With the federal Opposition leader announcing an inquiry into the effects of global warming on the Australian economy, it’s as good a time as any to look at what would happen if Stern’s recommendations were applied to Australia.
We estimate the full cost would be equivalent to a loss of 5.3% in Australian GDP. This estimate is based upon Stern’s own estimate of the long term social cost of carbon of $US85 per tonne of CO2.
This is, as we expected, higher than Stern’s estimate of 1% of GDP. We would expect this because Australia is a high carbon use economy. Our estimate is, however, within the range specified by Stern of -4% of GDP to plus 15% of GDP. It is at the top end of the smaller cluster specified by Stern, from -2% of GDP to +5% of GDP.
In the short term, should Australia sign the Kyoto Protocol and enter into carbon trading at a price of $US30 per tonne of CO2, this would have a short term cost of 1.87% of Australian GDP. This would result in a loss of 193,000 jobs of which 138,000 would be fulltime and 55,000 would be part-time. This is based on Stern’s own estimate of an initial cost of traded carbon in the range of $US30 per tonne.
These job losses could be reduced by introducing a two-year wages freeze with the beginning of carbon trading in the region of US$30 per tonne of CO2. These sacrifices only make sense if we follow Stern’s recommendation and allow production of low carbon energy in all its forms including nuclear.
It may of course prove that objectives similar to that of Stern can be achieved in Australia by a carbon trading system other than that described within the Kyoto Protocol. Such a system may not be so initially costly to the Australian economy.
To read a full analysis of this issue, click here.
Dr Peter Wood, research school of physical sciences and engineering, Australian National University writes: Michael Knox’s attempt to measure the cost to Australia of adopting the recommendations of the Stern Review makes a number of serious blunders. The article misunderstands the relationship between the Social Cost of Carbon and GDP and does not take into account the cost to Australia of global warming. The article naively equates the Social Cost of Carbon with a reduction in GDP equivalent to the amount of greenhouse gases emitted at that cost. If we were to adopt a price signal on greenhouse gas emissions through a cap and trade scheme or carbon tax, emitters will try to adopt least cost strategies to reduce their emissions or offset them through processes such as biosequestration. Knox seems to make the ridiculous assumption that the least cost strategy would be to reduce jobs or real wages. The CSIRO submission to the Task Group on Emissions Trading cites studies that suggest deep cuts by 2050 would reduce GDP growth by 0.10-0.25% per year, a figure much less than any of Knox’s. Even if greenhouse gas levels are stabilised at levels of around 550 parts per million, there are likely to be costs such as widespread destruction of the Barrier Reef (worth $5.8 billion per year or 0.9% of GDP) or increased droughts (the last two costed about $6 billion each). Knox does not consider costs such as these. When Stern discusses the Social Cost of Carbon, these are the costs that he is talking about.