A paper delivered to the Lavoisier Group Conference, May 2000

Economic Impacts on Australia

The Hon. Tony Staley

Introduction

In 1992, the countries of the world came together in Rio de Janeiro for what was known as the Rio Earth Summit or, simply, the Earth Summit. A burst of warm inner glow infused the cheeks of politicians right and left, great and small. The world was united in an historic resolve to Do Something about the environment. It was the green movement's finest hour.

The mass of good intentions produced a further mass of conferences and committees and working groups. From them emerged, among other things, the United Nations Framework Convention on Climate Change, based on the proposition that human activity was changing the global climate---warming it, in fact, by overloading the atmosphere with gases that trapped heat, much like the glass walls of a greenhouse create an environment for warm climate agriculture in the cold and damp of northern Europe.

Rio gave greenhouse a solid political platform. Debate raged at the time about its scientific validity, and still rages today. But politics quickly overtook science and today greenhouse is a major policy issue for governments everywhere, especially in the industrially developed world, and that includes Australia.

We should not be under any illusion. Governments, including ours, are implementing greenhouse measures because their electorates want it. People have become sufficiently concerned about the scenarios of deathly hot summers, rising seas, violent weather extremes and epidemics of tropical diseases for them to demand that their governments act to prevent such disasters. Governments of democracies are duty-bound to respond positively to community concerns, even in the face of evidence that action might be unnecessary or futile.

However, governments are not entitled---in the notorious phrase from the Vietnam war---to destroy the village in order to save it. And that is just what some observers fear will be the result of Australian greenhouse policy since Rio---we will reduce our greenhouse gas emissions but in the process cripple the Australian economy.

Certainly there will be an adverse impact on the economy. The Australian Greenhouse Office and the Australian Government are in no doubt. Consider the following quotes from the AGO discussion papers on emissions trading.

First:

And also:

In short, the perceived need to cut greenhouse emissions will cost some Australians their jobs now, and reduce opportunities for future Australians. The Lavoisier Group has been convened in the belief that most Australians are not aware of these crucial economic consequences of greenhouse policy, so plainly put by the AGO. We believe they are entitled to know.

The Economics of Greenhouse

For a number of years after Rio, environmental politics held sway in the international greenhouse debate. The focus was on reducing emissions because, after all, the objective was to save the world. It dawned only slowly in the political mind that the economic impact provisions in the Framework Convention actually meant something, that the implication of reducing emissions was global, fundamental economic restructuring.

Out of that realisation came the Australian Government's almost lone rejection of the hard-line Geneva Declaration of 1996 (3) and the ultimately successful argument for an international greenhouse agreement at Kyoto which recognised differences of economic structure among nations. It was clear to the Government by then that greenhouse was not so much an environmental issue as a fierce competition for economic advantage. The United States was facing off against the European Union. Japan was deeply concerned about both of them. China, India and other emerging economies were not about to sacrifice their drive for industrial development.

Australia has a vulnerable position in this power game. Our economy is energy-intensive and, in the simple equations of greenhouse, that means it is also emissions-intensive, since our main energy sources are fossil fuels---coal, petroleum and natural gas. Reduce fossil fuel consumption and you reduce greenhouse gas emissions.

For Australia, this is not as simple as the starting equation. Australia has one of the highest population growth rates in the world and therefore a high rate of growth in domestic energy demand from that fact alone. Many of our most valuable exports base their competitive advantage on the availability of relatively low cost, coal-derived energy. Natural gas produces a lower level of greenhouse gas emissions but is more expensive. Non-fossil fuel alternative energy is even costlier and, in any case, cannot be produced economically in the quantities required, at least not in any reasonable timeframe.

And so it goes: wherever you look in the Australian economy competitively priced fossil fuel energy is the key to industry, jobs and everyday life.

The Kyoto Protocol

The Kyoto Protocol assigns Australia an emissions limit of 108 per cent of 1990 emissions, to be achieved on an annual average basis over the five years 2008 to 2012.(4) The Federal Government estimates that current policy measures are only enough to restrain emissions to 118 per cent by 2008-2012. And this is only at current rates of economic growth. No account has been taken of unpredictable events, such as proposals for further large-scale industrial development based on North West Shelf natural gas.

