Events and speeches

ROSS GARNAUT

As Stephen said, on Tuesday I gave to the Prime Minister in the morning the final report of the update of my Climate Change Review. And then I've spoken at the National Press Club about it at lunch time. My terms of reference required me to make an independent assessment of whether anything had changed in the years since I completed my work in 2008 and gave the original review to Prime Minister Rudd; anything that changed to change the conclusions from that. And there are a couple of changes, although we're dealing with a relatively short period of time and the most important dilemma for policy is that the science has become a little bit more grim, the new data, the new science theories of climate change.

So it's either confirming or pointing to the bad end of the possibilities identified by the serious climate science a few years ago. The better news is that the technologies available for reducing emissions seem to be developing a bit quicker than I assumed in the very detailed modelling of the cost of reducing emissions that I did for the original review.

There have been some important developments in the international situation and I spent a fair bit of time in the final report pointing out that, while we didn't get the agreement that I'd been hoping for and certainly Australia and Europe were hoping for at Copenhagen at the end of 2009, that what was done then and followed up very effectively at Cancun in Mexico, another meeting of the United Nations Framework Convention on Climate Change at the end of 2010, adds up to a substantial agreement of a different kind than we thought we were working towards and one that is worth trying to make work.

So I'll come to that. Always good to be back in Perth. I continue regularly to be one step behind my colleagues of the University of Melbourne when the Eagles lose.

[Laughter]

And always great to be back. We had a very enjoyable public forum in Perth Town Hall when I brought out my draft report in 2008, and that and similar events all over Australia convinced me that although this was a very difficult public policy problem, a diabolical public policy problem. It did have a saving grace and that was the depth of community interest in the subject.

The independent centre that wants to do something about it, a political base that they can work on and move policy forward if they choose to do so. And it's that saving grace, the community interest and support for action, that's the reason - the whole reason - why the climate change policy issue is back on the national policy agenda now, when both major parties in the Parliament sought to put it aside a year and a half or so ago.

It's back now because the community insisted that it come back. So we're back really for the fourth time, discussing some economy-wide approach to getting Australia to play its fair share in an effective global effort to deal with climate change.

We're not playing our fair share now and the minimum that we should be aiming for is to catch up and unfortunately just at the moment that's the maximum ambition that's feasible, that we catch up with what the rest of the world's doing. We'll have made a difference if we stop being a drag and seek to catch up.

In seeking to catch up, we have to acknowledge that we're in the middle of a great struggle, a great struggle over policy on climate change. But it's bigger than that and I spent a fair bit of the final report talking about that. The final report is on the Garnaut Review website if you haven't seen it. In a few days' time Cambridge University Press will be putting it out as a book.

But I spent a fair bit of time in the final report talking about the context of political culture in which this debate has been conducted and I put this in a historical context. For the first eight decades of Australia's federation, we had a political culture that gave very large scope for vested interests in business and union vested interests to dominate many areas of policy.

One consequence of that is that Australia had the worst productivity performance of all of the developed countries through the first eight decades of our federation. We managed to break out of that and the time of the breakout's pretty clear, 1983 and from then „til the end of the century, we managed to run economic policy with much stronger focus on the national interest and to break free of some of the controls of central interests and vested interests on the policy process.

And for some time independently in this debate, before Kevin Rudd and the Premiers brought me into climate change in 2007, I was talking about my worries about the return of the old political culture in Australia which was generating what I was describing from 2005 as the great Australian complacency of the early twenty-first century.

So there was a very specific debate going on over what we do about climate change policy and it was part of a general policy about whether we've still got a political culture in which it's possible for Governments to pursue the national interest, or whether they are just being buffeted by vested interests in policy making.

It's relevant that this current debate in 2011 is being carried out at a time of quite exceptional prosperity as conventionally measured. I've got a chart in the final report that shows Australian productivity relative to the United States going back several decades. We usually sit around eighty-five per cent and we were doing much better through the reform period.

In the nineties, Australia had the strongest productivity growth in the world. But average incomes were about eighty-five per cent of the United States. At the end of the century, our productivity growth stopped but our incomes started rising. And now they're about twenty or thirty per cent higher than average incomes in the United States.

