Garnaut Review favours carbon price over direct action

Those fighting tooth and nail against the carbon tax found their justification on Page 17 of Ross Garnaut’s 2011 Climate Change Review released today. “Australian households will ultimately bear the full cost of a carbon price,” said Garnaut. The country's biggest selling newspaper, the Herald-Sun’s report on the review chose this sentence as their first direct quote from the review. Opposition leader Tony Abbott also used it as his headline quote from the 40-page summary update to the review. The reason why is obvious: it is the line that causes maximum political damage to Prime Minister Julia Gillard as it runs counter to her promise householders would be shielded from the tax.

That this quote is taken out of context is no surprise in the light of similar shenanigans, nor it is that the one sentence that has immediate political implications be lifted above all others in a considered economic tract about the future. As British former Tory MP Iain Dale found out when he went to parliament today, this country does a poor line in genuine debate and the response is as Professor Garnaut must have feared. When the political game is expediency above everything and the media game is primarily about conflict, a reasoned document such as this will get short shrift. The future seems very far away when there is so much shit-stirring to do in the present.

The future is very much on Garnaut’s mind. He begins by bringing the science up to date from his last review in 2008. There is a statistically significant warming trend and it did not end in 1998 or in any other year. If anything science says matters have gotten worse since 2008 and its prognosis of drastic global warming is now established beyond reasonable doubt. The projection of Australia’s emissions trajectory if nothing is done to change behaviour has grown to 24 per cent above 2000 levels (a 4 per cent above the levels expected in 2007). As Garnaut says “this will not be easily understood by other countries and is likely to bring Australian mitigation policy under close scrutiny.”

All countries will closely examine each other’s efforts to confirm that each is contributing its fair share. China is on a fastpath towards climate action and has also achieved considerable success in the implementation targets with widescale regulatory changes in energy and innovation. The Cancun Agreement has pledged Australia to 2020 targets of –5% to –25% of 2000 emissions with a review in 2014. Garnaut said it was in the country’s national interest in in effective mitigation to make the emerging arrangements work.

He then went on to look at the two models to reduce carbon emissions: a market-based approach, built on a price on emissions; and a regulatory approach, or direct action. In the market-based approach, carbon can be priced either by fixed-price schemes (carbon taxes) where the market decides how much it will reduce the quantity of emissions or by floating price schemes (ETS) win which permits to emit are issued up to a set limit. The permits are tradeable so the market sets the price. In the alternative route, regulation or direct action, there are many ways that government can intervene to direct firms and households to go about their business and their lives.

Garnaut much prefers the carbon price option. For one, it raises considerable revenues that can buffer the transition. Much of this revenue could be used to reduce personal income tax rates on households at the lower end of the income distribution and would encourage labour force participation. Some revenue should also be used to purchase carbon credits from the land sector and also to support the business sector to innovate emissions-reducing technologies. It has less short-term negative effects on productivity growth and incomes than "direct action". The other problem with direct action is that it relies on the ideas of a small number of politicians and their advisers and confidants who would be subject to lobby pressure. “While some of these ideas might be brilliant,” Garnaut said, “they would not be as creative or productive as millions of Australian minds responding to the incentives provided by carbon pricing and a competitive marketplace.”

Electricity prices will go up in that marketplace, but not as much as they went up after 2006 due to distortions in price regulation of distribution networks. There would also be compensation, which did not occur in 2006. Garnaut suggests a starting price of carbon in mid-2012 as $20-$30 rising at 4 percent a year. An ETS of some sort will be needed to be administered by an independent authority such as a Carbon Bank. By 2015 agriculture will need to be brought into the fold, perhaps in line with New Zealand’s plans to do exactly that.

Garnaut does indeed say householders will bear the full cost of a carbon price as international markets will determine returns to capital. But this is why “it makes sense from equity and efficiency perspectives for households to ultimately receive the vast majority of the carbon pricing revenue.” Tax cuts will assist household to spend money on goods and services that embody low emissions and at the same time the carbon price will set off a supply side adjustment to enable low cost emissions reductions.

Its not in the review papers but Garnaut has this to say about those who say Australia is a small contributor to the world's emissions and should not take the lead. “We matter even on climate change, even though our emissions are only 1.5 per cent of the world’s, just like the UK matters with its 1.7 per cent.” The Tory-led British Government has pledged to cut carbon emissions in half by 2025. That is “direct action” Tony Abbott and the anti-carbon tax cheer squad would have nightmares over.