The National Greenhouse Strategy(5) encompasses a broad range of measures but basically it rests on two interconnected policy positions:

1. Focus on the coal-fuelled electricity industry, which produces about 35 per cent of Australian emissions, through generation efficiency standards, a stand-alone domestic emissions trading system and favouritism towards natural gas as a substitute fuel.
2. Ensure that international emissions or carbon credits trading, carbon sink offsets and other so-called flexibility mechanisms are fully implemented under the Kyoto Protocol, scheduled to be finalised this November at The Hague Conference of the Parties.

The Government knows that Australia cannot achieve its Kyoto target by emissions abatement measures alone. Offsets from carbon sinks, recognition of land use changes and emissions/carbon credit trading are essential. These so-called flexibility mechanisms at least give us a chance to manage the economic impacts, if we are to pursue a reduction in greenhouse gas emissions. The Government is right to insist that Australia will not ratify the Protocol until all the provisions relating to flexibility mechanisms are settled to the satisfaction of the Australian people.

Economic Impact on Australia

The proposal to create a trade in greenhouse gas emissions and carbon credits probably covers all the economic issues associated with greenhouse policy, as illustrated by the vast international literature on the subject. Development of a trading system requires identification of emitters, quantification of their emissions, certification of carbon credits, construction of market instruments, a carbon pricing structure and a verification/audit mechanism.

The development of an emissions trading system therefore allows the impact of overall greenhouse policy to be judged. The four AGO discussion papers published last year provide a general view, as quoted above, and in March this year the Victorian Government released a bi-partisan report by Allen Consulting Group which modelled impacts on specific industries.(6)

The Allen Report listed winners and losers under four scenarios---three modelling different domestic emissions trading set-ups and a fourth modelling the impact of a broad range of measures. It should be said that no account was taken of any international trading system, nor of emissions abatement measures being implemented under the National Greenhouse Strategy.

All three trading scenarios predict a high price for emissions permits to be issued by the Federal Government under a cap and trade system. The base case scenario prices permits at $44 a tonne of carbon dioxide-equivalent and states plainly that this is equivalent to a carbon tax.(7) The report goes on to say that a permit price or carbon tax of $30 a tonne would translate to a 75 per cent rise in electricity pool prices.(8)

It then stated:

There should be no surprise then that the Allen models predict a significant fall in gross domestic product and retrenchment in the loser industries---coal-fired power generation, aluminium, cement, petroleum, motor vehicles and agriculture. People interested in the numbers can refer to the report. More crucial are the implications of that list of losers.

Almost without exception the major losers are based in regional Australia. We are talking here about the likes of the Latrobe Valley, Geelong and Portland in Victoria; the Hunter Valley and the Illawarra in New South Wales; Gladstone in Queensland; Elizabeth in South Australia and Kwinana-Bunbury in Western Australia.

Let us isolate just one example. The aluminium smelter at Portland in Victoria exists because of the supply of brown coal electricity from the Latrobe Valley at world competitive prices. The smelter employs about 800 people, including contractors, out of a regional population of 15,000. An enterprise of that size generally creates three more jobs in the community per employee---that is, a further 2400 people probably have jobs in the Portland district because of relatively low cost electricity.

The higher electricity prices flowing from greenhouse measures will erode Portland's competitiveness against smelters in Asia, Africa and South America which will not be affected by the Kyoto Protocol or its outworkings. In fact, they might be advantaged by it.

The result is inevitable, once the Kyoto Protocol is implemented. The smelter's contribution to Portland will start to reduce as costs are cut. Jobs and contracts will be pared back. There will come a time when the owners have to decide whether to carry on. As far as anyone can see at present, the answer will be negative.

The irony of this situation is that the imposition of cap and trade domestic emissions trading, or more honestly a carbon tax, will not reduce greenhouse gas emissions from the Latrobe Valley power generators to any significant degree by the Kyoto deadline of 2008-2012. That is, unless the cost burden forces a shutdown of generation capacity---and that, given the brownouts of last summer, has other unpalatable implications for Victoria.

The National Interest

The Australian Government made another admirable decision in 1996, as well as the refusal to be forced into an untenable position at Geneva, referred to earlier. And that was the reform of our treaty-making process.(9)

This statement set down a clear path for involving the Australian people in how Australia accedes to international treaties. Key elements of the process now include the tabling in Parliament of the proposed treaty and a National Interest Analysis of its provisions. The treaty is also considered by the Treaties Council, a body representing the States under the Council of Australian Governments.

