Climate | Environment | Emissions Reduction

Growth 59: Climate Change - Getting it Right

CEDA's Climate Change - Getting it Right report promotes a risk management approach to climate change - achieving reductions in emissions through markets, carbon pricing and investment in low emissions technologies, while preserving economic growth. [Research and Policy article - Full content is only available to CEDA members]


Read Professor John Freebairn's introduction to the report
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Report highlights

Climate Change - Getting it right has been produced for the International Counterparts Climate Change Conference that CEDA is hosting in Sydney 15-16 November, but is a substantive report in its own right. The Report aims to promote intelligent analysis and debate on one of the most difficult policy challenges facing the world, by offering a variety of perspectives from Australian and international experts.

While there is growing acceptance that climate change could pose serious risks to future generations, projections of climate change necessarily rely on assumptions about the future. As in any exercise in prediction, there are uncertainties - in the science as well as the economics. Yet, we cannot wait for perfect knowledge before taking action.

"Getting it right" - finding the balance between minimising climate change damage and reducing economic activity - will require a risk management approach. The recommendations of CEDA's Climate Change - Getting it right report are that the most important tools for taking action are markets, carbon pricing, improvements in energy efficiency and investment in low emission technologies on an unprecedented scale.

The task for policymakers in Australia, and around the world, is to introduce economic incentives that encourage more careful use of the climate 'asset'. This is a market-based solution which should produce more benefits, for a greater number of people and at a lower cost, than regulation or subsidies. What we don't know is what level of emissions improvement can be achieved for a given level of investment.

The three most common suggested policy responses to climate change are a tax on carbon emissions (carbon tax), a system of trading rights to emit carbon dioxide (cap-and-trade), or a hybrid between the two. Each proposal has strengths and weaknesses; the optimal choice is not clear cut.

A global response is required to achieve a meaningful reduction in emissions. Though diverse national interests make agreement difficult, we must strive for a multilateral framework that engages industrialized and developing nations alike.

Chapter Summaries

Chapter 1: Introduction By John Freebairn

Climate Science

Chapter 2:  Warming up - What we know about climate change By Graeme Pearman

Current peer-reviewed literature concludes that the Earth has warmed over the past century and that much of this warming has been due to the accumulation of  greenhouse gases in the atmosphere. The cause of this accumulation has been human activities, the combustion of fuels, changing land-use and agriculture. This warming has now manifested itself in changes to details of climate: rainfall, winds, storminess, sea level, deglaciation, and so on. Impacts of these changes have been observed on human and natural ecosystems around the world. The science anticipates a further warming of around 2-4°C through this century with a wide range of concomitant effects. Both adaptive and mitigative actions are necessary to deal with these changes and limit dangerous changes into the future.

Chapter 3: Climate models - Measuring and forecasting climate change By Ronald Prinn

This chapter reviews the key scientific, economic and policy issues that, taken together, provide a significant impetus for lowering greenhouse gas emissions to mitigate future climate change. First, I briefly discuss the current evidence for climate change, then discuss detection of the human influence on climate that is so important to policy. I then review the models of human and natural processes that are used to predict future changes in climate with an emphasis on the modelling system developed at the Massachusetts Institute of Technology (MIT). Next I address the uncertainty in current climate forecasts using the MIT model. This is followed by a review of the risks to humans and natural ecosystems that arise from allowing very significant future global warming to occur. I then review some economically viable technological pathways for meeting future global energy needs while lowering greenhouse gas emissions. After this, I briefly address the major policy options and their costs. Finally, I comment on the unresolved issues in climate science that need future resolution.

Economics and governance

Chapter 4: Reviewing Stern - Lessons for Australia By Robert Mendelsohn

Although the Stern Review is sometimes cited as an authoritative account of the economics of climate change, it is more of an advocacy paper for aggressive short-term abatement than a balanced economic analysis. The Stern Review makes four assumptions to support capping greenhouse gas concentrations at 550 parts per million (ppm). First, it examines the cost of its preferred policy only against doing nothing at all. It does not consider more efficient policy alternatives. Second, it chooses a very low discount rate to try to hide the long lag between mitigation costs and climate benefits. Third, it exaggerates climate damages, looking at only the worstcase scenarios. Fourth, it takes a very optimistic view of the cost of abatement, assuming a rapid rate of prolonged technical change will make mitigation inexpensive. Consequently, the Stern Review is not a balanced assessment of the costs and benefits of climate change and the recommended policy of aggressive near-term abatement is most likely a terrible waste of resources. Australia's Garnaut Climate Change Review should be careful to avoid these same biases.

