Jon Stanford. Policy Approach to Climate Change

Jun 12, 2015

Policy Series

Given that the substantial threat brought about by anthropogenic climate change has been recognised for a quarter of a century, it is remarkable that global policy makers have been so dilatory in responding to it. Voluminous scientific and economic studies have been produced, Ministers have met annually to discuss and negotiate a global policy response and yet in terms of outcomes nothing much has happened. This year, however, the annual conference of the parties (CoP) to the UN Framework Convention on Climate Change (UNFCCC) to be held in Paris will be of unusual importance. The parties will be required to commit to making reductions in greenhouse gas emissions beyond 2020 in pursuit of their agreed objective of limiting the future rise in global temperatures to two degrees Celsius.

To date, the only significant global response to climate change has been the Kyoto protocol, signed in 1998. Under the terms of the protocol, most developed countries undertook to reduce their greenhouse gas emissions to 95 per cent of 1990 levels by 2012. In the decade to 2013, however, when the world’s primary energy consumption increased by 28 per cent, the use of carbon-intensive fossil fuels remained at a high level. Fossil fuels comprised 87 per cent of global primary energy consumption both in 2003 and in 2013.[1] The kindest statement that can be made about the Kyoto protocol is that it probably did not make the situation any worse.

A “diabolical” global policy problem

That said, the difficulties confronting policy makers in seeking to address climate change are many and intense. Ross Garnaut was not exaggerating when he called it a diabolical policy problem.

There are important efficiency issues involved in taking action against climate change. The fundamental difficulty is that greenhouse gases know no frontiers so that a global agreement is required if they are to be significantly reduced. Because reducing emissions can involve considerable costs and we do not always have technologies that are efficient and effective substitutes for fossil fuels, it is not surprising that national governments are reluctant to commit to substantial action. In a situation where the actions of most individual countries can make only a negligible difference, there is also a free rider problem, or even a positive economic incentive to take as little action as possible and leave the heavy lifting to others. In addition, the problem of ‘carbon leakage’, or the migration of footloose investment projects to jurisdictions with zero or low taxes on carbon emissions, implies that national governments face a substantial disincentive to taking ambitious action against climate change that would involve getting in front of the pack.

Not least among the policy problems are considerations of equity which, to the extent that they are often subjective, can be relied upon to provide fertile ground for disagreement. Since it is generations as yet unborn that will suffer the main impact of climate change, inter-generational equity is one important consideration. It is not easy to persuade people to make economic sacrifices for future generations they will never know, particularly if they are not wealthy themselves. This can lead to a conflict between ethical aspirations and the hip pocket nerve. Opinion polling suggests that while a substantial majority of Australians support taking action to address climate change in principle, most people are far less willing to accept the necessary increases in the prices of petrol and electricity.

This issue spills over into a significant difficulty in terms of horizontal equity. It is notable that the OECD nations accounted for almost none of the increase in energy consumption between 2003 and 2013. Non-OECD nations on the other hand increased their primary energy consumption by 63 per cent over the same period. Yet quite understandably, under the terms of the Kyoto protocol, most of these countries were not required to reduce their emissions. It is difficult to explain to people in India, for example, many millions of whom do not yet have any power supply, that they should not aspire to enjoy the same benefits of cheap electricity that has in part enabled people in the developed world to build and increase their wealth. There are, therefore, persuasive reasons for either excluding developing countries from restrictions on the use of fossil fuels or, preferably, to provide financial support for them to invest in greenhouse-friendly technologies.

Given that non-OECD countries now account for over half of global emissions and that the United States also refused to be bound by the Kyoto protocol, it is not surprising that the treaty was ineffective. Its provisions for greenhouse gas reduction covered only about one quarter of global emissions, with the world’s two largest emitters, the US and China, remaining outside its reach. This problem of coverage will need to be addressed in any future agreement if it is to be effective.

Finally, policy issues are always less tractable when they are bedevilled by competing ideologies. Climate change fits neatly within this category. On the left, the Greens often appear to have the big resources companies in their sights, for reasons over and above climate change, and also to be ideologically opposed to any low or zero emissions energy technologies that are not renewable. On the right, the science of climate change, bizarrely, is often seen as a green/socialist plot to attack big business. Self-proclaimed experts decry the work of peer-reviewed climate scientists despite having no relevant expertise or qualifications in the field.

A “diabolical” Australian policy problem

In many areas, Australian policy makers can take credit for their performance over the last thirty years, particularly in microeconomic reform. We do, however, fall back to the pack when it comes to tackling global warming, where Australia’s record has been unexceptional.

In retrospect and compared with what followed, the performance of the Howard government now looks relatively good. Despite not ratifying the Kyoto protocol solely to demonstrate solidarity with President George W. Bush, Australia committed to meeting our Kyoto targets (which were admittedly considerably more generous than for other nations). Nevertheless, Australia generally punched above its weight at Kyoto and in annual conferences of the parties; the government established the Australian Greenhouse Office; and the Coalition took an emissions trading scheme to the 2007 election.