Not so Green Paper : Labor avoids the tough decisions again

The Australian federal government released its eagerly awaited green paper today on its response to climate change. A green paper is government speak for a “discussion paper” and does not represent a commitment to act. However, it is a significant response to the challenge issued by the Garnaut Report. The green paper says the Government still intends to introduce Garnaut’s model of an emissions trading scheme by 2010 but has renamed it a Carbon Pollution Reduction Scheme. Climate Change minister Penny Wong says the scheme represents a significant economic reform which responds to threats across the Australian economy. "Placing a limit and a price on pollution will change the things we produce, the way we produce them and the things we buy," she said.

The Green Paper’s foreword (pdf) reiterated the line that carbon pollution is causing climate change, resulting in higher temperatures, more droughts, rising sea levels and more extreme weather. It says the impact will be great on Australian food production, agriculture, water and tourism if no immediate action is taken. The paper says the Government is taking action on three fronts: reducing greenhouse emissions, adapting to climate change, and helping shape a global solution.

The central plank of the strategy is the Carbon Pollution Reduction Scheme. It is a cap and trade scheme which will place an upper limit on carbon pollution each industry can emit. The biggest polluting businesses and industries will buy a permit for each tonne of emitted carbon. This involves one thousand companies (representing just one percent of Australian business) who produce 25,000 tonnes of carbon each year. The money raised by the scheme will go towards investments in clean energy and what it calls “adjustment” costs.

These adjustment costs are attracting the most flak from Green groups. The key element of the adjustment cost is the decision to cut fuel taxes for three years on a cent for cent basis to offset the initial price impact. The Government has also promised assistance measures for low and middle income households and free permits to the most emission-intensive industries including coal-fired electricity generators. Greens Senator Christine Milne says the adjustments neutralise the carbon price signals and has protected the investment of polluters in the coal, aluminium and logging industries. She also criticised the mixed message on petrol. “The Government has its foot on the brake and the accelerator at the same time,” she said.

Meanwhile the Government says that climate change requires a global solution. It points to its early ratification of the Kyoto Protocol and its serious negotiations for the next stage. It says that emission schemes are already in place in 27 European countries while 28 states and provinces in the US and Canada are also introducing trading as is New Zealand. The Government says it will take account of the evolving international negotiations in determining the path set to meet the target of reducing Australia’s carbon pollution by 60 per cent below 2000 levels by 2050.

Many critics have stated that the Government have caved in to Opposition pressure with its proposal. Canberra Times’s economic correspondent Peter Martin says the real author of the report is Brendan Nelson. Gary Sauer-Thompson agrees and says “the ALP has embraced the Liberals policy whilst belting them over the head for being wimps.” Chris Hammer in The Age said the Government has “defied” Ross Garnaut (though whether the act of ignoring the evidence of an independent auditor can be described as defiance is a moot point). Onymous Lefty Jeremy Sear described the plan as a “pissweak ALP copout” and said the petrol excise reduction is futile as oil prices will continue to rise.

Bernard Keane in Crikey calls the green paper “a handout bonanza for our biggest polluters”. He says the Government will give away more in assistance and free permits than it gets for the paid permits. Keane believes the scheme is a political reaction designed to “minimise the whingeing from our biggest polluters – motorists and electricity generators.” In its efforts to minimise opposition to the scheme, the Government have come up with an anodyne response that is likely to fail in its primary duty to reduce carbon emissions.

Sadly, this prevarication seems to be the norm from the overly poll-conscious new Labor administration. Two weeks ago, Barrie Cassidy interviewed Kevin Rudd for ABC's Insiders program and he asked him to nominate the "toughest decision" the Government has made since coming into office. Rudd gave a waffly answer before alluding to the theme of climate change saying: "The easiest thing to do is stick your head in the sand and say not my problem, but I frankly don't think most Australians can do that and look in the faces of their children and their grandchildren. They think that it is their problem and they expect Government to take responsible, calm, measured approaches to dealing with it and that's what we're seeking to do." The Green Paper is certainly calm and measured, but is it responsible? The jury will be out for a very long time.

