KEN HENRY. The political economy of climate change

Myopia, loss aversion and free-rider problems undermine the provision of public goods, including global public goods like climate change mitigation.  It’s easy to understand why climate policy has been a failure in Australia.    But what happens when the central case of long-term projections, something outside of the bounds of what has been considered probable in the near-term, comes crashing into the present?  That’s what our politicians were dealing with through 2006, following several years of drought.  Eventually, entrenched positions were abandoned.  Could we see this happen again?

Just over ten years ago the Australian Parliament rejected for a second time the Rudd Government’s Carbon Pollution Reduction Scheme (CPRS) and the Liberal Party changed leader to Tony Abbott, bringing to an end a 2 ½ year period in which all major Australian political parties supported world’s best climate change mitigation policy.

The Howard Government had been reluctant to embrace emissions trading.  It wasn’t until late in 2006 that Prime Minister Howard accepted that an increasingly complex patch-work of ad hoc interventions would not satisfy public concerns about climate change, eventually commissioning a Task Group report on an emissions trading scheme.  The core recommendations of that report were accepted by the Coalition Government mid-2007, a few months before the election that brought Labor to power.

What lessons does this earlier period have for the present?

Humans have a tendency to overweight the short-term, heavily discounting, even ignoring, longer-term consequences.  This behavioural bias is usually labeled ‘myopia’.  Humans are also prone to over-valuing costs relative to benefits, a behavioural bias labeled ‘loss aversion’.  Because of myopia and loss aversion, human decisions are frequently not rational.

Governments are also prone to short-term decision-making, and overvaluing costs relative to benefits.  But this can be rational for people elected for a parliamentary term of only a few years, directly accountable to myopic voters having to deal with the pressing day-to-day cost of living.  Why would it make sense to expend energy, and political capital, dealing with a problem that is not even on the radar of the electorate, or which is considered unlikely to have a significant impact on the general quality of life for some decades to come?

It is rare for democratically elected governments to identify distant problems for near-term action.  The ‘burning platform’ narrative, constructed on Paul Keating’s 1986 banana republic warning, provides one case study.  The narrative anticipated a substantial deterioration in the quality of life.  Even though that projection might, realistically, have applied to generations beyond those then voting, the narrative was sufficiently powerful to motivate an ambitious program of policy reforms.  The banana republic warning resonates even today, notably in intransigent attitudes to budget deficits.

Another government-initiated warning came at the end of the reform period, with the publication of the first intergenerational report, in 2002.  That report, and its successors published in 2007, 2010 and 2015, was intended to motivate policy effort to lift productivity and workforce participation.  But the narrative constructed on the intergenerational reports has not been successful.  One plausible reason is that it has avoided ‘burning platform’ language, consistently describing challenges emerging over a 40 year time horizon.  The Australian National Outlook report, released earlier this year, has a similar posture, seeking to inform people of long run challenges and opportunities, again over a 40 year projection period, rather than sounding the alarm with the threat of crisis.

Climate change provides another case study.  Last century, policy makers all over the world became aware of projections by climate scientists that suggested that our quality of life could not be sustained without considerable behavioural change, and that a failure to change behaviour dramatically would probably have devastating consequences for the physical environment and for human welfare.  Climate science projections typically involve a time-scale of a century or more.  And while the ‘central case’ is always alarming, most projections provide a wide range of plausible outcomes.

All policy proposals to mitigate climate change involve relatively certain short-term costs in return for considerably less certain, and very distant, future benefits.   Unsurprisingly, people who are highly susceptible to myopia and loss aversion simply don’t ‘get it’.

And there is a further challenge for those who propose measures to mitigate climate change.  This is due to what economists label the ‘free-rider’ problem, a source of market failure that undermines the optimal provision of public goods, national security being the classic example.  Unlike private goods, public goods are both indivisible and non-excludable.  These characteristics mean that everybody has access to the same quantity of the public good regardless of what they pay for it, even if they pay nothing.  (Different people might value the same quantity more or less highly, as they do private goods.)  But if you access the same quantity as everybody else irrespective of what you pay, then why would you pay anything at all?  Surely, it is rational to ‘free ride’ on others.  This is why the provision of public goods is a responsibility of government, with its unique power to raise revenue through taxation.