So it's a period of exceptional material prosperity, exceptional average incomes and yet it's a period in which lots of people feel that they're doing it tough. So there is a paradox to be resolved. The resolution of the paradox is that this extraordinary resources boom, a once in history resources boom, is generating strong growth in average incomes but putting extreme pressure on some parts of the economy, certainly on all of the industries that are involved in international trade.

All the export industries, all the import-competing industries, including universities and so it's true that there's quite a large part of the Australian economy that is under extreme pressure, at the same time as average incomes are extremely high. And this becomes part of the debate about carbon pricing.

We've had a number of interests representing business, in manufacturing especially, actually saying "well, this is the worst of times to introduce a carbon price. We're under such extreme pressure", and attributing the pressure that's on them to a carbon price that they haven't actually felt yet when the reality is that the pressure comes entirely from the resources boom, the increase in the exchange - the interest rates, the exchange rate associated with the resources boom.

The Governor of the Reserve Bank has been very explicit about it. He says that the resource boom has become so big that we have to reduce employment and investment in other parts of the economy to make room for the expansion of the resources sector without inflation.

Every new big mine, and every new natural gas project means that there do have to be jobs shed in the universities, in the manufacturing sector, in farming, in other parts of the economy. Well in the debate that we've had over the framework of the old Australian political culture, we've had a lot of Australian business interests in those industries that are under pressure, pointing to the very great difficulty of dealing with the carbon price when they're under pressure.

Well it just happens that the economic analysis that I've done and I've talked to a lot of other people about it, and am very confident about the conclusions, means that the proposals for carbon pricing that I'm suggesting with the support for trade exposed industries that is proposed, will not lead to any loss of employment in the other tradeables industries, in manufacturing.

In fact it's possible in the other tradeables industries as a whole there might be a bit of a release of pressure. That's the reality but in the political culture in which we're working the pressure resulting from the resources boom has become quite a big argument against carbon pricing.

I tried to take that head on, both in the report and in my Press Club address on Tuesday. It's an historically important discussion for a number of reasons. One is that we're really at a critical time for dealing with the global climate change problem. We're running out of time. Every passing year with current rates of growth in emissions makes it less and less likely that we will be able to avoid severe damage from climate change.

The requirement to take action is urgent and as I'll say in my remarks tonight, to have the country in the developed world that has the highest per capita emissions, Australia has quite exceptional average incomes at the moment, lagging behind in not doing its fair share, becomes a drag on the global effort, it's relevant to that effort.

So it's important we break through that now and if we don't succeed in coming up with an economy-wide approach to reducing emissions as a result of the current policy debate, that won't be the end of the matter. The issues will still be there, they'll come back onto the agenda. The climate change policy issue will still be here tomorrow but the chance of dealing with it at reasonable cost may not.

The analysis in my review in 2008 demonstrated that Australia has the most to lose of any developed country from unmitigated climate change. There'll be nowhere to hide. All developed countries will be severely damaged if there's not effective global mitigation.

There are some countries that won't be damaged as much early on and you've had the President of Russia and there's some debate in Canada about how a few degrees wouldn't hurt in Moscow or Quebec and that actually might be right for the first couple of degrees. But the disruption associated with unmitigated climate change is going to be so deeply destabilising that there won't be any havens even in the north of Canada or even the north of Russia.

But Australia will be the most damaged and earliest damaged and there are a number of reasons for that. One is that we're already a country of climate extremes. So for example, our agriculture is already being conducted in places that are at the margins of aridity and temperatures where agriculture is practiced anywhere in the world.

So if variations in climate can push us into a space that's very difficult for agriculture, whereas at least for a while if it gets warmer in East Anglia, they can start to use varieties of wheat that were developed for the hotter climates of Western Australia. There's no equivalent for us to go to, as things warm here.

We're also much more severely at risk than other countries because developing countries generally face quite big threats to stability. And we are the developed country that sits most clearly in a region of developing countries and we would be at the front of all that. We're very much aware being in Perth, that the science is pretty clear that some of the early unambiguous footprints of climate change are there in the drying of the south west of Western Australia.