The Kyoto Protocol is subject to this process.(10) Australia has signed this treaty, an action which signals commitment to its principles, and has stated that it will ratify---that is, accept the treaty as law---provided certain conditions are met. These include international agreement on the acceptance of carbon sinks as offsets to emissions and on the establishment of a trading system in emissions and carbon credits.(11) As discussed earlier, these are crucial to Australia's ability to meet the 108 per cent target, to which we are already committed, while maintaining some degree of economic growth.

The question now is: what constitutes the national interest? Is it in the national interest to cast doubt over jobs in towns like Portland or Gladstone in order to reduce Australia's greenhouse emissions by some fraction of the 1.5 per cent of global emissions that Australia produces?

We have to admit the possibility that it might be. Australia is part of the global community, it does have a role to play internationally and its economic interests are inextricably entwined with the world trading system. Australia cannot afford to be excluded from the international community.

But apart from the small number of people consumed with greenhouse issues, who is aware that Australia is facing a serious decision that will impact directly on individual Australians? Apart from official papers, where, in plain language, has it been spelt out that an effective greenhouse response means restructuring the Australian economy? There is no real public debate. Vox populi television coverage, for example, is concerned almost entirely with environmental issues. The personal economic impacts of greenhouse need to be discussed with the same level of community participation.

A National Interest Analysis presented to Parliament and the Treaties Council would canvass all the issues, environmental and economic. At the end it would tell Australians where their governments believe the national interest lies. National media coverage would ensure that the message is presented for popular debate and conveyed to the farthest corners of our land. Only then can we be sure that the Australian people have been given a chance to decide that what is being proposed in their name is actually in their interest.

Conclusion

Wide community acceptance of the global warming proposition is driving governments in Australia and throughout the industrialised world to implement policies separately and together to reduce emissions of greenhouse gases.

However, the clear implication of greenhouse measures---if applied as envisaged by the Framework Convention on Climate Change and its offshoot, the Kyoto Protocol---is global, fundamental economic restructuring. Reducing greenhouse gas emissions means, at its simplest, reducing industrial activity, or finding alternative means of maintaining standards of living. The cost will be high.

Measures to meet the perceived need to cut greenhouse gas emissions will eliminate the jobs of some Australians now, and reduce opportunities for future Australians. There can be no doubt of that. The Australian Greenhouse Office has said so and the recent Allen Report to the Victorian Government confirms it.

Hardest hit will be those regional communities which host major industries---such as the Latrobe Valley, Geelong and Portland in Victoria; the Hunter Valley and the Illawarra in New South Wales; Gladstone in Queensland; Elizabeth in South Australia and Kwinana-Bunbury in Western Australia. The vast North West Shelf development will be cut off long before it reaches its potential to provide huge export income, jobs and technology advancement deep into the 21st Century.

The Lavoisier Group believes the economic consequences of greenhouse are being given insufficient public exposure. The personal impacts of greenhouse should be discussed with the same level of community participation that environmental issues are.

Individual Australians are entitled to know the cost to them of reducing greenhouse gas emissions. At the very least, this should be the subject of the National Interest Analysis that is required to be tabled in Parliament before Australia ratifies the Kyoto Protocol.

The analysis would define where the national interest lies. It would give Australians the chance to decide that what is being proposed in their name is actually in their interest.

Endnotes

1. Australian Greenhouse Office, June 1999, National Emissions Trading, Issuing the Permits, Discussion Paper No.2, chap.5, p45.

2. Ibid., chap.4, p39.

3. Minister for the Environment, June 1996, address to the Second Conference of the Parties to the United Nations Framework Convention on Climate Change, Geneva.

4. Allen Consulting Group, January 2000, Report to the Department of Premier and Cabinet, Victoria, Greenhouse Emissions Trading.

5. Australian Greenhouse Office, November 1998, National Greenhouse Strategy; Prime Minister, November 1997, ministerial statement, Safeguarding the Future: Australia's Response to Climate Change.

6. Allen Consulting Group, January 2000, report to the Department of Premier and Cabinet, Victoria, Greenhouse Emissions Trading

7. Ibid., section 10.2, p191.

8. Ibid., section 11.3, p221.

9. Minister for Foreign Affairs and the Attorney-General, May 1996, joint statement, Reform of the Treaty-Making Process.

10. Treasury, May 1999, Commonwealth Budget 1999-2000, Ministerial Statements, Investing in Our Natural and Cultural Heritage, chap.8, box 8.1.

11. Minister for the Environment and Heritage, May 2000, address to the World Business Council on Sustainable Development and the Australian Business Council Forum, Warming to the Challenge: the Role of Australian Business in Combating Global Warming, Melbourne.