Of course, even with the provision of public goods being underpinned by taxation, people will still seek to free-ride. This form of behaviour is labeled tax avoidance.  Avoiding contributing to the financing of public goods seems to make sense from the perspective of the individual, since it avoids a personal cost without impacting the benefit received.

Climate change mitigation is a global public good.  Every individual in every nation benefits, irrespective of the cost they bear from the mitigation activity.  So why wouldn’t every nation ‘free-ride’ on others?  Surely, it is rational for every nation to avoid making any contribution to mitigation.

Myopia, loss aversion and free-rider problems encourage political leaders to assume a posture of complacency.  Nothing needs to be done urgently, and doing anything at all might merely be to impose an avoidable short-term cost on the nation, with no impact on global events.  Better to adopt a posture of comfort and relaxation: ‘She’ll be right, mate.’

It is no wonder climate change policy has proved so difficult.  Yet in 2007 every government in Australia – Commonwealth, State and Territory – was united on the desirability of implementing a world’s best emissions trading scheme (ETS) to achieve climate change abatement, with the Howard Government being the last to join the consensus.  How did Australian governments arrive at that position?

Before answering that question, it is worth noting that climate change mitigation is not the only global public good in respect of which our governments have had to consider an appropriate posture.  Most Australians would consider it a defining national characteristic that we have been prepared, on several occasions, to make an out-sized contribution; an effort considerably larger than what might be anticipated by reference to our tiny population and GDP shares.  Think of our human sacrifices in the two world wars of the last century and in our participation in the so-called ‘war on terror’ in the wake of the horrific events of 11 September 2001. These and several other disproportionate efforts have sent a message, both domestically and internationally, that Australia will act decisively, and join any coalition of willing partners motivated to make the world a safer place for this and future generations.  We can always be counted on to make a disproportionate contribution to that goal.

Yet Australia’s posture on action to achieve climate change mitigation is very different.  Australia was a signatory to the December 1997 Kyoto Protocol on climate change.  But nobody involved in the negotiations over national carbon abatement targets for that protocol, least of all the Australians sitting at the table, considered that we were wanting to make an out-sized contribution.  It would be fair to say that the Australian posture on climate change commitments has generally been to negotiate the smallest respectable abatement target.  We have had our reasons, but none of them has a shred of moral decency when stacked up against the sacrifices we have been prepared to make in pursuit of other global public goods.

The thing that produced the extraordinary political alignment in 2007 had nothing to do with Australia’s positioning in international affairs.  It was an overwhelmingly domestic volt face.

Public attitudes to climate change in the early years of this century demonstrated that while Australians might generally be tolerant of complacent leadership, the weight of public opinion, and community expectations of leaders, can swing rapidly.

Short termism appears to satisfy a basic human desire for comfort.  The ostrich syndrome illustrates an extreme case.  It may be false comfort, but it is comfort nevertheless to deal exclusively with those things we consider reasonably certain and manageable.  This is how we perceive the near term; reasonably certain and manageable.  In contrast, the distant future is inherently uncertain and difficult to manage.

But what happens when we get a nasty surprise?  What happens when we discover that what we are experiencing in the present is well beyond the bounds of what we had considered probable in the near term and is something we cannot control?  Well, short termism then provides no comfort at all.  And when what we are experiencing in the present looks very much like the central case of what the experts have been predicting for the long-term, when we find a nightmarish future crashing into the present, we might want to know why our political leaders have not been doing everything humanly possible to make the world a safer place, for this and future generations.

This is the position that confronted the Howard Government in September 2001, following the terrorist atrocities committed on America, and again late in 2006, following several years of devastating drought in Australia.  And today’s catastrophic bushfires, and rapidly vanishing water security, again following years of drought, put the present government in a similar position.  The political economy of late 2019 is looking a lot like late 2006.

Some have a view that when people are running for their lives from bushfires it would be indecent to have a mature conversation about climate change.  I know some of the people who have fled bushfires these past several weeks.  As they have run, they have wondered whether their governments have done enough to make the world a safer place.

Ken Henry was Secretary to the Treasury from 2001 to 2011.                


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16 Responses to KEN HENRY. The political economy of climate change

  1. Charles Lowe says:

    Yet again do I quote:

    “I know some of the people who have fled bushfires these past several weeks. As they have run, they have wondered whether their governments have done enough to make the world a safer place.”

