Speech to the Minerals Council of Australia—1 June 2011
Mr Blair Comley
Secretary, Department of Climate Change and Energy Efficiency
Minerals Council of Australia
1 June 2011
Thank you for the invitation to speak today on the important issue of climate change policy.
I have spent some time in recent weeks thinking about what to cover in this speech. In the end I decided to try and explain the overall climate change policy story, at least with respect to mitigation.
As I travel around Australia working on climate change issues I am struck by a divide between those of us that live, sleep and breathe climate change and others who dip into the issue from time to time while focussing on their day job.
Let me be clear at the outset. I am not criticising in any way the latter group. Indeed, I think the mistake that we can often make is to assume that everyone is traversing the same journey, or that understandings that have been reached at a point in time have been locked in and are well understood. It is also hard at times for those that don’t live, sleep and breathe climate policy because the debate often focuses on very specific issues as if they are the essence of the debate. When this is happening it should be no surprise that it all looks hideously complex and confusing.
So with that background let me start at the beginning.
The science
The beginning is the science of climate change.
I am not a scientist, so as a policy maker I need to rely on the most credible sources of scientific advice. The state of the science was most recently summarised by Professor Will Steffen in the publication The Critical Decade: climate science, risks and responses. Professor Steffen’s analysis is built on work in the peer-reviewed literature and the contributions of bodies such as the Intergovernmental Panel on Climate Change, the Royal Society of the United Kingdom and the Australian Academy of Science. Professor Steffen summarises the four key messages of the science as follows.
First, there is no doubt that the climate is changing. The evidence is overwhelming and clear.
Second, we are already seeing the social, economic and environmental impacts of climate change.
Third, human activities – the burning of fossil fuels and deforestation – are triggering the changes we are witnessing in the global climate.
Fourth, this is the critical decade. Decisions we make from now to 2020 will determine the severity of the climate change our children and grandchildren experience.
The climate change mitigation story is built around the last two propositions.
Because human activities are a cause of climate change we can do something about it. And because of the nature of our current activity there is an urgent need to change behaviour relatively quickly if we are to avoid significant environmental, economic and social harm.
The impact of greenhouse gases on the environment is driven by the concentration of these gases in the atmosphere. Professor Steffen and other experts often refer to a two degree Celsius increase in temperatures above pre-industrial levels as a “guardrail” which is the boundary above which we enter the realms of “dangerous climate change”.
However, this level of warming is not without risks and Professor Steffen notes that while informed by scientific understanding it has been developed through a political process. I understand Professor Steffen to be saying that the two degree guardrail has been informed by where we start from and what may be politically possible as he does note that there are significant risks of serious impacts at temperature increases below two degrees.[2]
The Government has stated that it is in Australia’s national interest to achieve an outcome that stabilises greenhouse gas concentrations at 450 parts per million of carbon dioxide equivalent in the atmosphere. This level would give us around a 50 per cent chance of staying within the two degree guardrail.
Ensuring that the world stays within the two degree guardrail will be incredibly challenging. Australia cannot achieve this outcome unilaterally. It must be achieved through concerted international action.
Because most greenhouse gases, and in particular carbon dioxide, are long-lived in the atmosphere what really matters is the cumulative emissions over time that contribute to the stock of gases in the atmosphere. This means that we effectively have a carbon budget within which the world must operate if it is to stay within the guardrail. If we spend a lot of the budget early, then more dramatic action will be required later. The later we leave the adjustment the more disruptive and costly it is likely to be.
Professor Steffen illustrates the budget and our current position in Chapter 3 of his report.
To have a 75 per cent chance of staying within the 2 degree guardrail we can emit no more than 1000 gigatonnes of carbon dioxide in the period 2000 to 2050. For a 50:50 chance we can emit no more than 1440 gigatonnes of carbon dioxide.
Through the period 2000 to 2008 we emitted 305 gigatonnes of carbon dioxide. Emissions are still growing so we could emit around 700 gigatonnes of our budget by 2020. If this occurs we will have spent a large part of the budget in the first two decades of the century and will still have strong economic and population growth putting upward pressure on emissions in the decades to follow.
The problem of collective action
It is important to pause and consider why it will be so challenging to achieve the required reductions in emissions to stay within the guardrail.
Is it because it is too costly, at least compared with the benefits of avoiding the very significant environmental, economic and social impacts?
Well the answer to that, at least in aggregate, is a resounding “no”.
Economists have been estimating the aggregate costs of reducing emissions for a number of decades. Given the complexity of the task there has been remarkable stability in these estimates.
At an aggregate level the estimates of the economic cost of achieving 450 parts per million in 2050 have generally been less than around 5 per cent of GDP. [3] This is not a reduction in living standards from today, but a reduction from what would otherwise be the case. The Treasury modelling estimated in 2008 that Australian GDP would be over 170 per cent higher in 2050 even if mitigation activity consistent with 450 parts per million were undertaken.
