Decarbonising Australia is going to take decades. It should raise Australian living standards, compared to doing nothing. But unlike many prior policies that lifted living standards, it will not show up directly in GDP. And that’s a problem.
One of the biggest risks to decarbonisation is economic. Change is costly. If we see falls in GDP per capita — if people feel they are getting worse off — then decarbonisation will swiftly become a live political issue. Australia lost its carbon tax once. We must learn from that.
We’ve seen in recent years just how furious a populace can get when prices rise and wages stagnate. Rising electricity bills are often the herald of populist politics. When people are angry, Australia’s contribution to a great global project to reduce emissions will be an easy scapegoat.
To maintain the decarbonisation project for 30 years we need to accept that some of the necessary changes will be costly. How do we create public acceptance of some cost?
Part of the answer is to challenge the expectation that living standards are only supported by increasing GDP. The events of recent months make this clear. Australia’s incinerated landscape and hazardous air quality are not directly measured in GDP, but they matter enormously for quality of life.
But that is not the only answer. Not everyone will accept that removing the risk of climate change is worth regression in living standards. We must also unleash productivity gains that permit the economy to thrive while we decarbonise.
The costs of change
The sooner we act, the better it will be for the climate. But, because prices of greener solutions are falling, the sooner we act, the more costly change will be. It’s a cruel fact.
The dollar cost of energy from wind is still higher than the dollar cost of energy from brown coal, for example. A battery for a car still costs more than a petrol engine. Decommissioning power plants that still have life in them means spending a lot of money on their replacements that we would not otherwise have had to spend. And so on.
Electric vehicles are relatively advanced as far as low carbon technology goes, but simply building the electricity infrastructure to support electric vehicles, for example, will be a multibillion-dollar project.
The cost of reconfiguring electricity grids for electric vehicles is estimated at $2500 to $8500 per vehicle, according to research by Boston Consulting Group.
If 1 million cars a year are sold in Australia over the next 10 years, and 10% of them are electric vehicles, that’s 1 million vehicles and a potential cost of at least $2.5 billion — just to create the very beginning of the EV revolution.
There are a lot of headlines about the economic upsides of acting on climate change. The upsides are real. The costs of not acting are huge. But the costs of acting are real too, and no intelligent person can deny them.
How big are the costs of decarbonisation at an economy-wide scale? This is a hotly debated question, with some absurd answers being thrown around. Less than zero, claim some people who want to decarbonise. Many trillions, claim others with a stake in the status quo.
One recent article in The Australian Financial Review set the price of climate action at $5 trillion or $100,000 per household, covering the cost of new appliances, solar, batteries for storage, batteries for two electric cars per household etc.
Trillions are always awe-inspiring. In this case they should also inspire a little mental arithmetic. Australia has around 10 million households, so even at the extremely generous price of $100,000 per household we can only get to $1 trillion.
What’s more, such accounting fails to acknowledge that much spending would be required anyway. Eventually we all replace our cars, our light-globes etc. And the country replaces its electricity generation systems. If we make low-carbon choices at those points the marginal extra cost is minimised.
But dubious estimates are not only on one side. People fighting what is essentially a good fight — to reduce emissions — are prone to distortions too.
The Melbourne Sustainable Society Institute estimates costs of $35 billion over 2019 to 2030. Put another way, that’s $300 per household per year. Diving into the details reveals that this modelling assumes a carbon price –a policy which would make emissions reductions cheaper, but a policy that Australia does not have.
Much of the cheaper ways to reduce net carbon emissions rely heavily on the idea of “net”. They use offsets — things like increased forestation. But planting trees while still burning fossil fuels doesn’t lock in decarbonisation — those trees could be cleared (or could burn) in the future. The solutions that work best — leaving fossil fuels in the ground — are also the most expensive.
How do we manage this?
In some industries, change will be cheap. In others, it will be awfully expensive. The amazing falling price of solar power generation means energy is at the cheaper end of the scale.
The new Darlington Point solar farm, in rural NSW, will cost just $450 million to provide enough power to supply the equivalent of 115,000 NSW households — or a bit under 5% of the state’s total. (Although solar alone can’t provide power at night without investing in storage too.)
Making steel without emitting carbon, however, is going to be much harder. And aviation is tricky too. Batteries are so heavy that planes are likely to be the last vehicles to give up using fossil fuels.
To avoid damaging living standards, we should first harvest low-hanging fruit. Australia should, for example, work on solar power first and move on to reducing emissions from aviation later, when technology is more advanced. We’re aiming for net zero emissions by 2050, not tomorrow.
It’s been very helpful recently that green power has got cheaper. But we can’t rely on prices to decarbonise for us. They don’t only move in ways that are helpful. Indeed, as demand for oil and coal ebbs, only the cheapest producers will be left in the market, and great cost savings may be on offer from the carbon-intensive side of the economy.
At these times, it’s vital to remember that GDP is not living standards. We could easily add to GDP by increasing fossil fuel use, but in doing so indirectly damage our living standards.
Tomorrow: the productivity challenge inside the move to decarbonise the economy.