Garnaut sets off to sell the Emissions Trading Scheme

Ross Garnaut set off on his state capital tour of Australia this week to explain his report to the people in public forums. With the government promising to implement an Emissions Trading Scheme (ETS) by 2010, Garnaut has the difficult job of persuading a wary public that the scheme is in their best interests. While Labor was voted into office on the platform of addressing climate change, recent polls suggest that the public may not yet be ready to make the required lifestyle changes or understand what the impacts of the ETS are.

On ABC’s Insiders this Sunday, Kevin Rudd struggled to answer the question: what in “plain simple terms” is an Emissions Trading Scheme? Rudd prefaced his answer by reiterating the need to act. In a line that will be used as a mantra by all Government climate change spokespeople, he said the cost of inaction was greater than the cost of action. Rudd said the trading scheme would put a cap on emissions, with permit allocated across the economy to the total amount of carbon. A carbon market would be allowed to trade up to the cap. A government green paper will decide the difficult question of who gets the permits and for what.

Garnaut’s report acknowledges Australia’s trade-exposed, emissions-intensive industries have valid concerns. The key elements demanded by the report are that the scheme be introduced without delay; it must be broad based and should include transport and fuel. He recommended carbon sales be sold before trading begins to help guide the market on price. Half the revenue raised from the permits would go to low income households, 30 percent to trade exposed carbon intensive industries and the remaining 20 percent to R&D.

The Government has lain down five tests for an ETS. Firstly, it must be a ‘cap and trade’ approach; in other words, an effective scheme must be one where total emissions are capped with permits allocated up to the cap. Secondly, the ETS must effectively reduce emissions by 60 percent by 2050. Thirdly, it must be economically responsible, keeping costs low and Australian industry competitive. Fourthly, it must be fair with costs and benefits shared across the community. Finally, it needs to act now because economic modelling shows that delayed action increases the cost.

The clean Energy Council said emissions trading would provide a massive boost to the economy, unlocking $20 billion in clean energy investment. The Council’s policy general manager Rob Jackson said it was critical that the scheme began as promised in 2010 to provide business certainty. He said now was the time to make decisions for long-term energy infrastructure investment. “An early start and a secure trajectory will give business the sign it needs to invest in emissions reduction,” he said.

Importantly Jackson believes the ETS needs to be implemented along with complementary measures such as the 20 per cent renewable energy target. This target was a key plank (pdf) of Labor’s election policy. The policy read “A Rudd Labor Government will ensure that the equivalent of at least 20 per cent of Australia’s electricity supply is generated from renewable sources by 2020”. This amounts approximately 60,000 gigawatt hours (GWh) or the electricity used in 7.5 million homes and would deliver a reduction of almost 350 million tonnes of greenhouse gases in the next two decades. But with Labor ruling out nuclear power, that may prove an impossible ask. Hence the importance of the 20 percent R&D windfall from the ETS.

However Garnaut’s call for a bi-partisan approach looks completely dashed now that Opposition leader refused to commit to supporting an ETS by 2012. Nelson backed away from the coalition’s pre-election commitment on the 2012 date and went back to the tired old Howard line that it would be “economic suicide” for Australia to act alone. He urged Rudd to use the upcoming G8 conference in Japan to push for a global response. But party colleague and former federal environment minister Ian Campbell says Nelson should avoid playing populist politics and support a carbon trading scheme. Campbell attended a public gathering in support of Garnaut’s report. "I think what the opposition needs to realise is they can be quite proud of the role that we played in government to get a trading scheme on to the policy agenda,” he said.

The big question will be what will be the price of carbon? Current offset prices vary from 50 cents to $30 a tonne. The ‘cap and trade’ system where companies decide the most economical way to meet an overall cap, include widely varying details with unknown impact. The market will very much depend on how governments implement the system. That's why finding the right price of carbon is key. In Europe the price has varied wildly with fundamentals such as weather, policy, market psychology and a host of miscellaneous factors all influencing the price. But the benefits are there if the price signal is right. There will be a massive opportunity to generate income from activities that previously attracted no additional revenue, such as investment in emission reduction, renewable energy generation, greenhouse friendly fuels and carbon sequestration. The age of carbon ‘user pays’ is at hand.

