Too much pain, too little to gain
The government says its emissions trading scheme tax will bring no risk to the economy. Indeed, Kevin Rudd constantly harps about savings of 15 per cent if we move early to implement the tax.
In fact, there is a considerable risk to the economy from the ETS tax and any alternative measures designed to force marked reductions in carbon dioxide emissions. Policies to force such reductions inevitably entail large hikes in energy prices. Even the super-optimists recognise that decarbonising the economy means dislocations in transforming the Australian economy. And the likelier outcome is that the price increases necessary to force abatement of CO2 emissions will cause dramatic reductions in living standards.
The ETS tax measures before the parliament seek a 5 per cent reduction in emissions by 2020. This is only the first rung on a ladder that will require Australia to reduce emissions by 80 per cent.
The purpose of the ETS is to ensure Australia plays a fair role in reducing global emissions of greenhouse gases. Britain's Stern report put the global cost of countries taking no action at 5 per cent to 20 per cent of gross domestic product by 2050. Although Stern foreshadows further losses beyond 2050, these are difficult to reconcile with the science of climate change whereby any warming effect of increased concentrations of carbon dioxide is logarithmic. Any warming effect from increased emissions of otherwise harmless gases therefore tails off rapidly. Moreover, no other estimates go close to the level of damage envisaged by Stern.
Twenty or so peer-reviewed studies examined by Dutch economist Richard Tol put the global costs from the temperature increases envisaged by the Intergovernmental Panel on Climate Change at plus 0.5 per cent to minus 5 per cent of GDP by 2050.
Like Stern's estimates of the damage costs from global warming, those by the Treasury are outliers among economic studies worldwide. Treasury puts Australia's loss if no emission-reducing action is taken at about 5 per cent per capita by 2050 (8 per cent by 2100).
Although this is significant, it is in the context of a business-as-usual increase in GDP of 66 per cent per capita by 2050.
On the other side of the ledger is the cost of carbon abatement measures that entail the total economic revamp of the Australian economy, including the sacrifice of our natural advantage of very low cost energy. Treasury estimates this cost at just a few percentage points of GDP by 2050.
However, Treasury's cost estimates are based on hopelessly heroic assumptions.
As well as requiring us to buy emission rights from overseas, they assume we will have 30 per cent of our electricity generated by wind and other high cost, non-controllable exotic renewables, with most of the rest generated from coal or gas incorporating carbon capture and storage.
The latter technologies have yet to be invented and many people, ironically including Al Gore, doubt they can be viable.
Treasury's forecasts of relatively benign costs of radical abatement action have little credibility. They stem from assumptions about technological developments, without which the costs of trying to force the projected 80 per cent reduction in Australian emissions would be likely to drive down Australian incomes to Third World standards.
Risks cut more than one way. There is a risk from climate change of a loss in GDP per capita. This amounts to a few percentage points in the context of business-as-usual per capita growth of more than two-thirds.
But there is also a risk of severe economic consequences of addressing such change.
The Prime Minister has said: "The [Carbon Pollution Reduction Scheme] holds in its hands our children's fate, and our grandchildren's fate. It's time to remove any polite veneer from this debate. The stakes are that high."
This is incontestable. If we take early action that involves imposing draconian taxes on our energy industries and the assumptions of a rapid and low-cost adjustment response are misplaced, we condemn our offspring to a marked reduction in living standards.
It is clear to everyone that Australia going it alone, in accordance with the government's policies, makes no difference to the world climate unless, as Rudd narcissistically claims, our leadership results in all other countries coming on board. Deferring action until other countries have shown similar resolve is the appropriate response.
Moreover the costs of delay, in the event radical carbon abatement measures do prove necessary, is small. Delaying implementing an ETS tax for 10 years, even on the Treasury's shamelessly lily-gilded estimates, brings a loss of only 0.3 per cent of GDP by 2050. In the context of per capita GDP levels under business-as-usual estimated at 66 per cent above those presently prevailing, this is a cheap insurance payment.
Such a strategy has become more persuasive in view of hacked emails from leading research scientists. The emails appear to indicate some scientists who claim to have identified a warming of the climate have been knowingly using questionable data.