I know it's not politically correct to refer to such things, but the science has been predicting it and when it starts to happen you can't help noticing it. So Australians have a stronger interest than people from any other developed country in making sure the global community comes to grips with the problems. And Western Australians have a stronger interest even than the average of Australians.

So there's not much doubt that strong global mitigation is very much in our national interest. That was all those calculations in the original report based on a lot of economic modelling. Well I haven't repeated all that because I've had to do all the work in seven months this time so that it's all finished by 31 May so that the Multi-Party Committee on Climate Change can consider it in June of this year and that's all going on now.

So I didn't repeat the modelling, but there's nothing that would have weakened any of those conclusions. As I said at the beginning, those general conclusions on the benefit for Australia of Australia playing its full part in an effective global effort still stand.

Well, what is our fair share in a global effort? I've got a chapter on that in the final report. But it's not a simple matter. One has to take account of the fact that you need different measures for low income developing countries than for developed countries, if you want all countries to sign up to effective action. I work through all of that and within the framework that I was suggesting the major developing countries are now making a considerable effort. And within that context it's reasonable to ask whether Australia is making a reasonable effort, compared with other developed countries.

Let's just look briefly at what is happening in other countries, because although it should be well known, although it's well documented, although you don't have to spend very long on the Internet to educateyourself about it. It is a disputed matter in the debate in Australia about whether other countries are doing anything.

I did say at the National Press Club that when you find someone saying that he's worried that Australia might get ahead of the rest of the world, take him by the hand and assure him that there's nothing to worry about.

[Laughter]

Europe has been at the forefront of effective action on global climate change for quite some time. First of all the Scandinavian countries. And one of those Scandinavian countries is an economy, the only other developed country which is similar to us in extraordinary wealth per person of fossil fuels and that's Norway. And the Scandinavians introduced carbon pricing in the early Nineties.

That's one reason why in Norway, which has more valuable fossil fuel per person than we do, all that oil and gas, and Norway has emissions of just over ten tonnes per person, we've got emissions of twenty-seven tonnes per person. We're the top of the developed world and Norway, despite their oil and gas resources, is below average for the developed world.

And the European Union, of course, they've had an emissions trading scheme for half a dozen years, since 2005, but they've [inaudible] and lots of flaws in the original standard have steadily been improved, but there has been an effective carbon price all the way through and they've become more conscious of it the longer it's been in place and have gradually been removing weaknesses and flaws and tightening things up.

And some countries in Europe have gone well ahead of that emissions trading scheme and Europe, of course, accounts for about half of the people in the entire world. We're talking about half a billion people of the billion people in the world who have standards of living like us. Half of them, they're living within carbon pricing for some time but the rich countries and stronger countries of Europe, Germany, France, the United Kingdom, have gone well beyond that and some very important recent developments in the United Kingdom, just in time for me to gather them and put them into the book at the last minute.

I had already resolved to recommend that targets in Australia receive advice from an independent committee like the UK independent committee on climate change. Well, it brought down a recommendation a month or so ago that Britain cut emissions by fifty per cent from 1990 levels by 2025. British emissions started very much lower than ours. I think it's about half of ours but they'll reduce those by fifty per cent by 2025.

Britain is in the middle of a deep recession. It hasn't recovered from the global financial crisis. The recommendation was debated at length by the British Cabinet and they decided to - under the rules the committee's advice becomes policy, becomes law, unless it's overruled and the Cabinet decided that the Parliament would not overrule it. That's a significant development at a tough time.

It's common in Australia to point to China and the United States, in absolute terms the two biggest emitters in the world. Although China only has per capita emissions of about a quarter of ours. The United States has higher emissions by global standards but significantly lower than ours per person.

But Australians tend to say "well, if those big emitters, China and the United States, are not doing much, what's the point in us doing anything?" And so I spent a fair bit of time in the final report going through what they are actually doing. And despite China still being compared with us, a relatively low income developing country, what it's done in recent years is transformative and reduction of emissions will become a central feature of the Twelfth Five Year Plan that the Premier of China brought down in March within which China, over a five year period, will reduce the emissions intensity of production by twenty per cent, as part of its commitment to the international community to reduce emissions intensity by forty to forty-five per cent between 2005 and 2020.

