Caps Review Part 4: Economics

By James Wight
Posted on 13 March 2013
Filed under Carbon Reduction, Politics

This is the fourth part in a series about the Caps and Targets Review being conducted by the Australian Government’s independent Climate Change Authority (CCA) this year. Part 1 summarized the global climate crisis, Part 2 explained the importance of the review and how CCA should approach it, and Part 3 outlined the role Australia should play in climate action. This part debunks the economic justifications for inaction.

The Australian government should not limit itself to least-cost mechanisms. Maximizing the scale, pace, and effectiveness of climate action is far more important than limiting the costs of action. Effective climate policies that help avoid enormous costs from climate change are preferable to climate policies that are cheap and ineffective.

The apparent costs of climate policies are short-term and greatly exaggerated while the external costs of CO2 emissions are greatly underestimated and long-lived. Most of the costs of climate change are long-term, unquantifiable, worst-case, and non-market costs, which are not included in cost-benefit analyses of climate action like that of the Garnaut Review.[i] Also, many cost-benefit analyses use high discount rates to estimate the future costs of climate change, which is questionable both on ethical grounds and because it assumes economic growth can continue indefinitely. The true external cost of CO2 emissions could be far higher than the current carbon price of $23/tonne, so high that practically any measures to move to a zero-carbon economy are worth taking.[ii]

Whenever someone tells you a policy is or isn’t cost-effective, ask “cost-effective based on which assumptions, over what time period, and for whom?” Emissions cuts that appear cheap can often be less credible than those with a higher upfront cost (I will elaborate on this point in Part 6). Contribution to the long-term structural change required to decarbonize the economy should be prioritized over apparent short-term cost-effectiveness. Arguments for economic efficiency are often used as excuses to undermine the intent of climate policies. Such efforts to minimize costs overlook that the cost of climate policies is (or at least is supposed to be) mainly paid by polluting companies: it’s like saying anti-tobacco legislation should be “least-cost” for tobacco companies.

Australian governments to date have tended to equate fossil fuel mining and export interests with the national interest. This misguided belief can be traced to a major mistake made in the 1980s in energy and trade policy, to stake Australia’s competitiveness on coal exports.[iii] Given the scale of the climate change threat, climate policy must not be subordinated to this mistaken goal.

The contribution of fossil fuels to the economy is overblown. Only 0.3% of Australian jobs are in coal mining. The majority of mining industry profits either go overseas or benefit only a small minority of Australians. The mining boom is driving up the Australian dollar and thereby destroying other industries. The mining sector did not prevent a recession, but in fact went into recession itself in 2009.[iv] In one sense, having high per capita emissions makes it easier for Australia to cut emissions than other countries, because there is more “low-hanging fruit”.[v] Even phasing out Australia’s coal exports would merely cause Australian GDP to double by 2031 instead of by 2030[vi], paling in comparison to the impacts of the several degrees of global warming associated with continuing demand for those exports.

Continuing to rely on fossil fuels would damage Australia’s future competitiveness. The fact that most fossil fuels are unburnable implies the global economy contains a “carbon bubble”. The valuation of fossil fuel companies is based on the assumption that their reserves will be burned. If we wish to avoid global catastrophe, that bubble must burst. When it does, more than $20 trillion worth of fossil fuel reserves will become stranded assets and the companies’ value will plummet.[vii] Environmentally unsustainable investments are ultimately also economically unsustainable. Those countries least reliant on fossil fuels will be most competitive in the future.

Australia can exit the fossil fuel business and instead export renewable energy technologies to the world. The relative importance of sectors in the Australian economy has always changed over time. Australia has vast renewable energy resources. It is possible for Australia to achieve 100% renewable energy by scaling up existing technologies.[viii] The price of renewables are falling exponentially as they are deployed, and can be further reduced by scaling up deployment, whereas the price of fossil fuels will ultimately rise as more and more countries price carbon and because they are non-renewable resources. Australian action can help change the relative prices of energy technologies globally.[ix]

The main contributor to electricity price rises has been gold-plated investment in transmission and distribution, not carbon pricing or other climate policies.[x] In contrast, climate change can be expected to cause massive increases to the cost of living, particularly food prices.

Domestic equity concerns should be addressed by assisting workers to transition into green jobs, not by handing out free permits to polluting companies. International equity concerns should be addressed by providing developing countries with funding and technology for climate change mitigation and adaptation, not by continuing to supply them with fossil fuels whose effects will hurt the world’s poorest worst of all. In many off-grid regions, solar PV is cheaper than fossil fuels.[xi]

The most important equity issue that CCA must consider is intergenerational. Young people like myself and future generations will suffer the impacts of the greenhouse gases emitted in the present. In this context, cost-benefit analyses tend to be inequitable because the use of discount rates effectively discounts the lives and living standards of future generations.[xii]

In Part 5, I will make my central recommendations on emissions caps.



[ii] F Ackerman & Stanton, E, Climate Risks and Carbon Prices: Revising the Social Cost of Carbon, Economics for Equity and Environment, 2011, viewed 14 September 2012, http://www.e3network.org/papers/Climate_Risks_and_Carbon_Prices_executive-summary_full-report_comments.pdf

[iii] G Pearse, ‘Quarry Vision: Coal, climate change, and the end of the resources boom’, Quarterly Essay 33, Schwartz Media Pty Ltd, 2009, pp. 25-26, 43.

[iv] F Green & R Finighan, Laggard to Leader: How Australia can lead the world to zero carbon prosperity, Beyond Zero Emissions, 2012, viewed 9 September 2012, http://media.beyondzeroemissions.org/Laggard_Leaderv1.pdf, pp. 82-84.

[v] C Hamilton, Scorcher: The dirty politics of climate change, 2007, Black Inc. Agenda, Melbourne, pp. 42-43.

[vi] G Pearse, ‘Quarry Vision: Coal, climate change, and the end of the resources boom’, Quarterly Essay 33, Schwartz Media Pty Ltd, 2009, pp. 87.

[vii] Carbon Tracker Initiative, Unburnable Carbon: Are the world’s financial markets carrying a carbon bubble?, 2011, viewed 9 September 2012, http://www.carbontracker.org/linkfileshare/Unburnable-Carbon-Full1.pdf

[viii] Beyond Zero Emissions, Zero Carbon Australia Stationary Energy Plan, 2010, viewed 9 September 2012, http://media.beyondzeroemissions.org/ZCA2020_Stationary_Energy_Report_v1.pdf

[ix] F Green & R Finighan, Laggard to Leader: How Australia can lead the world to zero carbon prosperity, Beyond Zero Emissions, 2012, viewed 9 September 2012, http://media.beyondzeroemissions.org/Laggard_Leaderv1.pdf, pp. 55-56, 80-81.

[x] J Grimes, ‘The truth about rising power prices’, Renew Economy, 20 June 2012, viewed 21 February 2013, http://reneweconomy.com.au/2012/the-truth-about-rising-power-prices-75112

[xi] F Green & R Finighan, Laggard to Leader: How Australia can lead the world to zero carbon prosperity, Beyond Zero Emissions, 2012, viewed 9 September 2012, http://media.beyondzeroemissions.org/Laggard_Leaderv1.pdf, p. 47.

[xii] D Roberts, ‘Discount rates: A boring thing you should know about (with otters!)’, Grist (blog),  24 September 2012, viewed 21 February 2013, http://grist.org/article/discount-rates-a-boring-thing-you-should-know-about-with-otters/

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