The Media, Dennis Ferguson and the Garnaut Report

After finishing watching the best American news show on television this evening (the PBS NewsHour), I switched over to Channel Nine for the six o’clock news and their take on local events. First up were the good citizens of Miles who, egged on by media and politicians, did their civic duty and ran a man out of town. The man is Dennis Ferguson; a man who faces court over child sex charges but who is likely to walk free because he is incapable of receiving a fair trial in Queensland. The resultant vigilante hysteria merely makes matters worse.

We should not be surprised at this as the whole stupidity of the Bill Henson case revealed. The latest enemy of the people was forced to seek police protection as the media revealed not only his identity but his whereabouts and encouraged locals to take matters into their own hands. As a result the civil liberties lawyer Terry Gorman was placed in the invidious position of recommending the media back off and give people some privacy. If ever a case required a suppression order, then this was it. The Gold Coast Bulletin was the chief offender with a series of headlines about the case that "sent a clear message to the Bligh Government” (not particularly worrying about separation of powers).

The paper wrote a page one lead on Wednesday (interestingly, not available online) screaming at its readers to "dob in a monster". The article continued: “In the past, men like Ferguson have been placed in communities without the knowledge of the parents or children living there. If you see him, call The Bulletin and tell us where he is. Phone us on 5584 2469. Help us put pressure on authorities to have him locked away and to keep our children safe.” When I rang that number late this evening to complain that the Bulletin was the real monster here, I only got the cadet who dutifully took my message. Nevertheless the Ferguson story is rightly front page news, if only to show the shameful treatment of him by the people and media of Queensland. Of course, it wasn’t played that way. What we got instead was the deification of a lynch mob dressed up as “outraged citizens”. Shame those citizens weren’t half as concerned by the consequences of the real news of the day buried down Nine’s schedule.

That news was Ross Garnaut’s climate report. His address at the Press Club was newspaper gold but hardly unmissable television. So ratings reasons alone determined this was not the main news on Australia’s Fourth of July (for the most part still 3 July in America). So while whenever he said “carbon emissions scheme,” people used the remote control to switch him off. While this would apparently be the behaviour Garnaut wishes to encourage, people don’t switch off their TV but merely change the channel to something more amenable.

Whereas there are signs that the US is treating the problem serious, it seems people in Australua are not interested in the truth of climate change. How else to explain the rise in sales of SUVs in Australia? The two biggest price signals at the moment are the cost of oil and the cost of a mortgage. The central bank crudely controls the levers of the latter, while supposedly unpredictable “market forces” form the former. It remains a mostly unknown truth, that the higher price of petrol is actually a good thing, despite Aussie SUV sales, a price signal that will put a brake on car-induced emissions.

Nevertheless there remains considerable resistance to the understanding that climate change is actually at all. Many prefer to believe climate change will be turned into pumpkins at midnight. In his draft report (pdf) today on the proposed Emissions Trading Scheme, Ross Garnaut had a word or two for these people. He said “The outsider to climate science has no rational choice but to accept that, on a balance of probabilities, the mainstream science is right.” Garnaut reminds them about the Prisoner’s Dilemma.

The Prisoner's Dilemma is the classic betting problem of multi-party decision-making. The dilemma is not a zero sum game, but the idea behind it is there are deceptively simple decision problems that don’t have elegant solution. So, for instance, the simplest short-term cure for global warming is to go nuclear but that argument is treated like someone who "painted himself red, glued horns on his head, strapped on a three-headed phallus and walked naked into St. Peter’s in Rome shouting “WHO’S YOUR DADDY?”

But who your daddy is, is of little consequence to global warming. The argument is not aabout decisions of the past but of the future. And the jury remains firmly out on the efficacy of nuclear power compared to its perceived dangers. The solution to the Prisoner's Dilemma is that the best decision for an individual can depend on what he/she knows or can guess about the other’s intentions and therefore it is best to be in a position to share intentions. In other words, without global co-operation we are all pretty much screwed.

But that’s just my opinion. I’m no scientist but am happy to report their findings. Of all the official UN-sanctioned recommendations in the last few years, none of them have recommended that there is no problem and we need not do anything about it. On the contrary, official dry-as-dust summaries such as Garnaut’s and Stein’s reviews suggest that the cost of doing nothing is higher than the cost of doing something.

