which would equate to at least 20% of generation in 2020.
xv While the Coalition has in the past supported a $500 million Low Emission Technology Demonstration Fund and committed other funding for renewable energy development, Solar Cities, increasing wind forecasting capability, and R&D into advanced electricity storage technologies. However, it has not committed additional funding in the current election campaign.
xvi The ALP has committed $650 million to renewable energy RD&D (i.e the Renewable Energy Fund and Energy Innovation Fund) and to a $500 million National Clean Coal Fund.
xvii The Coalition Clean Energy Target may provide some incentive to the early deployment of new low emission technology and had been working with State Government's to remove regulatory barriers to CCS deployment.
xviii The ALP's MRET and RD&D should provide some incentive to the early deployment of new low emission technology.