The narrow economic cost is the insurance premium we would need to pay to avoid dangerous climate change. It is equivalent to income rising by around one tenth of a percent more slowly than it otherwise would.
Or put another way it is equivalent to getting to the level of income we would otherwise have obtained in 2050 about 18 months late.
In my view the reason for the difficulty in ensuring that world does not breach the guardrail is threefold: the difficulty in convincing everyone of the scientific case (in other words convincing people of the benefit of acting); the difficulty of agreeing to the distribution of the burden, both within and between countries; and the difficulty of convincing everyone that any transitional impact on jobs and competitiveness can be managed if everyone ultimately acts, but in a phased or uncoordinated manner.
The point about the distribution of the burden is reinforced by the fact that the aggregate economic cost includes both those who gain from the transition, who innovate and find opportunities and those who bear costs from the transition. This means that while there are winners the gross costs are higher than the net costs. Furthermore, in the case of climate change those bearing the costs are quite concentrated. This is an age-old problem in economic reform where the benefits are large and dispersed and the costs are small and concentrated.
Fundamentally the problem is one of achieving collective action when it is in the interests of everyone for everyone to act, but not in the interests of one country to act if other countries never do. It is also in the national interest of a country, when national interest is narrowly defined, to seek to bear the smallest share of any burden that must be borne by the world as a whole. I say “narrowly defined”, because if a country plays this game too well, then they may undermine international action that is demonstrably in their national interest.
International agreement is largely about building trust and confidence that others are acting. This is particularly difficult in climate change negotiations as North/South, or developed/developing country divisions are significant.
Trust and confidence is built by emission reduction targets, agreements on common measurement methodologies, systems of reporting and verification and international finance flows.
Common methodologies assist in the assessment of the level of effort. Monitoring, reporting and verification systems are critical because they provide confidence to others that action is being taken in other countries.
These observations are pertinent to the current state of international negotiations. Past international climate change policy has often focussed on the legal form of agreement as a measure of the extent of climate change action.
While undoubtedly some countries still pay much attention to the legal architecture, there is a growing focus and awareness on the extent of action on the ground. The world may still reach a treaty-level approach to climate change mitigation, but in the short-term it appears likely that we will be in a world where countries pledge action and other countries rely on transparency mechanisms to assess others’ progress.
Importantly, while Australia is still seeking an internationally legally-binding agreement, the current state of play does not necessarily mean that in the short-term global ambition will be lower than would be the case with a treaty. It is clear that many countries, including China, are prepared to do more domestically than they are prepared to commit to internationally in a legally binding agreement.
In a world where all countries are pledging action and having their actions monitored and assessed the most significant contribution each country can make is to make progress on the ground.
Demonstrated action on the ground also assists in allaying concerns about uncoordinated action threatening jobs and competitiveness. This is partly why it is in developing countries’ interest to clearly explain their actions to the world.
It is also in all countries’ interests to ensure that any measures that are put in place to deal with potential competitiveness issues associated with uncoordinated or phased action do not themselves undermine international trust and confidence. There is a very real risk that border tax adjustments would do just that.
Domestic action
This leads to a discussion of Australia domestic action.
The Australian Government has committed to a national target of between 5 and 15 or 25 per cent below 2000 levels by 2020. The 5 per cent target is unconditional on the state of international action and is bipartisan.
While the higher targets are linked to international action the lower target is not. This reflects the judgment that it is in Australia’s interest to begin the transformation of the economy in order to smooth the adjustment to a carbon constrained world.
National emissions for the purposes of these targets are measured as the emissions that occur within Australia (or domestic emissions) net of any purchases of international abatement.
This definition of national emissions arises from the international negotiations and is highly unlikely to change. Seeking to reopen this issue would almost certainly undermine trust and confidence within the international community, putting back the prospects for global action.
Accordingly, once Australia has committed to a target, then the community is ultimately liable for the consequences of any emissions that occur within Australia. The allocation of that liability is a matter for the community to decide, but it must rest somewhere.
I have discussed elsewhere that it will be very challenging to meet the 5 per cent target solely from domestic emission reductions. [4]
5 per cent below 2000 levels is equivalent to 23 per cent below our latest estimate of business as usual emissions.
This is equivalent to reducing emissions by 160 megatonnes below our business as usual emissions in 2020.
160 megatonnes is roughly equivalent to the emissions of 10 power stations the size of Hazelwood in Victoria, or around 80 per cent of the current emissions from the electricity grid.