    I hate to say this. (I even hate myself in doing so.)

    Yet I am so convinced that it is going to take that depth of emotional experience to muster such a populist swell as to convince such an embededly recalcitrant Government – such a policy averse Government – to actually start prosecuting the case for urgent Global emissions reduction.

    It seems to me that we’ve all got to visit hell to avoid condemnation to it.

  2. I think that 2019 is like, but more challenging than 2007 – because we are 12 years further into onrushing climate change and we have further 12 years of additional CO2 in the atmosphere. The climate has cycles in the temperature and rainfall patterns. John Howard hit one. Scott Morrison is hitting another, but under the cycles is the trend for rising temperatures.

    But worsening here-and-now climate impacts are driving another trend – a growing realisation that human-caused climate change is real, that scientists do actually know a lot about climate change and that we are now inside the outer boundary of highly dangerous climate change. The reality of current impacts is evaporating the uncertainty that many people have felt. It’s no wonder that 2019 was the year that the Oxford Dictionaries chose “climate emergency” as their word of the year.

    But if we are already in the danger zone this raises huge questions about what we now do.

    Being in the danger zone now means that it is too hot now, which means that our task is to cool the planet – back to the safe level – not merely slow the temperature rise or halt it at some level not too much more than the present. There are three ways to cool the planet and only one way to do it fast enough to prevent ecological, social and economic breakdown. The first method is to go to zero emissions ‘immediately’ – but cleaning up the air through the replacement of coal-fired energy generation will remove particulate power station pollution that is currently masking over half of a degree of warning – so we will therefore push the world temperature over +1.5°C and then it will take natural processes 20,000 years or so to restore a naturally safe temperature (and ocean acidity). Option two is to go ‘immediately’ to zero emissions AND as well build (and largely tax-fund) the world biggest new industry to take all the excess CO2 out of the air (to un-mine all the coal, oil and gas that has been moved from the earth’s crust into the atmosphere and the oceans since industrialisation), a task that will take possibly one or two centuries to complete – during which time civilisation fries. The third option, is to do zero emission ‘immediately’ AND build a huge industry to take the excess CO2 out of the air AND deploy solar reflection methods to provide immediate cooling (provided the scientists are sure that the side effects of solar reflection are not worse than the heating that they are counteracting). This third “pizza with the lot” strategy (once it has been made feasible and safe) can provide ‘immediate’ relief, will secure global food production and provide maximum protection for vulnerable populations and ecosystems around the world, avoid massive refugee movements and greatly lessen military security threats and will stop and reverse most of the super-dangerous positive feedbacks in the climate/earth system.

    Any option for cooling the earth will have to be delivered while coping with the impacts and costs of real-time climate change catastrophic events and processes.

    Putting the third, maximum protection (least worst) strategy in place has huge implications for the economy and economics, and for governance and politics. This solution strategy will not be able to be delivered as part of business-as-usual or even reform-as-usual. Like the World War 2 economic mobilisation, this response will need society to go into emergency mode – not just to cope with the impacts of extreme weather events but to deliver the core three-part prevention/safe climate restoration strategy.

    To make this response possible will require not only social mobilisation at the community level but also among the elites. It must also be approached on a non-partisan basis. With the new wave of climate impacts (over the last couple of years) we can already see people from all political persuasions recognising the need for effective action.

    In the late 1960s through to the early 1980’s the mining industry (that at the time only controlled about 5% of the business dollars in the Australian economy) catalysed a successful peaceful revolution to get rid of import tariffs. Now it’s time for the non-fossil fuel elites to build an alliance to catalyse another peaceful revolution, this time to put the climate maximum protection strategy (option 3) into operation.

  3. Rob Calvert says:

    The time for action was about 30 years ago….I despair at the self serving morons who continue to be elected by a feckless public.

  4. CC Goodwin says:

    I wonder how different things might be if lobbying politicians was illegal and so were donations, if there were truth in advertising laws applying to political parties, if we had stronger media concentration laws, and a federal ICAC.

