Garnaut summary and responses
I’m going to use this post to put down a summary and some responses to the final Garnaut Review as I read it. Comments welcome, but may become obsolete as the text changes.
I’m mainly working from the Final Review, which is being published as a book by Cambridge. But some of the most importnat material, such as details on the proposed compensation package, is in Annexes to the Summary, so I’ll jump to that where necessary.
Part 1: The global shift
Ch1: Straightforward and well-presented summary of the science. Conclusion
the evidence is now so strong that it is appropriate that we move beyond the civil court parameters of ‘balance of probabilities’ that I applied in 2008 towards the more rigorous criminal court conclusion of ‘beyond reasonable doubt’.
I agree. Conversely, at this point, those who deny the scientific evidence are either consciously perjuring themselves or deluded by those in the first group. Virtually all the prominent figures on the anti-science side are in the first group.
Ch2: Carbon after the Great Crash Even under business as usual, can expect little growth in emissions from developed countires as a group. Hence focus shifts mainly to China and India, which makes problem more difficult. Recent research casts more doubt on overshooting scenarios, suggests increases in global temperature will be very hard to reverse. Positives are a slowdown in population growth (though recent revisions to UN projections are a bit more pessimistic) and big expansion in global gas reserves (I plan to write more on this later. Overall, it’s very good news, but there are plenty of problems to manage).
Ch3: What’s a fair share? Generally, a glass half-full view of the combined impact of Copenhagen and Cancun. Post-Kyoto hopes for a broader internationally binding agreement have been abandoned. On the other hand, most countries have made commitments for substantial reductions. Draws on experience of trade negotiations to suggest non-binding commitments may be more ambitious leading to better outcomes even with some backsliding. Contract and converge (to a common entitlement per person) is still the central program. Australia must make large reductions in emissions per person, but benefits relative to Kyoto-style targets because population growth is taken into account automatically.
Ch4:Pledging the future Most countries have made pledges to reduce emissions in period to 2020. Could be consistent with 450 pm path if larger cuts are made after 2020. Europeans are well ahead of everyone else, particularly Norway, UK, Germany, France. In this context, as I’ve observed previously the UK announcement of a cut of 50 per cent, relative to 1990, by 2025 is an indication of what can be done. China has made substantial progress already with a variety of measures
What once seemed unattainable targets to Chinese economic authorities are now viewed with confidence. Officials have been pleasantly surprised at the rate of decrease in costs and are now talking confidently of reaching the high point of the emissions intensity reduction.
Indonesia and Brazil have made big steps. India has a clean energy tax of about $1/tonne on coal (the brevity of discussion about India suggests that they are not doing much as yet). Australia, US and Canada laggards “people in these three countries who want to avoid action to look to the other laggards for comfort. ” Nevertheless some hopeful signs. Again, gas looks like the potential saviour in the short and medium term. Regulation through the EPA is yielding aggressive regulatory measures. In the absence of a proper market price, has adopted a shadow price of $21/tonne for regulatory purposes (I calculate this at about $A20 at current exchange rates, $A30 at PPP). Conclusions
* Reaffirm unconditional 5 per cent target and range of conditional targets
When you next hear someone say that he is worried that Australia might get ahead of the rest of the world in reducing greenhouse gases, take him by the hand and reassure him that he has no reason for fear … It would be a reasonable aim to be making good progress in catching up with the average of the developed countries. And we do have a chance of getting ahead of the pack in the way we go about reducing emissions. With carbon pricing we can do as much as others at lower cost. That is one way of getting ahead of the world that shouldn’t frighten anyone.
Part 2: Australia’s Path
Ch5: Correcting the great failure Argues for a market based approach, drawing on 1980s agenda. ( I’m less enthused than Garnaut about that agenda, but the point that resistance was driven primarily by rent-seekers in the business sector is correct, and has hit home with important opinion leaders like the Fin. ) Argues for independent setting to “minimise reliance on recurring judgments by government”. Variois mechanisms, all reasonably described as market-oriented. Initially fixed price rising over time, eventually replaced by trading scheme.
Arguments for starting price in $20-30 tonne. Modelling suggest $26 is what we need to achieve a 5 per cent reduction. Consistent with trading price of emissions in EU and US regulatory price, a bit above CDM credit price, below UK non-traded sector price. Argues for 4 per cent a year increase based on Hotelling rule with 2 per cent real discount rate and 2 per cent risk premium.
My comments: This is the most important single choice in the whole scheme, and I think Garnaut has it about right. Impact on household electricity prices will be modest, especially compared to recent increases driven by distribution costs, so main impact will be through substitution on production side. $25/tonne (approx =$25/MwH for black coal) is about the price where for existing plants, gas-fired electricity becomes cheaper than electricity from black coal plants, and brown coal becomes dearer (though there are a lot of differing estimates on this). Given a commitment to rising price over time, most new investment will be in gas and wind, and brown coal stations will face early shutdown. Politically, it seems high enough to keep the Greens onboard, but low enough that Abbott will look silly when the supposedly massive adverse effects turn out to be undetectable.
6 Better climate, better tax
Likely revenue of $11.5 billion from a $26/tonne tax. Using this for well-designed tax reform could halve GDP cost of reform, or deliver 15 per cent cut (below 2000) at cost that would otherwise be needed for 5 per cent cut. Proposal is to allocation 60 per cent to households through tax reform and higher benefits payments, 30 per cent to business, about 10 per cent for “carbon farming” and 15 per cent for innovation. Budget neutrality achieved by folding in existing innovation funding and through savings from offsets.
Jumping to the Summary, proposed tax changes are
In line with these principles, an amended version of the income tax reform proposed by the Australia’s Future Tax System review (Australian Government 2009) could be implemented. In particular, the raising of the tax free threshold to $25,000, the removal of the low income tax offset and potentially the seniors’ tax offset but not at this stage proceeding with the other changes to thresholds and rates. Then simultaneously adjusting thresholds and or rates to effectively net off the value of the cut in tax for higher income earners (say, for example, those earning more than $80,000). These changes should be designed to leave higher income earners no worse off as a result of tax changes
As Garnaut says, this seems to offer big improvements in efficiency at the bottom end of the tax scale, with only a modest increase in progressivity at higher levels.
Includes brief refutation of a common error
It is sometimes suggested that providing households with assistance would cancel out the benefits of introducing a carbon price. It is said that, if we impose a carbon price that costs a household $100 and then provide that household with a tax cut worth $100, nothing has changed. These suggestions are wrong. The carbon price, even with the tax cut, alters the relative prices of more and less emissions-intensive goods and services. High-emissions goods become more expensive relative to low-emissions goods. Demand for the former falls, while demand for the latter rises. And putting a price on emissions encourages producers to use less emissions-intensive processes to produce goods and services.