China's going about that through the use of many measures. They're doing many things to promote low emission sources of energy and that covers virtually the whole range of them: nuclear, biomass, wind, solar, substitution of coal for gas. It also involves pretty heavy handed regulation; officials going around and if particular enterprises have what are judged to be excessive emissions, they're told to clean up or close down and they're closed down pretty quick smart if they don't respond.

It's not something that would work well in our political system and it's not something that's economically efficient. It's a costly way of doing things, but they're doing it and getting results. And in the United States, the Cabinet of President Obama takes this issue very seriously. I have, in the course of the update, been able to spend some time with his closest advisors on these issues, people who work directly with him, including the Secretary for Energy, Stephen Chu, and there is no doubting the very strong commitment of the United States Government that what they have promised the international community is to reduce emissions from 2005 by seventeen per cent by 2020.

Our commitment is expressed from 2000. The equivalent commitment from the United States would be sixteen per cent reduction by 2020. And President Obama doesn't have control of the House of Representatives and even when he did, he was looking at a carbon pricing bill and the emissions trading scheme bill through the Congress and now there's clearly no prospect with the Republican control of the House of Representatives. So they're doing it in different ways through regulatory powers, the Environmental Protection Agency.

Many states in the United States are taking strong action to reduce emissions. California is legislated to have an emissions trading scheme by the beginning of next year and California is not a place of trivial size. If it existed on its own, it'd be the tenth biggest country on earth.

Under the United States Constitution, at the time from the election, citizens can bring forward propositions to overrule policy and there was a big campaign to overrule the climate change policy at the last election and very strongly supported by oil interests and it lost. So there's a fair bit to those policies. So certainly we don't have the excuse of saying that China and the United States aren't doing anything.

One hears another argument that they're not doing things in the same way as us so we shouldn't have a carbon price because China and the United States don't have a carbon price. Well, I think where we need to measure performance is by what's happening to emissions on how we get there. It happens that the United States and China are choosing to do things in an expensive way.

The regulation that both are using will involve much higher costs, much higher costs on the standard of living in their communities than we could achieve through carbon pricing. The actual economic costs of doing it through regulation are higher and in addition, if you do it through regulation, you don't - the Government doesn't raise the revenue which you can then use to compensate householders or to support low emissions industries or in other ways.

So it's doubly costly - regulation or direct action has the double cost and so the question is how can that become a reason for us not doing things in a cheap way, the fact that the two biggest emitters on earth are following quite ambitious programs to reduce emissions, but choosing expensive ways of getting there.

My friend, Jagdish Bhagwati, the well known economist from Columbia University in New York, used to talk about the foolishness of trade negotiation and negotiators who are able to say well, we won't do anything unless you do something when, of course, each country made itself poorer by not doing anything and he used to characterise that sort of behaviour as promising to keep shooting oneself in the foot for as long as you keep shooting yourself in the foot.

[Laughter]

We seemed to have that sort of discussion - for as long as China and the United States shoot themselves in the foot by adopting expensive ways without any opportunity for compensating householders or supporting low emissions industries, that's not a reason for us to do it.

Just a few words on the scheme that I've recommended and it's not terribly different from my recommendations of a few years ago. I'm suggesting that on balance, and I can argue about the details of these things forever, but on balance an emissions trading scheme is suitable for the Australian environment.

I said in my initial report that we should start with a fixed price and we should keep a fixed price for as long as there was a lot of uncertainty about the international environment, about the basis of trade entitlements. That happens to be the condition that we're in now. I'm proposing that we have a fixed price for three years and then we move to a floating price, by which time I think the international conditions will be there, if we work on them, for international trade in entitlements.

That's pretty much what I recommended last time. I talked then about the emissions trading scheme with an initial fixed price. It never occurred to me to describe it as a carbon tax but that's the name that it's been given in the current Australian discussion.

