Economic modelling is one of many tools for policy development. It is often taken out of context and misused. The present debate over the cost of Labor’s climate policy provides an example. Lack of context, modelling assumptions and selective use of modelling results risks distorting future climate and energy policy, with serious consequences.
Before entering into discussion of recent Coalition claims regarding the impact of Labor’s climate policies, we should consider some context.
The costs and social and environmental impacts of global failure to limit climate change are very large. Indeed, the probability of runaway change is increasing [ https://www.theage.com.au/environment/climate-change/our-carbon-budget-is-all-but-spent-but-who-in-canberra-is-counting-20190505-p51k8c.html?js-chunk-not-found-refresh=true ].
As noted in a previous article [ http://johnmenadue.com/alan-pears-beyond-the-climate-chaos/ ], Australia’s present commitment falls far short of its fair share. Further the Coalition’s decision to use ‘Kyoto Carryovers’ cuts its effective 2030 target to around 15%, not the headline 26-28% cut from the 2005 level. Labor’s 45% cut is at the low end of the scientifically credible 45-65% cut.
The Coalition claims it is achieving adequate progress towards its target. However, progress is occurring largely despite, not because of, its efforts [ https://www.climatecouncil.org.au/resources/climate-cuts-cover-ups-censorship/ ].
International comparisons tell a sad story. The World Economic Forum’s 2019 assessment of progress towards energy transition [https://www.weforum.org/reports/fostering-effective-energy-transition-2019 ] ranks Australia 43rd, among the worst performing developed countries. The International Energy Agency (IEA) puts Australia among the worst performers on energy efficiency in its 2017 and 2018 rankings, with very little improvement in recent years [ https://webstore.iea.org/market-report-series-energy-efficiency-2018 ]. The American Council for an Energy Efficient Economy rating saw us slip from 10th in 2014 to 18th in 2018 [ https://aceee.org/portal/national-policy/international-scorecard ].
The IEA’s 2018 review of Australia [https://www.iea.org/countries/membercountries/australia/ ] recommendations included adoption of ambitious vehicle fuel efficiency standards – rejected by the Coalition government. IEA also recommended strong industry energy efficiency measures ‘building upon the experiences of the Energy Efficiency Opportunities program’ that was shut down by the Abbott government, despite cutting millions of tonnes of emissions from major industries at an average cost of minus $95/tonne of CO2. An independent review recommended its continuation [ https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Energy_Efficiency_Repeal_2014 ].
Analysis by Climateworks Australia as part of a global project in 2014 found that Australia could achieve very large emission reductions while maintaining economic growth. Its latest update (https://www.climateworksaustralia.org/sites/default/files/documents/publications/climateworksaustralia-tracking-progress-report-2018.pdf ), comments that ‘Recent research suggests that faster than expected technological advances have made steep cuts in emissions easier to achieve’ and estimates that a 55% cut to emissions is achievable by 2030. Their work utilises both economic modelling and thorough technology assessment with CSIRO.
So Coalition claims that stronger climate action will devastate the Australian economy should be carefully scrutinised. Numerous sources indicate that we are failing to capture substantial cost-effective emission reduction potential, and that innovation could cut costs and increase abatement.
The Coalition claims rely heavily on its interpretation of recent economic modelling by Brian Fisher of BA Economics [ http://www.baeconomics.com.au/bae-explores-some-of-the-possible-economic-outcomes-of-labors-climate-policy ]. Modeller Warwick McKibbin [ https://johnmenadue.com/warwick-mckibbin-how-should-technocrats-count-the-true-cost-of-climate/#more-26516 ] has noted that:
“In the Fisher report the carbon price is $263 per ton CO2, which is vastly different to that estimated in G-Cubed [the model used by McKibben and others]. There are very few experts who would agree with the marginal abatement cost curve in the Fisher study. It does not mean it is wrong – but as an outlier the result needs to be understood and fully articulated. The key difference across models must come down to the assumptions about rigidities in the BAEGEM model.”
If we accept that economic models may provide different results, but they may provide useful insights, especially when one model is used to compare different scenarios, the BA Economics paper makes some interesting points (p.7):
“It is important to note however that no attempt has been made here to model the economic effects of physical climate change itself. The current exercise is intended to highlight the baseline economic effects of different policy choices with respect to access to international emissions permit trading and shielding of EITEs.”
In this context, the main finding of the study (p.7) is:
“The clear finding across the scenarios modelled is that the negative economic consequences of adopting stringent emissions reductions can be substantially ameliorated through greater trade in international permits.”
This finding is not controversial. It reinforces the case for Labor to engage with industry to negotiate the detail of its approach with key stakeholders, especially with regard to potential use of offset permits. It supports the claim that it is difficult to estimate the cost of Labor’s policy at present.
And it is worth remembering McKibbin’s comment that “Around 80 per cent of the loss in GDP in Australia [due to the Paris Agreement] is caused by the policies of other countries. This clearly indicates that the debate on climate policy should be focused on making sure the world follows a sensible climate policy rather than debating the size of the Australian target.”
With regard to electricity costs, the BA Economics study states (p.14):
“…the wholesale electricity price under Labor’s climate policy is around 20 per cent higher than that resulting from the Coalition policy…..”
This higher electricity price results from assumptions about renewable electricity prices, the extent to which fossil fuel generation is replaced, and the resulting impact of high carbon prices, as noted on p.13:
“Output falls in most sectors as a result of the Plan. The emissions target generates a price on carbon which raises electricity prices. This higher input cost then flows through to all sectors that directly or indirectly use electricity. The sectors most adversely affected by the Plan are electricity, thermal coal, metallurgical coal, oil refining, non-ferrous metals, and chemicals, rubber and plastic.”
CSIRO, Bloomberg, AEMO and many others estimate that a renewable electricity future will be cheaper, and is occurring quickly. Faster transition to renewable energy would reduce the impact of a carbon price on average electricity prices. The IEA is confident that more aggressive energy efficiency improvement would add to savings. I trust these specialist judgements over those of less well-informed economic modellers.
While, at present, electricity comprises only a third of Australian emissions, electric vehicles charged by renewable electricity, enhanced rail infrastructure, public transport and smart urban planning will cut transport emissions that now comprise almost a fifth of our emissions. Emerging solutions, including efficiency improvement, electrification (using heat pumps and other technologies as proposed by Beyond Zero Emissions [www.bze.org.au ] and the Australian Alliance for Energy Productivity [ http://a2ep.org.au/ ] in their reports), renewable hydrogen and structural change will drive large emission reductions across combustion and process emissions, now a quarter of emissions. Effective policies can cut emissions from forestry and land use, while increasing sequestration. For example Ross Garnaut [ https://www.bing.com/search?q=Ross+Garnaut+superpower&pc=EUPP_ASTE&mkt=en-au&httpsmsn=1&refig=1cf34f6e0d9c4bb0bededc4263ac0757&sp=-1&ghc=1&pq=ross+garnaut+superpower&sc=0-23&qs=n&sk=&cvid=1cf34f6e0d9c4bb0bededc4263ac0757&first=21&FORM=PERE1 ], chief scientist Alan Finkel [ https://www.chiefscientist.gov.au/wp-content/uploads/HydrogenCOAGWhitePaper_WEB.pdf ] and others have outlined our potential to cut our emissions and become a major renewable energy exporter.
A successful low carbon Australian economy is attainable – with the right policies.
Alan Pears AM has worked on clean energy and climate policy for several decades. His work spans all sectors of the economy, ranging from practical site-level projects to program development and implementation, policy analysis and education.