Friday, July 04, 2008

If you read nothing else today, read this - an extract from the Garnaut Review

The full draft report of the Garnaut Review is here.

"The weight of scientific evidence tells us that Australians are facing risks of damaging climate change. The outsider to climate science has no rational choice but to accept that, on a balance of probabilities, the mainstream science is right.

There are prominent dissenters on this matter, gathered under the rubric of ‘sceptic’. For the most part ‘sceptic’ is a misnomer for their position, because these dissenters hold strongly to the belief that the mainstream science is wrong. I exclude from this generalisation a small number of climate scientists of professional repute, who accept the theory of the warming effects of higher concentrations of greenhouse gases, but hold the view that these warming effects are relatively or even trivially small in comparison with many other causes of climate variations that are beyond the control of humans.

Effective international action is necessary but deeply problematic. Each country benefits from a national point of view if it does less of the mitigation itself, and others do more. If all countries act on this basis, without forethought and cooperation, there will be no resolution of the dilemma.

Resolution of the dilemma takes time—possibly more time than we have. The world has squandered the time that it did have in the 1990s to experiment with various approaches to mitigation...

Climate change is a diabolical policy problem. It is harder than any other
issue of high importance that has come before our polity in living memory.

Climate change presents a new kind of challenge. It is uncertain in its form
and extent, rather than drawn in clear lines. It is insidious rather than directly
confrontational. It is long term rather than immediate, in both its impacts and its
remedies. Any effective remedies lie beyond any act of national will, requiring
international cooperation of unprecedented dimension and complexity.

While an effective response to the challenge would play out over many
decades, it must take shape and be put in place over the next few years. Without
such action, if the mainstream science is broadly right, the risks of dangerous climate change, already significant, will soon have risen to dangerously high levels.

Observation of daily debate and media discussion in Australia and elsewhere
suggests that this issue might be too hard for rational policy making. It is too
complex. The special interests are too numerous, powerful and intense. The
time frames within which effects become evident are too long, and the time
frames within which action must be effected too short.

The most inappropriate response would be to delude ourselves, taking small
actions that create an appearance of action, but which do not solve the problem.
Such an approach would risk the integrity of our market economy and political
processes to no good effect.

We will delude ourselves if we think that scientific uncertainties are cause for
delay. Delaying now will eliminate attractive lower-cost options. Delaying now is
not postponing a decision. To delay is to deliberately choose to avoid effective
steps to reduce the risks of climate change to acceptable levels.

The work of this Review is directed at nurturing the slender chance that
Australia and the world will manage to develop a position that strikes a good
balance between the costs of dangerous climate change and the costs
of mitigation.

Australia has a larger interest in a strong mitigation outcome than other
developed countries. Our location makes us already a hot and dry country;
small variations in climate are more damaging to us than to other developed
countries. We live in a region of developing countries, which are in weaker
positions to adapt to climate change than wealthy countries with robust political
and economic institutions. The problems of our neighbours would inevitably
become our problems. And the structure of our economy suggests that our
terms of trade would be damaged more by the effects of climate change than
would those of any other developed country.

However, Australia carries some major assets into this challenge. Australians
are facing this new kind of challenge in the best of times. These are the times
that earlier generations of Australians hoped for their country.

Australia is fortunate that humanity is enjoying the harvest of modern
economic development in Asia and beyond. More people are emerging from
poverty more quickly than ever before in human history.

Australians’ recent return to material grace has had two direct causes. First
was our decisive rejection and reversal of mistakes of the early decades after
federation: the turning away from protectionism, xenophobia and the bureaucratic
trammelling of the market.

The second cause is the Asian economic boom. Australia’s resources and
human capacities are more closely complementary to those of the densely
populated countries of Asia than are those of any other economies on earth.

For other developed and many developing countries, the strong growth in
industrial production and demand for raw materials and food that accompanies
economic growth in China, India, Indonesia and other Asian countries is seen
as a competitive and inflationary threat. For Australia, it is unbridled opportunity.
Strong Chinese and other Asian economic growth has been the main factor
behind the lift in Australia’s terms of trade by about two-thirds over the past
six years. This has lifted the average value of Australian output and incomes by
over one-eighth from the effects of increased export prices alone.

It is neither desirable, nor remotely feasible, to seek to lower the climate
change risk by substantially slowing the rise in living standards anywhere, least
of all in developing countries. If such an approach were thought to be desirable
in some expression of distant and idiosyncratic values, Australians would not
accept it. Nor would it be in Australia’s interests for Asia’s developing countries
to accept truncation of their people’s hopes for rising living standards in the
interests of climate change mitigation. Their prosperity or its end is translated
quickly into our own.

The solutions to the climate change challenge must be found in removing the
links between economic activity and greenhouse gas emissions.

For Australia, the commitment to the mitigation of climate change can be
seen as the reinvestment of a part of the immense gains that have come from
accelerated Asian economic growth, in contributing to reduction of an adverse
side effect of that growth. In this, we are in a privileged position. We are different
from most other countries, and certainly from all other developed countries
except Norway.

These realities need to be kept in mind if we are to retain perspective in the
domestic debate about mitigation and the emissions trading scheme. Some
elements of the Australian resources sector have been especially vocal about
the perceived threat that a price on carbon poses to their competitiveness and
to Australian prosperity.

It is only to be expected that each firm, industry and sector will argue its own
case in its own interests. Senior corporate executives are paid to do exactly
that. But in taking these arguments into the national debate, let us make sure
that there is also a strong and independent centre for the policy-making process
that can keep sectoral claims in perspective.

