Climate Change Policy: An Australian Perspective

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Climate Change PolicyAn 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 dont 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 dont 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 RD 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 RD

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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

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