Download Climate Change Policy

Climate Change Policy:
An Australian Perspective
Warwick J. McKibbin
Centre for Applied Macroeconomic Analysis ANU,
& The Lowy Institute for International Policy
& The Brookings Institution
Business Leaders Forum on Climate Change, 28 March 2007
1
An Australian Perspective
• Uncertainty is the key issue in climate
change policy
 we don’t know how much or how quickly to cut
emissions despite the desire by many to specify
precise targets and timetables
 However clear long run goals are needed
• Uncertainties cascade
 the timing and magnitude of potential climate change
 the distribution of costs and benefits across time and
geographical location
2
The Reality
• Australia has vast quantities of low cost
high quality coal available for energy use
• Australia is only 1.4% of global emissions
• Whatever is done in Australia is dwarfed
by actions in the major countries such as
the United States, China and India
3
Some Guiding Principles
• The benefits of taking actions should be
weighed against the costs
• The Kyoto Protocol approach of fixed
targets and timetables no matter what the
costs leaves the Australian economy and
most countries in a vulnerable position
 It also makes the policy regime vulnerable
4
What Matters
• Australia needs to convince the world to
take sensible action on climate change
policy
 Our modeling shows that what the world does on
climate policies matters more for the Australian
economy than what Australia does
5
Some Issues
• Countries needs to maintain a degree of
national sovereignty over their
greenhouse policy
• The lack of key institutions in many
developing countries means that any
system must first rely on domestic
institutions
6
What Action is required?
• It is unlikely that a global system will
emerge from the top down because
countries don’t have the institutions or
government credibility to trade in a global
market of government promises (i.e. a
global carbon permit)
• It is more likely that a patchwork of
national systems with some degree of
coordination will emerge
 just like national currency markets
7
Features of an Australian system
• A portfolio of policies ranging from R&D in
alternative carbon abatement and
adaptation technologies, to market based
incentives is required
8
Features of an Australian system
• Key is the introduction of a long term and
short term carbon price
 the long term price (the guide for investment) should
be flexible given long term targets and reflect all
available information about the future
 the short term price (the economic cost) should be
low and fixed for some time as policies in the rest of
the world become clear and as information on the
climate builds.
9
Features of an Australian system
• Long term markets are required that
enable industries and individuals to
manage the climate risks associated with
long term capital investments
• The initial allocation of carbon rights
should build political constituencies
across businesses and households to
sustain the policy and to compensate
industries and individuals that are hurt by
the policy.
10
Early Action can make sense
• It is important that a low cost approach
with clear long term and short term
markets be developed now so that the
hedging of climate risk can be undertaken
• This is important to lower the economic
costs of climate policy uncertainty but
also to guide the other carbon abatement
policies such as private and public
investment in R&D
11
The Future
• The targets and timetables strategy that
underlies Kyoto has not worked well
because of the real problems with
unbounded costs and perceived
infringement of national sovereignty
12
The Future
• Progress in building a global system from
a coordinated system of national policies
and markets is more likely to produce real
emission reductions especially if the short
term costs can be managed and the long
terms gains can be priced in a credible
domestic market
13
Why Prices Matter
14
Figure 3: GDP, Energy Use, CO2 Emissions
USA
2.2
2
1.8
1.6
CO2 Emissions
1.4
Energy Use
1.2
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
1
19
65
Index 1965=1
GDP
Figure 4: GDP, Energy Use, CO2 Emissions
Japan
4.5
4
GDP
3
CO2 Emissions
2.5
2
Energy Use
1.5
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
1
19
65
Index 1965=1
3.5
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