I recommended the initial carbon price to be between twenty and thirty dollars and I suggested that you would need a good reason to move away from somewhere near the mid point of that range, suggested for the reasons I described in detail in the original report and more briefly in the final report.

And that should rise by four per cent per annum. Four per cent plus the inflation rate. That will be enough to start the process of structural change and it will generate a significant amount of revenue, about eleven and a half billion in the first year and I suggested that about fifty-five per cent of that should be allocated to households. And that is enough fully to compensate people on low and middle incomes for the price effects.

Now it is sometimes suggested both by people who want to do something about emissions and by people who don't that if you give the money back in that way it takes away the effects of the carbon price on emissions. Well it doesn't, and let's look quickly at what it does do.

If you put the price on carbon - let's just look at the electricity sector - put the price on carbon and the generators of electricity, if it's using a very carbon intensive source of energy like coal, will be paying a lot. If it's using an intermediate fuel from the point of view of carbon intensity like natural gas, they'll pay a moderate amount.

And so there will be quite powerful incentives within the electricity generation sector to move over time to less carbon intensive ways of generating electricity. And the household, although it will have received in tax cuts or adjustment to social security payments enough to pay the extra bill, will still face a higher electricity price. The individual household will make decisions on how it uses that money and will face a price of electricity that's higher relative to other prices.

It won't be poorer because it's had the tax cut or social security adjustment, but it will face higher electricity prices and we know from a lot of experience that that sort of increase in price does reduce consumption. A ten per cent electricity price leap - a lot of studies have shown reduces consumption by three per cent very soon and by seven per cent over time, as the effects work their way through.

And the carbon price will be rising over time and I'm suggesting that after three years, we go to a floating carbon price where we'll be linked to international markets and then the price from then on will be determined by what's happening to international pricing.

Initially I'm suggesting that about thirty per cent - almost thirty per cent of revenue needs to be used for assistance for trade exposed industries and with a bit of reluctance, I agree that for the first three years the type of arrangements that have been proposed in the Government's last scheme were suitable.

I think we do need a more disciplined approach based more strongly on economic principles. It will take some time to gear up to that and I proposed an independent authority applying very clear economic principles, be given the job of recommending on assistance to the trade exposed industries.

I would expect that that will lead to a reduction over time, possibly a substantial reduction in those payments, but other people have different views and that will be settled by the data and by the analysis by an independent authority. An independent authority something like the Productivity Commission.

I'm suggesting substantial funding going up to two and a half billion a year over time, to innovation in low emissions technology. The reason we need that is that when you've got a need for government structural change, the private markets alone will not give you enough of it, unless there's some element of public subsidy because the pioneer in any new technology invests a lot in learning; the results of which become available to the whole community and so you don't get enough of that innovation investment if you rely entirely on markets.

So we can reduce the costs of the transition by supporting innovation in new technologies and I suggested that there should be substantial funding, rising over time for offsets in the rural sector for genuine carbon sequestration in the rural sector. The capture of carbon in soil, pasture, woodlands and in some cases plantations and other things that can be done on the farm.

Success of the scheme is going to depend a lot on discipline and good governance and I suggest that those governance arrangements be built around three new independent authorities, with governments taking final decisions but a highly professional body can become very influential as the Reserve Bank has in Australia, as the Productivity Commission has in Australia and now the Climate Committee has in the United Kingdom.

And we need an independent carbon bank to regulate the scheme, an independent climate committee to recommend on adjustment of targets and an independent objective agency to advise on assistance to trade exposed industry.

Well, once we get this in place we will begin to see the transformation of the Australian economy. It is common that, once you put economy- wide incentives in place the transformation comes more quickly than you expect because people right through our society will be looking for opportunities to reduce costs or increase incomes by shifting their consumption away from high emissions products or finding products that are made in ways that embody less emissions.

And it's the genius in the market economy and once you put those incentives in place you'll get millions of Australians thinking of ways of reducing emissions and you end up finding more and cleverer ways of reducing emissions than when you have a few bureaucrats and a few politicians deciding on which regulatory actions are most suitable.

[Applause]

 

-ENDS-