The Government has initiated a new saga in addressing greenhouse gases policy options. It has set up a parliamentary committee with membership restricted to ''those who are committed to tackling climate change and who acknowledge that effectively reducing carbon pollution by 2020 will require a carbon price''.
The committee's focus is on the economics of a carbon price, but its tasks do not include examining the economics involved in the costs and benefits of policy actions. This avoids the two key questions; ''What is the benefit from preventing global warming said to be stemming from greenhouse gas emissions; and, what cost does Australia and the world at large need to pay in order to abate the emissions?''
There have been about a dozen ''peer reviewed'' studies into the global costs of human induced global warming on the basis of a 3 degrees Celsius increase in world temperature. The range of these studies estimated the average cost per head in 50 years time is between a gain of 2.5 per cent of gross world output and a loss of a similar magnitude.
Unlike other studies, the UK Stern Review provided a very high cost estimate, 12.5 per cent, but that report was not subjected to independent review and has been comprehensively discredited.
An avoidable cost of 2.5 per cent is not insignificant. But this is projected to occur in the context of a forecast 200 per cent business-as-usual increase in world real income per capita levels over that same period (a 70 per cent increase for Australia).
A key question is whether the business-as-usual outcomes are unaffected by the attempted transformation of energy sectors to prevent the emissions of carbon dioxide and other greenhouse gases.
This is pertinent to Australia which would need to eliminate over four fifths of current emissions. It is equally important to developing countries which would need to find and adopt different sorts of energy sources from those which have underpinned growth of rich countries. The failure of the Copenhagen Conference on greenhouse emissions was due to China and India having no confidence that the necessary cost breakthroughs were imminent.
Critical in estimating the costs is the CO2 price necessary to drive the changes. This in turn largely depends on the ease with which carbon emitting energy can be substituted for other forms of energy.
Some estimates suggest a carbon price at hundreds of dollars per tonne would be necessary to drive the targeted changes. Treasury suggests a price in present day dollars of $100 to $150 might do the trick. For Australia each $100 per tonne on the carbon price raises the wholesale electricity price threefold.
Though Australia would need to abandon its existing low cost energy (and policy denies it the nuclear option) Treasury puts the costs of achieving our target at only 3-6 per cent of GDP over the course of 40 years. But these projections are pure guesses. They are derived from bold technological assumptions coupled with the experience of consumers' responses to minor price changes that have taken place in the past. And, of course, they are based on all nations adopting similar carbon abatement regimes -- even Treasury recognises that income leakage from Australia would be serious should we go it alone.
The world's only experience of the sort of substantial price changes thought to be needed has been the quadrupling of oil prices during the 1970s. However, that event brought substitutions of oil by coal, natural gas and nuclear as well as increased oil discoveries. Climate change policy would prevent similar developments.
Some say energy is easily managed since it accounts for only 5 per cent of GDP and half of this consists of distribution costs. But much the same can be said of food, which in rich countries comprises only some 12 per cent of GDP, most of which is distribution and value-added features.
With both food and energy, forcing a major reduction in usage would bring the economy to the point of collapse. Indeed, low cost dependable energy is so critical to modern economies that, at least without substituting nuclear energy for fossil fuels, a dramatic loss of living standards may be inevitable at any carbon price.
These considerations barely merit a mention in the renewed debate on emission controls. Instead the agenda is focussed on a tax on the emissions or creating a tradeable right to emit.
This agenda is predicated on looming cost breakthroughs in renewables and carbon capture and storage costs. But if such changes are just around the corner, why not wait for them rather than take early action that involves penalising current technologies?
The bottom line is that on the best spin the Government can offer, we spend 3-6 per cent of GDP to save 3 per cent. But the more likely outcome is the measures proposed will mean economic stagnation and future income levels at only half what they would be under business-as-usual, even if Australia's outcomes were part of a coordinated global approach. Setting ourselves up as a pacemaker would create an even worse outcome and would almost certainly plunge the economy into a deep depression and wreck the nation's competitiveness.
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