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Where Australia's Climate Policy Should be Heading
Warwick J McKibbinAustralian National University
& The Lowy Institute for International Policy, Sydney
& The Brookings Institution, Washington DC
Presentation prepared for Canberra Business Council Lunch August 7,2008
Overview
• Climate Science and Policy• Lessons from Kyoto • Why Prices Matter• Post Kyoto Policy • What Australia Should Do
What do we know?
• Climate is a complex system that is always changing
• Average global temperatures have risen 0.6 degrees in the past century
• Natural variability and human induced change coexist
• We are pumping enormous amounts of greenhouse gases into the atmosphere
• Increasing evidence that there is a warming problem
• Policy uncertainty is causing economic losses
Figure 2: Global Temperature Record, Vostok Ice Core Data
-12
-10
-8
-6
-4
-2
0
2
4
050,000100,000150,000200,000250,000300,000350,000400,000450,000
Years Before Present
Dif
fere
nce
in M
ean
Tem
per
atu
re, C
Climate Science
• “Science” does not tell us exactly what the global concentration target should be - but it guides us
• Even if we knew the concentration target, “Science” does not tell us which of the many global paths for emissions should be followed for a given concentration target
• Even if we knew the global path for emissions “Science” has nothing to say about what target an individual country should follow
Climate Change Policy
• Is all about managing risk and dealing with climate uncertainty
• It is not about picking an arbitrary target and hitting that each year no matter what
Climate Change Policy
• Should be about enabling the whole society to manage the risks associated with climate change
• Should be about creating long term institutions and clear policy frameworks that can steer the global economy towards a less carbon intensive future
• Should be about creating a system that all countries find in their own self interest to be involved
What is Needed
• A change in the behaviour of energy users
• Technologies to reduce carbon emissions
• Technologies to reduce energy demand and increase energy efficiency
The Role of Prices
Figure 3: GDP, Energy Use, CO2 EmissionsUSA
1
1.2
1.4
1.6
1.8
2
2.2
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
Ind
ex 1
965=
1
GDP
Energy Use
CO2 Emissions
Figure 4: GDP, Energy Use, CO2 EmissionsJapan
1
1.5
2
2.5
3
3.5
4
4.5
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
Ind
ex 1
965=
1
GDP
Energy Use
CO2 Emissions
The Role of a Price on carbon
• The relevant carbon price is the long term carbon price
• Long term credible carbon prices are crucial for encouraging– Demand side management– The emergence of alternative technologies– The adoption and diffusion of alternative
technologies
Lessons from Kyoto Experience
• A system of rigid targets and timetables is difficult to negotiate because it is a zero sum game
• It is problematic for countries to commit to a rigid target for emissions under uncertainty about costs
• Even the most dedicated countries may be unable to meet their targets due to unforeseen events out of their control
A Reality Check on the Global Debate
• Countries will develop their own systems
• There will never be a global market for permits because permits are like money – they are the promise of a government to hit an emission target
Permit Trading Systems
• Require a permit to emit carbon
• Government either – limits the supply of permits and a market
determines the price given the scarcity of supply
– or sets a price that permits can be bought from the government (a tax)
The McKibbin Wilcoxen Hybrid
• Aim – Impose a long term carbon goal for the world and
distribute across economies– Generate a long term price for carbon in each country
to guide energy related investment decisions– Keep short term costs low– Provide a way for corporation and households to
manage climate risk– Each country adopts nationally and cooperate globally
Components of the Policy
• Long-term permits– A bundle of annual permits with different
dates that the permits can be used– Quantity of permits over time is the long run
goal – Supply is fixed (and diminishing) and
allocated to households and industry– Traded in a market with a flexible price
Components of the Policy
• Annual permits– Must be acquitted against carbon emissions in
the year of issue– Expire in year of issue– Elastic supply from national government– Price fixed for five (or ten) years and then reset
given information available– Act as a “safety valve” to cap the cost each year
Long Term Emission Permit
0
10
20
30
40
50
60
70
80
90
100
20
12
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
CO
2 E
mis
sio
n
Current Emissions = 100
2020
2030
2050
Carbon price
• In any year companies will use a mix of an annual coupon from the long term permit and annual permits printed by the government for a fixed price to satisfy their emissions
• The price of annual permits will be fixed
Climate Policy is like monetary policy
• Need clear long term targets (not necessarily timetables) with an independent agency charged with reaching those targets at lowest cost to the economy
• Need clear long term prices to drive investment
• Need fixed short term prices to minimize costs
Coordination of National Markets
• Independent but coordinated via fixed carbon price (P)
Japan
US
EU
Australia
P
An Illustration
• Use the G-Cubed multi-country model
The G-Cubed Model
– Countries (10)
• United States• Japan• Australia• Europe• Rest of OECD• China• India• Eastern Europe and Former Soviet Union• Oil Exporting Developing Countries• Other non Oil Exporting Developing Countries
The G-Cubed Model
– Sectors (12)– Electric Utilities– Gas Utilities– Petroleum Refining– Coal Mining– Crude Oil and Gas Extraction– Other Mining– Agriculture, Fishing and Hunting– Forestry and Wood Products– Durable Manufacturing– Non Durable Manufacturing– Transportation– Services
– Capital Producing sector
An illustrative example
• Generate a baseline of the model from 2003
• Generate a target path for emissions reduction to reach a global target of peaking emissions by 2028 and to be 60% below 2002 emissions by 2100.
• Impose an arbitrary but approximately equal burden across countries
Australia CO2 Emissions from Energy
0
200
400
600
800
1000
2008
2012
2016
2020
2024
2028
2032
2036
2040
2044
2048
BAU Target
Figure 2: Carbon Prices by Country
-2000
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
cen
ts p
er t
on
C
USA
JPN
AUS
EUR
OEC
CHI
IND
EEB
Australia CO2 Emissions from Energy
0
200
400
600
800
1000
2008
2012
2016
2020
2024
2028
2032
2036
2040
2044
2048
BAU Target Trading
Australia GDP Change
-8
-7
-6
-5
-4
-3
-2
-1
0
2008 2013 2018 2023 2028 2033 2038 2043 2048
Target Trading
What if the world gets it wrong
Example of high growth in China and India
Australia GDP Change
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
2008
2012
2016
2020
2024
2028
2032
2036
2040
2044
2048%
dev
iati
on
fro
m B
AU
Global cap and trade Hybrid
Conclusions
• Dealing with climate change uncertainty will be a major change to the Australian and global economy
• Still a great deal unresolved about where the world is heading
• It is critical to get the balance between long run environmental issues and short run economic costs right.
www.sensiblepolicy.com