Chapter 5: Beyond 2012 - Where global policy is heading after Kyoto By Brian Fisher and Anna Matysek

The international community has sought to find a policy solution to climate change under the United Nations Framework Convention on Climate Change (UNFCCC). Despite the great efforts made, it has not yet been possible to find a global solution that is acceptable to all major emitters. The main reason for this is the vast differences in national circumstances. In addition, there has been a presumption that international emissions trading is the policy instrument of choice, given its acceptance as part of the Kyoto Protocol. However, trading will only be effective with proper compliance and governance regimes in place. It is clear that such regimes do not exist throughout Annex I countries, let alone more generally across the world. It is clear that a global regime will not be in place in the next 20 years. In the near term climate change policy will be characterised by country and regional agreements. Australia will introduce a domestic emissions trading scheme. The effectiveness of this scheme will depend on its design features, but ultimately the reversal of the growth in global greenhouse gas emissions will require the adoption of new energy technology on an unprecedented scale. This will require not only a policy shift in developed countries, but participation by developing countries in a way that accommodates their aspirations for economic growth and addresses concerns about energy security and local pollution.

Chapter 6: Climate change and India - A perspective from the developing world By Jyoti Parikh

The race is on to find a post-Kyoto international framework. Whatever replaces Kyoto will only be effective if it is undertaken as a parallel effort and not instead of the United Nations Framework Convention on Climate Change (UNFCCC), which has been painstakingly created. The UNFCCC has not only ensured the participation of a large number of countries year after year, but also has a framework that could be built upon and expanded with various programs, like a carbon emissions trading scheme. This paper discusses various alternatives for a post-Kyoto regime. It focuses on a three-tier system, a proposal that considers per capita global average emissions as a reference point. It also briefly discusses the Asia-Pacific Partnership on Clean Development and Climate (AP6), in which Australia is playing a leading role. These issues are discussed in the context of the developing countries, especially as they relate to their needs and capabilities. The paper ends with a look at some of the strategies and polices for carbon emissions reduction in India.

Policy response and technology

Chapter 7: The carbon tax - An alternative to carbon trading By Robert Shapiro

A solid consensus has emerged among scientists and most public officials around the world that emissions of greenhouse gases from burning fossil fuels, especially carbon dioxide (CO2), contribute significantly to climate changes which could have very serious, adverse effects. Since every industrialised nation produces these emissions they all need to be part of the global effort to control them. This paper examines the two most prominent strategies for reducing greenhouse gases: a global system of national caps on the emissions and tradable permits, modelled on the Kyoto Protocol, and global, harmonised, net carbon based taxes. It finds that cap-and-trade systems can achieve their emissions targets year by year, but will introduce significant additional volatility in energy prices. These systems also entail substantial administrative complexities and costs, and their emissions goals can be undermined by evasion and manipulation. Carbon taxes are less certain to achieve their emissions targets year by year, but their levels can be adjusted to minimise this deficiency. They are also easier and less expensive to administer, less vulnerable to manipulation and evasion, and provide more reliable incentives to develop and use alternative fuels and more energy-efficient technologies. Based on economic analyses and evidence, we conclude that carbon taxes are the more environmentally effective and economically efficient strategy for addressing climate change.

Chapter 8: Managing price and targets - Why a hybrid policy is better for Australia By Warwick McKibbin and Peter Wilcoxen

Promising to reach an emissions target on a precise timetable is a popular approach to climate policy - indeed it underlies the Kyoto Protocol. Despite its popularity, there are many problems with this strategy. A better approach is to specify a target but to allow costs to determine the speed at which the target is approached. This can be achieved using a hybrid of targets and emission fees. This paper summarises the targets and timetables approach to climate policy and how it is usually implemented in cap-and-trade permit markets. However, as a basis for domestic policy or for an international climate regime there are major flaws in this approach. We then present the McKibbin Wilcoxen hybrid approach and compare it to the approach proposed by the Prime Minister's Emissions Trading Task Group.

Chapter 9: Castles in the ground - The prospects for carbon capture and storage By Peter Cook

Carbon dioxide emissions and atmospheric concentrations continue to rise. At the same time, projections of world energy demand indicate increasing use of fossil fuels, especially coal. Because of this, there is interest in using carbon capture and storage technologies as a mitigation option, particularly in Australia because of its dependency on fossil fuels for electricity generation and the importance of its fossil fuel exports. Capture options include post-combustion capture (PCC), integrated gasification combined cycle (IGCC) and oxyfuels combustion. Carbon dioxide can be stored in the ocean and in minerals, but by far the most likely option is storage in suitable geological locations. Australia appears to have abundant geological storage capacity, particularly in saline formations and to a lesser extent in depleted oil and gas fields. Australian capture and storage projects are planned for most states. Acceptance by the community will be dependent in part on cost, but confidence that the technology is safe will be crucial. This will require an effective regulatory regime and appropriate monitoring and verification. For capture and storage to play its part in reducing global emissions, we must aim at large-scale deployment by 2015-2020. Australia could become an early mover in the application of carbon dioxide capture and geological storage.