Modelling to date has indicated that Australia will either need a very broad and deep set of domestic abatement policies or will need to resort, at least in part, to some international abatement to meet the targets. As a result, the marginal liability for the community for a tonne of emissions is likely to be set by the international cost of abatement. Currently European Union permit prices are around A$23 per tonne. Abatement under the United Nations Clean Development Mechanism costs around A$18 per tonne. Most modelling assumes that these prices will increase in line with similar financial products.
From a policy perspective the key is to unlock as much abatement as possible in Australia that is cheaper than sourcing abatement offshore. Accordingly abatement should be sought right across the economy. The government’s framework is to look to renewable energy, energy efficiency and a carbon price to unlock as much of the low-cost abatement as possible.
The need to look across the whole economy is underlined by the current composition of emissions in the economy.[5]
While electricity generation is important it is far from the whole story accounting for 36 per cent of Australia’s emissions.
Direct fuel combustion makes up another 15 per cent, meaning that together stationary energy makes up about half of total emissions.
The other half is made up by 5 per cent industrial processes, 7 per cent fugitive emissions, 5 per cent from deforestation and forestry, 15 per cent from agriculture, 3 per cent from waste and 14 per cent from transport.
In addition, over the next 10 years the growth in emissions is not expected to be dominated by the electricity sector. This is partly due to the fact that the Renewable Energy Target is expected to have a significant influence on the deployment of new electricity generation capacity over the next decade. Existing energy efficiency measures, notably appliance and building standards also work to suppress growth in electricity demand.
As a result of these measures, the electricity sector is estimated to increase by only 12 megatonnes out of a total growth of 113 megatonnes from 2010 to 2020.
In contrast direct combustion, much associated with mining and gas activity, is estimated to increase by 29 megatonnes.
Similarly, fugitive emissions are estimated to increase by 27 megatonnes.
The breadth of the task across the economy is the reason that the Government has committed to pursuing a broad-based market mechanism in addition to the measures for renewable and energy efficiency.
It is very difficult for Government to determine precisely where the best abatement opportunities are, both within sectors and between sectors. That is why a long line of work in Australia, beginning with work by the Australian Greenhouse Office more than a decade ago, continuing with a state and territory taskforce, the Shergold Report, the Garnaut review and including the CPRS Green and White Papers, have all concluded that a broad-based market mechanism is the lowest cost way of reducing emissions. All of these processes included extensive consultation across the community.
The history of environmental market mechanisms supports the conclusions of these reviews. Prices have typically turned out to be lower than initially forecast as once firms are faced with incentives they use their superior knowledge of their own businesses to find the lowest cost ways of reducing pollution. Abatement has also popped up in ways that were not anticipated before the commencement of the schemes.
Market mechanisms provide incentives for reduced emissions, delivering an environmental benefit to society. That said, while generally more efficient than other abatement measures, this still comes at a cost. Just as some part of the community must bear the cost of emitting a tonne of emissions once a country commits to a target, some part of the community must bear a cost as a carbon price feeds through the economy.
A benefit of a market mechanism is that these costs are generally transparent and revenue is generated that can be used to address the social and economic consequences of any mechanism.
This transparency is also a benefit in dealing with jobs and competitiveness in the presence of uncoordinated action. In the past regulations have often been put in place without considering fully the implications for trade-exposed businesses as the impact of a regulation is often hard to assess. The vigour of the current debate is partly due to the fact that it is much easier for us all to quantify the likely impact of policy and put forward competing views on the materiality and appropriate allocation of the costs. The Government has certainly been mindful of these issues in considering the treatment of the trade-exposed sector under a carbon price and has benefitted from the input of stakeholders, many of whom are in this room today.
Conclusion
In summary, I have tried today to provide an overview of climate change policy, at least on the mitigation side.
I have tried to outline the following key elements.
First, we should aim to keep temperature increases below two degrees above pre-industrial levels. The benefits of staying under the two degrees guardrail exceed the costs.
Second, achieving this will be very difficult, not because of high aggregate costs, but because the problem of collective action in a decentralised world needs to be overcome.
Third, action is what counts and all countries will be observing the actions of others’ aided by enhanced monitoring, reporting and verification systems.
Fourth, once Australia has taken a target, then all emissions within Australia impose a cost on the community – it is up to the community to decide where to allocate that cost.
Fifth, we should unlock as much low-cost abatement as possible across the whole economy.
Sixth, a long line of analytical work in Australia, bolstered by extensive consultation, has supported market mechanisms as the lowest cost way of unlocking abatement across the economy.
[1] The views expressed are those of the author and not necessarily those of the Australian Government.
[2] Steffen, W (2011), The Critical Decade: Climate science, risks and responses, Climate Commission Secretariat, p18
[3] IPCC (2007), Summary for Policymakers, p21
[4] Blair Comley, Speech to the Committee for Economic Development of Australia, 11 June 2010
[5] Australia’s Emissions Projections 2010, DCCEE, 9 February 2011