Australia and the Garnaut Approach to Climate Change: Right Direction, Wrong Policy

Warwick J. McKibbin
Warwick McKibbin
Warwick J. McKibbin Former expert - Economic Studies, Center on Regulation and Markets, Distinguished Professor of Economics & Public Policy - Crawford School of Public Policy, The Australian National University

July 7, 2008

This opinion piece was originally published in the Australian Financial Review under the title “Right direction, wrong policy.”

The Garnaut review is to be acknowledged for the depth of analysis, and its coverage is breathtaking in its sweep. It should be read by every Australian, and be the first step in a wideranging bipartisan debate. But it should not be seen as a conclusion.

There are a number of ways to design an emissions trading system (ETS). Unfortunately, the particular form chosen is the flaw in the report. First, it is not that the ETS will cost too much; rather, it is that we just don’t know what it will cost. Second, the ETS relies too much on the wisdom of governments both domestically and internationally. This particular ETS appears to be as much about income redistribution as it is about controlling emissions in an effort to reduce our carbon footprint at the lowest cost.

Importantly, the review ignores the ETS’s impact on the international transmission of shocks, which may occur through the global ETS to countries such as Australia. A series of independent national hybrid ETSs, coordinated around a common price, can eliminate this risk. The ETS proposed in this review is prone to failure both nationally and globally; and if it does fail, the global environment and the Australian economy will be precariously placed.

Maybe the world community will get its act together in negotiating an effective global agreement based on national targets and timetables. Maybe most countries in the world without emission targets will take on targets even though they have been ruled out so far in the negotiations (for understandable reasons about the uncertain future). Unfortunately, there are too many maybes that need to fall into place for the particular form of the ETS proposed in the Garnaut review to be in Australia’s interest.

This does not mean do nothing. It means adopting an ETS based on what we have learned from the successes and failures in the global and national monetary systems, not from the experience of trade reforms and the trade debates globally.

Let’s also be clear on what we don’t know. A significant number of scientists argue that global concentrations of carbon dioxide emissions shouldn’t be allowed to reach levels that are regarded as dangerous. Science tells us nothing about how quickly we should cut emissions in any year; but even if it did, it tells us nothing about how much an individual country should cut emissions it is the global reduction that matters. The distribution across countries is either ethical or economic, it is not science. If economics was the determinant, emissions should fall where they are cheapest, by having a common world price. Economists would not argue for a country to take on an arbitrary target with an arbitrary timetable for reductions and then try and reach the common price through global trading across markets.

The Garnaut approach delivers a good global outcome only if all major countries are allowed to trade emission permits in a global emissions market. Yet the world has never been successful in creating a common market for money, because money is not a commodity it is the promise of a government. Governments have different degrees of credibility. For the same reason that there is unlikely to be a world money, there is unlikely to be a common world market for permits. So if the world market is unlikely, Australia takes the risk that our target will have to be met by domestic action alone, which can be very expensive.

Climate policy is about designing a system that manages the risk of climate change. It is not about taking risky bets that we can rely on the global community to do the right thing and follow a sensible climate strategy. We have to design a system that puts Australia in the best possible position to move together with the world if large emissions reductions are required. It also has to be a system that the world can adopt as a way to move forward from stalemate caused by the focus on rigid targets and timetables and wishful thinking.

We are at a critical juncture in Australia’s history. It’s time for the Rudd government and the opposition, in a bipartisan act, to convene a panel of internationally renowned Australian experts from all parts of the spectrum to draw on the work of the Garnaut review, the forthcoming green paper and other serious sources to engage in a wideranging public debate on the alternative policy approaches. It is not too late to get Australia’s climate policy right.