So you’ve got the “take out” from the Treasury modelling, that an ETS will have next to no long-run effect on economic growth even with a target aimed at the more ambitious abatement outcomes. And it will only cost households an extra $7 a week before compensation.
That’s an extra $364 a year, some media outlets quickly informed us. They should have added it would mean $3640 over ten years.
Nevertheless, Treasury’s pains to repeatedly point out that the reduction in GNP caused by an ETS was only a reduction against a much larger rise appear to have not been in vain. In Chapter 2, they provide a short explanation of how modelling results can be misreported that should be cut out and kept as a handy guide to how the media and politicians can distort outcomes.
The primary complaint about the modelling is that it assumes an international agreement on addressing climate change and, specifically, emissions trading. Two of the four scenarios modelled — the “Garnaut” scenarios based on his recommendations — assume success at Copenhagen next year and an international agreement from 2013; the other two — the “CPRS” scenarios — assume a more realistic phase-in of China from 2015, India from 2020 and other developing countries from 2025.
But as the Garnaut Report showed, the issue remains the same — the biggest factor in the costs of an ETS is whether we have one alone or in concert with the rest of the world, enabling businesses to import permits, and minimising the likelihood of leaking jobs offshore.
Far from being some Pollyanna-ish wishful thinking on the part of Treasury, in fact there’s no point modelling a one-out emissions trading scheme. No government is going to proceed with a full-fledged ETS in the absence of an international agreement. The best they’ll do is Garnaut’s “wait and see” fixed price scheme, which will have minimal impacts due to the low price proposed. The correct answer to the question “what happens if there’s no international agreement?” is, of course, that we’re stuffed.
The more detailed criticism of the modelling has come from Brian Fisher. Fisher heads the Liberal-aligned Concept Economics with Henry “let the planet cook” Ergas, which was involved earlier this year in attempts to encourage Brendan Nelson to retreat from his party’s ETS position inherited from the Howard Government. That debacle sounded the death knell for Nelson’s leadership, but never mind. Fisher, as former head of ABARE and a devoted fan of land-clearing, has zero credibility on climate change issues and a terrible track record in modelling, as Crikey has previously detailed.
Fisher, in an obviously hasty and at times unclear effort to undermine the Treasury assumptions for the Minerals Council, also complains about the international agreement issue, as well as suggesting Treasury underestimates the long-run cost of oil and gas. Given how badly wrong ABARE got its oil price forecasts on Fisher’s watch, this is rich indeed, but let’s assume he’s right. If oil and gas cost more than Treasury forecast, how does it affect the economic impact of an ETS? Wouldn’t it merely expedite the shift to renewable energy, reducing costs over the long term?
Fisher also laments today in (where else?) The Oz that the modelling does not assume the development of a nuclear power industry. That’s indeed a fair complaint, except that, again, it doesn’t suggest Treasury has underestimated the costs of an ETS. In the event governments permit a nuclear power industry in Australia, that will provide an additional option for a switch from carbon-intensive power generation.
The one substantial criticism Fisher manages to make of the modelling is its over-optimistic assumption that carbon capture technology will from some point in the 2020s facilitate and reduce the cost of the shift to low-emissions power generation by enabling us to keep relying on coal. Treasury did conduct a sensitivity analysis on the failure of carbon capture technology, which yielded 0.9% lower GNP growth by 2050 beyond that caused under the Garnaut 10% scenario — not a vast amount, but the most dramatic of the technology sensitivities modelled for Australia. Kevin Rudd’s huffing and puffing about his international carbon capture institute won’t conjure up a viable technology that will save us from having to address serious questions about our long-term energy sources.
However, there are two other factors that, in their omission, mean Treasury has been altogether conservative in its estimation of the costs of an ETS.
Firstly, it has deliberately not discounted future costs. Discounting is one of the big battlefields of climate change economics, and dominated a lot of criticism of the Stern Report. But because the Treasury modelling only applies to the costs of an ETS, not its benefits, they’ve ignored the issue. Discounting, if properly applied (how much is a dollar in 2050 worth today?), would significantly reduce the costs of an ETS in 2020 and 2050 if considered in today’s terms.
Secondly, Treasury has not include the costs of climate change, and the benefits of reducing those costs. Garnaut’s modelling estimated the cost of unmitigated climate change for Australia in 2053 at between 2 and 3% of GNP. To the extent that an ETS mitigated this impact, the costs of an ETS in GNP terms should be offset by a part of that 2-3%.
There are two other issues addressed, almost in passing, by Treasury that climate sceptics and advocates of delay ought to consider. Treasury conducted a sensitivity analysis on the option of delaying action on climate change. They found:
…once global mitigation action begins, GWP (Gross World Product) levels are lower than if the mitigation had begun earlier. The higher costs come from the need for greater emission reductions in less time to achieve the same environmental outcome, and the high cost of low‑emission technology options that have not benefited from reductions in capital costs. As a result, global costs (as a share of GWP) are about 10 per cent higher in 2050, and remain higher to 2100.
They also considered what would happen if we did nothing, even if the rest of the world took action.
When Australia free rides, the modelled economic costs to Australia are lower. Initially, when fossil fuels dominate energy sources, Australia benefits from a higher terms of trade effect, relative to the reference scenario, resulting from the cost competitive advantage of its commodities. However, by around 2020, Australia’s terms of trade fall relative to the reference scenario largely because of reduced global demand for Australia’s emission‑ intensive exports, such as coal and gas. By 2050, Australian GNP is 0.6 per cent lower than the reference scenario.
So there’s no free lunch, even if we want to pretend the planet was getting colder or wait until the last greenhouse sceptic is convinced.
The Treasury modelling doesn’t tell us what will happen in 2050 if we try to address climate change. But it tells us what won’t happen: the scenarios offered by rentseekers, special pleaders and advocates of further delay. It is conservative modelling that on balance appears to overstate the costs of emissions trading.
The latest Morgan Poll, conducted over the last two weekends, has the Government maintaining a strong lead amidst the economic crisis and debate over the impact of the banking guarantee. Malcolm Turnbull’s attempts to convert his critique of the Government as slow and dithering into hasty and ill-considered has yet to get any traction, although both major parties have collected support from the Greens and Family First. The ALP primary vote is up 0.5% and the Coalition 1.5%, yielding a 2PP figure of 56.5-43.5.
The only apparent benefit from the Turnbull leadership has been to settle the Coalition’s vote into the 42-46% range — well up on the dire sub-40 numbers Brendan Nelson was managing, but still uncompetitive. Labor has come down from its heights of 60+% earlier in the year – is the honeymoon over? — but remains firmly with the 54-58% band. Kev still has his G20 and APEC trips where he can play statesman, although there’s a suggestion the public are a little over his jetsetting.