Balance, reason and understanding of the premises and logic leading to
policy conclusions are the keys to Australia and the world using well its last
chance to get this difficult policy problem right.

No answers to questions as complex and difficult as those introduced in this
chapter would seem right, or palatable, to everyone. Perhaps no answers, with
their many parts, would seem right or palatable to anyone.

Many will disagree with elements or the whole of the conclusions of
this Review. Many will disagree with the policy proposals that flow from the
conclusions. They would prefer cheaper, more certain, later and less disruptive
ways forward, or higher levels and urgency of Australian mitigation ambition.

The Review would prefer cheaper, more certain, later and less disruptive
ways forward, if any were available that were not associated with large risks of
damage from climate change.

Tempting though it is to do so, it is neither rational nor helpful to reject
conclusions because we do not like them. The conclusions will only be ‘wrong’
if the premises or logic leading to them are wrong. The Review aims to be clear
in its premises and methodology, so that they can be contested transparently.
If the subsequent public policy debate follows these lines, we will improve the
prospects of Australian governments taking good decisions in the year ahead
on a sound basis and with widespread community support, and therefore with
prospects of policy continuity.

By mid century business as usual is likely to see irrigated agriculture in the Murray-Darling Basin lose half of its annual output. The Great Barrier Reef will be effectively destroyed.

By the close of the century, business as usual, at the median
of the probability distributions of mainstream science’s assessment, is likely to have ended irrigated agriculture in the Murray Darling Basin. Depopulation will be under way.

The increased incidence of heatwaves and hot days is likely to lead to about
4000 more deaths across Queensland annually. The rise in temperatures is
likely to have caused the end of snow-based tourism.

As fragile states in our Asia–Pacific neighbourhood are further weakened by the effects
of climate change, we can expect the Australian Defence Force and Australian Federal Police to be more heavily committed in support of peacekeeping operations.

Australians will be substantially financially wealthier in 2100 in terms of access to
goods and services, despite any setbacks from climate change. But they are likely
to be substantially poorer in terms of environmental amenity.

Australians over a century of change will have demonstrated the capacity to
adapt in various ways. In some regions, retreat will have been the only viable

If the world were to have agreed and implemented global mitigation so that
greenhouse gas concentrations were stabilised at 450 parts per million or even 550 parts per million of carbon dioxide equivalent, then the story of risks of impacts for
Australia could be radically different.

Australians are well placed to deal with the challenges of this economic reform
agenda. The reforms of the past have made the Australian economy more
open, market-oriented and adaptable than at any time in its history. We have
a good record in institutional design and in establishing genuinely independent
agencies to implement those arrangements. In the case of an emissions
trading scheme, we have the benefit of learning from schemes that have been
implemented internationally, most notably, the three phases of the European
Union’s scheme.

Although it is tempting to compare the greenhouse gas mitigation challenge to earlier
Australian programs of economic reform, we must exercise caution here.

Previous reforms—such as trade liberalisation, financial regulation and
competition policy—were targeted at raising incomes by allowing the allocation
of resources to their most productive uses.

By contrast, the climate change
reform agenda must be focused on minimising the potential for loss of income
after the introduction of measures to limit the release of greenhouse gases.

As with all reform programs, altering pre-existing economic relationships
within the economy is likely to generate winners and losers. Consumers who
are willing and able to replace higher-emissions products with lower-emissions
products will adjust relatively painlessly. Firms with less dependence on
emissions-intensive production processes, or which have the ability to switch
production process quickly in order to minimise their exposure to a carbon price,
may find that their market share and profitability increase.

Firms that have less
flexible capital structures could be faced with having to choose between passing
on the price (and losing market share) or absorbing the price of emissions at the
expense of profitability. All things being equal, such firms may face some loss
of market value.

As with all programs of economic reform, mitigation policy must be forward looking.
Policy interventions and the use of scarce resources should focus on
improving future economic prospects rather than reacting to past decisions by
governments or the private sector.

While it is not possible to foreshadow all the demands that will be placed
on the revenue raised from the sale of emissions permits, the case for compensatory
payments to shareholders in firms that lose value is a relatively low priority for
a number of reasons.

First, it will be difficult or impossible to assess the effects of the emissions
trading scheme on an individual firm’s profitability as the counterfactual supply
and demand conditions in those markets cannot be observed.

Second, there is no tradition in Australia for compensating capital for
losses associated with economic reforms of general application (for example,
general tariff reductions, floating of the currency or introduction of the goods
and services tax) or for taking away windfall gains from changes in government
policy (for example, reductions in corporate income taxes).

Third, alternative forms of assistance such as structural adjustment
assistance that is targeted at the future competitiveness of firms (or in some
cases, regions) is likely to provide a greater benefit to the overall economy than
a backward looking, private compensatory payment to existing emitters.

There is a risk that Australia is not bold enough to proceed on the basis that a
market-based emissions trading scheme, supported by mechanisms to remove
defined market failures, as proposed by the Review, offers the most effective
and efficient solution.

This hesitancy could arise from the Australian distrust of
markets, deeply rooted in its business and community sectors. It may also arise
from anxiety that the system will not drive new technologies,
even with the support for research, development and commercialisation of
new technologies that we outline.

There will be pressure from interests that stand to lose from high permit prices for caps on the price of emissions permits that would compromise the emissions reduction objectives.

Political resistance to the implications of carbon pricing on prices for some products may drive demands to leave those sectors out of an emission reductions scheme.

The Review is confident in its advice that Australia will meet its greenhouse gas mitigation goals with least risk and lowest cost if it holds firmly to a comprehensive, market oriented emissions trading system as its main weapon in the fight to contain global warming."