The Federal Treasurer and the Minister for Climate Change and Water today released Treasury’s economic modelling on climate change. The report, Australia’s Low Pollution Future: The Economics of Climate Change Mitigation, investigates the potential economic impacts of reducing greenhouse emissions over the medium and longer-terms, and takes into account local, national and global factors. The Report also assesses distributional impacts, including the consequences arising from the implications of placing a price on carbon emissions for household consumption. Today’s report is one of the most complex economic modelling tasks ever undertaken in Australia, however it was acknowledged that the modelling is not a complete assessment of the economic, social and environmental costs and benefits of climate change policies, and nor does it take into account recent global financial uncertainty.
The modelling released today demonstrates that:
- Australia can reduce emissions and continue to grow economically;
- The longer the delay in implementing an emissions trading scheme (ETS), the more expensive responding to climate change will become; and
- With a global carbon constraint, many key industries will become more, not less, competitive.
Treasury modelling: the impact on growth
The modelling examines four alternative scenarios for achieving a low pollution future.
According to the report, two scenarios, Garnaut -10 and Garnaut -25, assume a global stabilization emissions peak within the next two decades. These scenarios assume an international emissions scheme from 2013 covering all emissions sources and economies. Because emission targets for individual nations are based on the per capita allocation developed by Professor Garnaut’s Climate Change Review, Australia’s emission reduction targets vary from 10 per cent below 2000 levels by 2020 and 80 per cent by 2050 (based on 550 ppm); and 25 per cent below 2000 levels by 2020 and 90 per cent by 2050 (based on 450 ppm).
Two other scenarios, CPRS -5 and CPRS -15 take account of the potential costs of Australia’s Carbon Pollution Reduction Scheme within a more realistic multi-stage global environment. Because of their reference point, these scenarios take greater account of the existing structure of national economies and phase international emissions trading over time – developed economies are assumed to participate from 2010 with developing economies joining over time, leading to full global participation by 2025.
Under these scenarios, Australia’s long-term emission reduction target is 60 per cent below 2000 levels by 2050, with CPRS -5 assuming a slower start to global emission reductions and stabilization at 550 ppm. Under CPRS -5, Australia’s medium-term target is 5 per cent below 2000 levels by 2020.
CPRS -15 assumes a faster start and stabilization at 510 ppm, with Australia’s medium-term target is 15 per cent below 2000 levels by 2020.
Importantly, the modelling demonstrates under each of the four scenarios that Australia’s economic growth and prosperity continues to increase. All four policy scenarios modeled demonstrate that economic growth can be sustained while substantially reducing emissions. The Report demonstrates that from 2010 to 2050, real Gross National Product grows on a per capita basis grows at an average annual rate of 1.1 per cent in the scenarios compared to an average of 1.2 per cent in the reference scenario. By 2020 it is calculated that real GNP per capita is around 9 per cent of current levels compared to 11 per cent in the reference scenario. By 2050, this amounts to 55-57 per cent above existing levels compared to 66 per cent in the reference scenario.
This follows from the Treasurer’s recognition that efficient mitigation policies that include a price for greenhouse gases from all sources and in all regions can decouple the link between economic growth and emissions and will in fact necessitate an increase in the economy's carbon efficiency. Efficient emissions pricing will reduce the emissions intensity of Gross Domestic Product (GDP), but this will not result in a decrease of actual GDP. In fact, the economy will be able to produce more for every tonne of emissions generated.
A factsheet regarding the Treasury’s modelling can be found here.
The Treasury’s full report can be found here, and a summary report can be found here.
Treasury modelling: the impact on Australian industry
Under each of the scenarios above, the modelling finds that the impact of the introduction of an ETS on Australian GDP will be modest, and that the economy will continue to grow as emissions decline. In summary:
- Pricing emissions results in a slowing of growth for emissions intensive sectors such as coal, gas, iron and steel, and livestock. Growth accelerates for low and negative-emission sectors, such as forestry and renewable energy.
- All producers will face falling global demand for emission-intensive goods.
- The Government proposes transitional assistance for emission-intensive trade-exposed sectors (EITES) when it introduces the ETS to reduce ‘carbon leakage’ (where EITES move out of Australia to other locations that do not price emissions resulting in an increase in global emissions).
- Australian output of key emission- intensive exports, such as coal, aluminium and meat products, grow more slowly than in the reference scenario.
- Australia’s share of global trade increases for coal. This is because the industry will respond before its international competitors.
- Australia’s share of global trade is broadly maintained for iron and steel. This is because Australian production of these goods is less emissions-intensive than it is elsewhere, and in a market-based setting, the most energy-efficient producer will, all else being equal, also be the least-cost producer.
- Australia’s share of global trade falls for aluminium, given its relatively higher emission intensity of production in Australia.
- There will be a boom in jobs in the renewable energy sector.
The Global Financial Crisis and the increasing cost of delayed action
The report does not take account of the current Global Financial Crisis. As the Report itself identifies,
This report focuses on the medium to long-term transformation of the Australian economy, not short run fluctuations arising from events such as the current turmoil in global financial markets.
Nonetheless, the Treasury modelling reinforces the Federal Government’s intent to introduce the Carbon Pollution Reduction Scheme (CPRS) in 2010. The Treasurer has indicated that the modelling proves that there is an ‘economic imperative’ to take early action. This is confirmed in the report, which shows that the longer the delay, the more expensive responding to climate change will become. The report further demonstrates that a delay in implementing the Government’s CPRS could encourage a build-up of emissions-intensive capital stock that may later become a significant liability. In contrast, early action allows individuals and businesses to plan adjustment pathways and better manage changes in skills acquisition and capital stocks.
Acting early is particularly important in the context of the worldwide response to carbon emissions. The Treasury modelling suggests that economies that defer emission pricing will become relatively more emissions-intensive. The underlying assumption is that when an emission price is eventually introduced, the economy and individual companies would face greater costs, particularly as global investment will be redirected to early movers. The modelling suggests that, by 2050, GDP costs for economies that act early are 15 per cent lower than countries that wait for the world to act together.
The Government has argued that the financial crisis is all the more reason for the Government to go ahead with its reform agenda, especially in the areas of climate change, streamlining federal-state relations, and overhauling the tax system.
Sources:
Treasury website and reports are here.
The Treasurer’s address to the Per Capita Policy Conference in Brisbane is available here.
Kevin Rudd is firm on carbon plan, The Australian, 30 October 2008
Australia will profit under emissions trading: Wong, ABC News, 29 October 2008
