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Making Australian climate policy

Hydrocarbon Engineering,

Acording to Warwick J. McKibbin of the Brookings Institution, the recent announcement by China and the US of post 2020 carbon emission targets has been misrepresented by both sides of the debate. It was not a negotiation or an agreement. Rather, it was a joint announcement of targets that both countries believe they can already achieve with current policies and their own forecasts of the future.

The view of climate sceptics that nothing is happening in the world in regards to climate policy is clearly wrong, McKibbin claims. What is happening is very inefficient and potentially costly for the world and particularly Australia. Thus Australia’s self interest is to drive the climate policy debate before we pay a higher price than necessary to address climate risk.

The basic problem is that the debate on climate policy is a battle between extremes. There are those who believe the world will end unless immediate and drastic action is taken to reduce human emissions of greenhouse gases. In contrast, there are those who believe that climate change does not exist. The problem with a debate between two extremes is that the policies which emerge are rarely the sensible policies that would address the central problem. What’s more, information is misrepresented by both sides who believe that any distortion to the facts is acceptable if it achieves the outcome they desire.

Climate policy is not about certainty and targets, McKibbin accentuates. Climate change policy is about managing risk given enormous uncertainty.

If climate change does turn out to be mostly driven by factors outside of human control then draconian climate policy now may impose severe economic costs on top of a situation where economic resources will be needed to fund adaptation to natural climate change.

If human induced climate change is the problem, then doing nothing when there are low cost options available today to mitigate emissions may turn out to be very expensive. Doing nothing magnifies the economic uncertainty and this creates larger costs. A low cost, flexible policy is clearly better than either extreme.

According to McKibbin, the most important question today is which policy is most likely to minimise the risk and costs for Australia in future years?

The Direct Action approach targets a small number of emitters to achieve a given reduction target. Because not all sources of emissions are given an incentive to change behaviour, it must be that the cost of a unit of emissions reduction under the Direct Action policy will be higher than a policy that puts a long term price on all carbon decisions in the economy.

A well designed carbon price will change the price of carbon facing all firms and households today and in the future. Therefore, a small adjustment by everyone can achieve a given reduction in emissions over time.

By design, Direct Action doesn’t change the cost of carbon intensive products such as electricity so a large number of households and firms do not change their behaviour. It must therefore be more costly than a well designed carbon price.

The second aspect of Direct Action is that the government pays for the reduction, whereas in a well designed carbon pricing model the payments can be kept off the government budget and kept within a market of buyers and sellers.

This doesn’t matter much given the current trajectory of Australia’s emissions and Australia’s 2020 target. The differences are probably small. Environment Minister Greg Hunt is most likely right that Direct Action can deliver the 2020 target at a reasonable cost (but not at the lowest economic cost).

In the longer term, the question is how adaptable is the policy to changing global circumstances? What if the joint announcement by China and the US leads to a substantial shift in global policy in Paris in 2015? The costs of deeper cuts under a Direct Action style of policy will increase sharply because only a small share of emissions will be required to carry a rapidly rising burden.

In addition, the fiscal deficit will be put under strain because funding will need to pour into the Emissions Reduction Fund. There needs to be a clear path from Direct Action to something scalable, McKibbin claims.

Australia needs to lead the international climate policy debate. This requires a mature debate at home. It might be that the Coalition government has made the right call for the design of Australia’s climate policy given a particular future.

However, recent Australian governments have shown that poorly designed policies based on a future that doesn’t eventuate can ultimately end up costing the Australian economy dearly.

Adapted from a report by Emma McAleavey.

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