Economics of climate change, part one

Published as ‘Reality check’, Geelong Advertiser, Friday 11 July 2008, p. 21.

The 500-page Garnaut report on what Australia should do about climate change is not your average bedtime reading, but we will all have to come to terms with its arguments, sooner rather than later. While there seems to be general support in the community for the idea that we ought to do something about what human beings are doing to their only home, there is less agreement on what we should do and the consequences of not doing anything, or doing the wrong thing.

One of Garnaut’s main notions is that we should set up a carbon-trading scheme to help encourage a move away from the generation of carbon dioxide and other greenhouse gases. The idea is that a price should be set for the emission of a certain quantity of the polluting gases and industry, including power generation, should bid for what are effectively licenses or tradeable certificates to produce that amount of pollutants. If the industry becomes more efficient and cleaner (or has a smaller carbon footprint, as they say), then it can sell the unused amount of its licenses or certificates in the open market. An entity which needs more capacity to pollute can buy that on the market at the going price. The costs of these permissions to pollute will be passed on to customers, but the incentive to reduce the quantity of emissions will now be clear to all. Some entities will be carbon neutral; that is, their emissions will be matched exactly by the amount of carbon they absorb in the production process. Others will be able to absorb more than they emit and hence earn carbon credits, which can be traded.

Garnaut has not included agriculture in his scheme so far. This is a big gap since methane is more polluting than carbon dioxide and animals generate more methane than industry does carbon dioxide. It is true that methane, the exhaust gas of ruminant animals, hangs about in the atmosphere—like a bad smell—for only about 12 years whereas carbon dioxide is around for twice or three times as long. But as Garnaut makes clear, if we allow exceptions, then some other parts of our economy and society have to pay more or reduce their emissions further. The absence of agriculture means other sectors have to carry more of the cost of adjustment to our new world.

There is some unease that recently the Premier of Victoria approved a new brown coal-fired power station for the Latrobe Valley. While this may produce more greenhouse gases than say a gas, solar, nuclear or wind powered plant, the new power station will be significantly more efficient than existing base load generators at Yallourn and Loy Yang. For some time to come the bulk of base load power in Victoria will continue to be produced from brown coal, and this is what makes us among the worst per capita emitters in the world. But we need to think very seriously about how to replace that by more efficient forms of coal-fired production and the so-called alternative green forms.

There is a high degree of uncertainty at the moment about the likely pattern of technical change in the area of energy efficiency. If we could be certain which technology was going to produce the best outcome it would be an easier, though probably not a costless decision. But there is a risk involved that high investment may yield very little return.

Australia is not, as some suggest, leading the world in carbon trading or energy efficient technology. New Zealand and several European States are ahead of us and are making much bigger cuts in their energy consumption and pollution. We can learn from their experience, but in return there are some promising signs that we are beginning to develop expertise which can be turned into export sales. The deep drilling into the core of the earth to release geo-thermal energy in the north of South Australia is looking very promising. Our solar industry has already spawned some successes, though one of the best of these (a firm making large-scale solar energy capture arrays) has already relocated to the United States. The sequestration of carbon in underground sinks has also begun, though it will be some time before the environmental effects are fully assessed and understood. Our wind and water-power capacity and experience is growing and the first experiments in harnessing the waves for something other than surfing are being planned.

It would be good if Australians could see climate change as a challenge rather than a threat, as it tends to be portrayed in some of the more alarmist quarters. It would be even better if the two main political parties could take a slightly longer view of what is required and accept, as Garnaut insists, that a bipartisan approach to the issues involved would be preferable. By all means let’s keep an open mind over the new technologies and the time it will take to implement all the measures necessary, but can we pull together on the broad outlines of this approach to climate change for our children’s sake?