The ALP will kill the economy. You have been warned
Voters have not been told the full story on cost of carbon
Voters have not been told the full story on cost of carbon Brian Fisher Mar 18, 2019 — 11.45pmSaveLog in or Subscribe to save articleShareAnyone who believes that Australia can significantly reduce its greenhouse gas emissions over the next decade without major economic cost is seriously misinformed.At the political level, the avoidance of discussion about the real costs of climate policy is an ongoing source of frustration to me as an economist who has been engaged in this area since 1992.And with another federal election looming, how can voters be expected to make informed choices about transformative climate policy if they are not told the full story?Electricity is far from the only industry that will be impacted with costs and job losses. Paul Jones PDJSetting emissions abatement targets is the easy part – the difficult part is determining the specific policy measures to reach the target, explaining the rationale for the approach and being up-front about what it will cost.As it stands, the federal government has committed to a 2030 emissions reduction target of 26-28 per cent in-line with Paris agreement commitments, whereas the opposition has committed to a more ambitious 45 per cent reduction target as well as a 50 per cent renewable energy target.AdvertisementThe government will utilise the so-called Kyoto carry-over provisions, which are effectively credits for outperforming on earlier commitments, to meet its target, while the opposition is yet to confirm its position in this regard.The government has adopted a suite of measures to reduce emissions, including the $2.55 billion Emissions Reduction Fund, which it plans to extend beyond 2020 as it looks towards its 2030 commitment. The opposition has announced some policy preferences but is yet to fully detail its platform out to 2030.The two main factors that influence the economic cost of abatement are the size of the target and the level of flexibility in pursuing lower cost abatement options.For example, policy that allows the trading of permits imbeds a lower domestic abatement task via a contribution from lower cost emissions reductions elsewhere overseas. The effect on the global climate is the same but the economic cost to Australians is lower. Similarly, utilising the Kyoto carry-over credits reduces the scale of the abatement task and also the cost.To better inform the debate about the costs of abatement, BAEconomics for the first time has modelled the economic impacts of six different scenarios for meeting the respective targets of the two major parties. In all scenarios we have assumed the least cost way of meeting the targets and that other countries meet their targets.Tellingly, our work shows that under any scenario there is a notable economic cost in terms of reduced GNP, job losses and lower real wages compared to what otherwise would have occurred. The cumulative GNP loss out to 2030 ranges between $A80 billion and $A1.2 trillion and job losses in 2030 range between 78,000 and 586,000 depending on the approach. Real wages will also be reduced by 2 per cent at the lower end up to 23 per cent.Through our modelling we have also been able to project what Australia's carbon price or penalty will be under different policy approaches. Assuming all countries meet their Paris commitments, the projected international carbon price in 2030 is $US42/t CO2e.The government's reduction target, results in an estimated shadow carbon price of $A92/t CO2e. By comparison, meeting the opposition's heftier targets would result in a carbon price of $A326/t CO2e if it also adopts the Kyoto carryover provisions. Without using the carryover that price would more than double to $A696.In addition, the modelling reveals the cost of emissions abatement to the different sectors of our economy. Assuming emissions reductions are contributed by all sectors, the electricity generation, transport and combustion sectors contribute a disproportionate share given their larger emissions bases.Under our reference case, coal's share of the electricity generation mix, by 2030, would be 40 per cent, falling to 32 per cent under the government's target and just 18 per cent under Labor's 45 per cent emissions reduction target. The share of gas would increase by a similar margin under both scenarios assuming that domestic gas supply is adequate.Under opposition policy, renewables would of course make up 50 per cent of the energy mix and would reach 36 per cent under Coalition policy.Perhaps not surprisingly, the hardest hit sectors in terms of reduced output, include electricity, thermal coal, non-ferrous metals, chemicals, rubber and plastic. Manufacturing, construction, transport and services are also adversely affected.Thermal coal for example, an important industry for regional Australia, would see reduced output of 21 per cent under the government's emissions target rising to a reduction of 44 per cent under the opposition's target, if carry-over provisions are used and 64 per cent if they are not.While agricultural emissions will remain relatively constant under all scenarios, due to the difficulty and higher cost of reducing emissions in that sector, cropping, fishing, livestock, forestry and food processing are notably affected, particularly under the 45 per cent target.Any special treatment or carve-out for emissions-intensive trade-exposed industries would shift significant further cost burdens directly onto households and the non-traded goods sectors.Ultimately, the modelling confirms that while there is material economic consequence to reducing emissions regardless of the target, these costs can be dramatically reduced when policy flexibility is embraced.Dr Brian Fisher is managing director of BAEconomics and has participated as a lead or convening lead author in three IPCC climate assessments.
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