Kevin Rudd stated that climate change was the “greatest moral, economic and environmental challenge of our generation“. Yet apart from ratifying the Kyoto protocol, which because we were going to meet the target anyway was the easy bit, his climate change policy ended up being a damp squib. Paradoxically, the Greens, who should own this issue as none other, turned out to be saboteurs. By making the perfect the enemy of the good, the Greens contrived first to sink Rudd’s emissions trading scheme and then not only to persuade Julia Gillard to break her promise of no carbon taxes but also to impose a carbon price that was higher than that of most other countries. By opening the door for Tony Abbott, a man who believes that climate science is “crap” and “coal is king”, the Greens scored a spectacular own goal.

While the politics and equity issues around climate change policy are difficult, if we allow ourselves to be guided by economic considerations we should:

  • Since scientists state that climate change will be particularly dangerous for Australia, prosecute the case for ambitious international action to limit global warming
  • Invest heavily in developing new cost-effective low emissions technologies
  • Use a market-driven instrument, such as emissions trading with access to international credits, to reduce emissions in the most efficient way
  • Be neutral in encouraging the deployment of low emissions technologies, for example by not favouring renewables.

In comparing the policies of the present government to this blueprint, they rate badly in every respect:

  • The government’s ambition for tackling climate change is low: it generally fails to send senior Ministers to international meetings and, embarrassingly, worked hard to keep climate change off the agenda for the last G20 meeting in Australia
  • It has attempted, although frequently foiled in the Senate, to reduce substantially Australia’s efforts in climate change-related research and development
  • It has destroyed Australia’s policy architecture for a market driven, emissions reduction instrument and instead, ludicrously for a conservative government, implemented a subsidy scheme for emitters directly opposed to the well-established ‘polluter pays’ principle
  • It has maintained the policy of having a renewable energy target which discriminates against other low or zero emissions technologies.

The wild card for the government’s climate policy, however, is the upcoming CoP in Paris in December. At that meeting, Australia will be required to join with other parties to the UNFCCC in providing a commitment to reduce emissions post-2020 in pursuit of the agreement, to which it is a party, to restrict global warming to two degrees Celsius.

Setting and achieving an emissions reduction target

Although many countries are yet to reveal their initial position, the current level of global ambition for the Paris CoP falls short of what would be required to achieve the two degree target. For example, the climate change agreement between the US and China announced in 2014, while showing a welcome increase in commitment from these two major emitters, represents a manifestly inadequate benchmark. Realistically, nations would need to commit to a reduction in emissions levels of at least 40 per cent from 1990 levels by 2030 if the target is to remain within reach, with the hope of new technologies becoming available after that date leading to decarbonisation of the global economy after 2050. The EU has already committed to a 40 per cent reduction target for 2030 and expressed a willingness to go further if other countries show a greater ambition. Canada, whose Prime Minister’s position on climate change is similar to Tony Abbott’s, recently proposed a 30 per cent reduction in emissions from 2005 levels by 2030.

Of course it needs to be asked whether, in practical terms, Australia would be able to achieve a 40 per cent reduction in emissions from 1990 levels by 2030.[2] Assuming a limited use of international emissions credits, the two sectors of the economy that would be most affected — electricity generation and transport — would need to undergo substantial technological change. Coal-fired generators would probably be replaced by gas combined cycle for base load duty, although following Premier Weatherill’s initiative in establishing a Royal Commission on nuclear energy in South Australia it may be that at least one State government could propose small modular nuclear reactors as a more economic option. Fortuitously, most of Australia’s fleet of coal-fired plant will approach the end of their economic lives in the 2020s. In the transport sector, electric vehicles and hybrids would need to increase their market share substantially.

What policy instruments should be employed to effect these major changes? Instinctively, an economist would advocate a market-based mechanism such as an emissions trading scheme. But one of the consequences of Tony Abbott’s effective “axe the tax” campaign has been to entrench community opposition to an overt carbon price, particularly a high one such as would be required, for example, to effect a shift from coal to gas. Indeed, the community appears much more comfortable with a regulatory approach as exemplified by support for the RET which, of course, embodies a significant implicit carbon price.

Because of opposition to a carbon price in the Congress, President Obama has adopted a regulatory approach to reducing coal-fired power generation. In Canada, Ontario has phased out coal generation, which provided over a quarter of the province’s power supply early in this century. One approach to the Australian electricity sector would be to impose a ceiling on emissions from generators. For example, assuming no carbon capture and storage, a limit of 900kg CO2/MWh by, say, 2023 would force the decommissioning of current brown coal generators, while a limit of 400kg CO2/MWh by 2030 would eliminate black coal plant. Below these limits, the market would determine which technologies would be adopted. Similarly in the transport sector, emissions limits could be established for new vehicles, again with the market determining which technologies were employed.

It is not clear that such a regulatory approach would involve any substantial loss of efficiency as compared to a price-based mechanism. It may even have some advantages in terms of effectiveness, because investors in low emissions technologies would have certainty as to when their projects would need to come on stream.

In conclusion, the global community can only hope that its leaders rise to the occasion in Paris. Australians also have the right to expect, in the national interest, that their government will play a leading role both in advocating an ambitious emissions reduction regime and committing to a national target consistent with the positive efforts of comparable countries.

Jon Stanford is currently a Director of Insight Economics. He had a significant career as an economist in the Australian Public Service, ultimately in the Department of the Prime Minister and Cabinet. He has worked extensively on economic and policy issues around climate change and energy, both in the public service and subsequently as a consultant.

[1] BP Statistical Review of World Energy.

[2] The choice of 1990 or 2000 as a base year is not a material issue for Australia as the level of emissions was similar in each of those years.



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