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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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.

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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

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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

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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

www.SensiblePolicy.com