Try telling that to climate change sceptics. The posse led by Blair and Andrew Bolt have no time for the voice of science. As Garnaut points out, "‘sceptic’ is a misnomer for their position, because these dissenters hold strongly to the belief that the mainstream science is wrong". There is a clue to their behaviour in another thesis I read this evening: “There is active debate among political scientists and political theorists over the relationship between participation and deliberation among citizens with different political viewpoints.” Readers tend to read that accord with their political beliefs. Those who believe there is no climate change, get a constant reminder they are right.

But what about those readers who don’t have political beliefs – what do they read? The politic agnostics are the vast majority and they will probably not read blogs at all. They will be wrapped up in Channel Nine and the like. Their rage will be misdirected. Instead of doing something about the elephant in the room, they will be ringing up the Bulletin and dobbing in a monster.

Greens pressure Government to implement Garnaut recommendations

Greens’ climate change spokesperson, Senator Christine Milne has said Australia cannot wait for the final Garnaut report in September to take action to reduce carbon emissions. Milne says the interim report released yesterday calls for urgent action and the Prime Minister Kevin Rudd should respond with a climate-focused budget in May. Her call was “The razor-gang should be targeting the $9 billion in subsidies the fossil fuel industries receive annually, instead of public service jobs," she said. "Every month the Rudd government delays action to reduce Australia's emissions will cost the environment and taxpayers more in the long run.”

In his interim report (pdf), the Government’s climate change adviser Ross Garnaut warns that climate change is occurring faster than previously thought due to strong economic growth in China and India. He says the Federal Government should consider going beyond its stated 60 per cent reduction target by 2050 in a global agreement that includes developing nations. The Report also favours bilateral and regional agreements to accelerate domestic and international action. “Steady, long-term policies are what Australia needs,” he said, “in order to provide the market certainty for making appropriately large reductions in emissions at the lowest possible costs to Australians’ standards of living”.

The report’s executive summary stresses it represents “genuinely interim judgements”. However it also states that the world is moving towards high risks of dangerous climate change quicker than most people have expected. This makes mitigation more urgent and costly. The report says Australia should follow the lead of the EU and make firm commitments this year to 2020 and 2050 emissions targets with a similar adjustment cost to that accepted by other developed countries. It says an emissions trading scheme (ETS) needs to be the centre-piece of a domestic mitigation strategy.

So far, the government is refusing to budge from its stated 60 per cent target from 2000 levels. Climate change minister Senator Penny Wong told a Senate committee said Labor set that target on basis of known information last year. She said these included European studies, The Stern Review, and those of the Intergovernmental Panel on Climate Change (IPCC). Wong refused to answer Greens’ questions about how the government's target related to the concentration of greenhouse gases in the atmosphere or predicted average temperature rises. Wong said the Garnaut Review and Treasury modelling were the two primary inputs to formulating climate change policy; however, it was up to the government to decide on targets. "You don't contract out decisions as significant to the Australian environment, community and economy to a single individual," she said.

In his final article for Crikey before he joins The Australian next week, Christian Kerr says Garnaut’s report underlies an inconvenient truth for the government. It was handy to delay the publication of the report until after the election but now the government must do something about it. Kerr says there will be higher petrol prices and higher energy costs involved in tackling greenhouse and it will be up to the government to sell the benefits of the strategy to the electorate. “Governments don’t just have to make hard decisions,” he said. “If they want to survive, they have to carry voters with them.”

Meanwhile the Greens have produced their own report “Reenergising Australia” to address climate change issues. In her preface to the report Senator Milne says “we have only ten to fifteen years to make the deep cuts in greenhouse gas emissions needed to avoid catastrophic climate change.” She says only political will is stopping Australia from making the necessary transition to a low carbon economy.

But they recognise it won’t be easy. Australia has the highest per capita level of greenhouse gas emissions in the developed world due a reliance on coal power, a large agricultural sector, low levels of public transport use, energy-intensive metal manufacturing and a high population growth. The Greens demand greenhouse gas reduction to 30 per cent below 1990 levels by 2020 and 80 per cent by 2050. They also demand institutions need to be reformed to support a low carbon economy and say governments should create economic incentives to move from high to low carbon energy sources. As Milne concludes, the aim of their report is nothing less than fundamental change to the consciousness on which Australia’s unsustainable economy is based. Garnaut has simply reiterated this need.