    • UTOPIA !! – such a wonderful dream. :\

    • Peter Lebatchelor says:

      Wow. You’re talking about Governance for the people, in the interests of the people.
      Yes, one can wonder, and imagine how difference things might be, as I like too.
      Imagine how difference life, aspiration and hope for the future would be, if, the world’s government leaders, together, gathered their people behind them, acknowledging the Science, and acted in the interests of all future life on Earth. Imagine. For the first time in Earths history, a powerful force of collective global positiveness.
      Imagine for a moment what that would be like.
      But, maybe, the forewarned disasters unfolding now, with people in fear and angry with politicians who have denied, lied and fiddled, is what it will take to smash down that wall of vested interest you mention, CC, and hold those responsible to account.
      Fearful angry deceived people, the game changer, I hope.

  5. Mike Scrafton says:

    Ken Henry has captured the key issues of the failure to address global warming, albeit unconsciously and inadvertently. This is not an economic problem – not one best described by public goods and free riders. This is a scientific problem. It requires radical steps that cannot be justified or described in economic speak. It is completely the wrong way to state the problem or find the answers.

  6. Michael Jess says:

    To be fair, the fears about global heating, anthropogenic climate change or whatever label you want have been around for 50 years or more. Until very recently one of the worlds most “respected” environmentalists David Attenborough was a climate sceptic, so what chance did the likes of eminent Professor James Lovelock or NASA’s James Hansen have to convince the influential (read moneyed) class to move to a different paradigm? Answer: none. Greta is right, the obvious thing to do is remove all the western world leaders and their corrupters/puppeteers- eg Koch, Murdoch and Rhinehart to mention but three of perhaps 5 million.
    Of course the problem with Australia is that there are remnant seashells atop Mt Kosciusko, our highest point. There is a higher point under our protection (ha ha) called Mawson Point in Antarctica, but someone else (USA) will bully us away from there. So moving up is not an option. My bet is that just when our first people get constitutional recognition our nation will be going the way of all the other south sea islands – serves us right, gutless wonders we all are.

  7. Kien Choong says:

    The cost of addressing climate change is relatively modest; it certainly does not entail accepting lower living standards. We can still enjoy growth (albeit slightly lower). It doesn’t even entail rising unemployment (jobs will be lost in some sectors, but made up in other sectors). All we need is a price on GHG or issue GHG emission permits; innovation and incentives will ensure that we eventually break the link between growth and GHG emissions.

    Addressing climate change would have been even cheaper had we started years ago. More people need to know this; I suspect many mistakenly overestimate the cost.

  8. My family and I barely escaped from the ferocious Canberra firestorm on 18 January 2003. All our possession were destroyed apart from what we wore and the car in which we drove form the scene though a burning street-scape, including a blazing petrol station. My comment after the fire is that this is precisely the time to comment – when the consequences of a climate crisis are burned onto the consciousness of the victims and the observers.

    John Howard made similar comments after the Port Arthur massacre when staring down those who resisted gun control.

    Science says that the world must be net zero-carbon by 2050 or the consequences will be dire. Australia must look ahead at a world that does not buy our coal and gas in the quantities it does today.

    There are green shoots. Australia can export zero-carbon energy in the form of renewable electricity and environmental (water hydrolysis) hydrogen. Large ‘battery tankers’ providing a ship of fully charged lithium batteries to any port in the world – electrically powered – is another.

    The world will turn its back on Australia if it relies on fossil fuel experts, and does not transition to a zero-carbon, energy export nation.

  9. Andrew Glikson says:

    Ken, You write “Climate science projections typically involve a time-scale of a century or more.” As the current bush fires in Australia and around the world demonstrate, the pace and scale of global warming and its cosnequences in terms of droughts, heat waves, fires, ice melt, sea level rise, storms and cyclones are occurring faster than anticipated. When the short-lived masking effects of aerosols are taken into account, the world is already near +2 degrees Celius above pre-industrial temperatures

  10. Wayne McMillan says:

    Thanks Ken I was going to write up something for John M on this topic but I think
    your piece eclipses what I was about to do. You cover all the important points from a historical perspective and your analysis is first class. I hope you will be writing more on John’s blog in the future.

  11. Max Bourke AM says:

    Brilliant explication of how we got here, but how the bloody hell do we get out, not so much for ancient fossils like me who have been clanging the bell on this issue for 30 years but next generations!

  12. Henry Bateman says:

    Perhaps as they flee they should be wondering have they done enough to encourage their government to do enough to make the world a safer place.

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