Home > Economics - General, Environment > Garnaut summary and responses

Garnaut summary and responses

June 1st, 2011

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.

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  1. TerjeP
    June 2nd, 2011 at 10:56 | #1

    Sam – yes a carbon tax that Is fully used to cut income taxes and payroll taxes would in my view deliver benefits purely as a tax reform. In other words even if there were no environmental benefits I would support a modest carbon tax that is revenue neutral in this manner. I’ve been saying it for years.

    If a one off $800 levy on all households in developed nations would avert catastrophic global warming then that would be worth while. However given the low probability of catastrophe and given that excluding the developing world won’t work in any case then your offering a false proposition.

  2. TerjeP
    June 2nd, 2011 at 11:00 | #2

    Is this the perfect out clause? It sounds a bit “Do it all my way or else.”

    Jim – let me spell out my threat explicitly. Do it the way I believe is beneficial or else I won’t believe it is beneficial. So there. Scary hey.

  3. TerjeP
    June 2nd, 2011 at 11:04 | #3

    Terje – surely you are being a little disingenuous when you say that the costs of policy will increase as well as the benefits if other countries follow suit. The per-capita costs will remain pretty constant but the benefits will aggregate.

    Why is per capita cost the relevant metric. Surely total cost and total benefit is what we primarily care about. The money has alternate uses that can do other forms of good.

  4. sam
    June 2nd, 2011 at 11:41 | #4

    @TerjeP
    Low probability of catastrophe under a business as usual scenario? You’re joking surely?

  5. wilful
    June 2nd, 2011 at 11:48 | #5

    @TerjeP
    I think that resource or capital taxes are preferable to labour taxes, so I agree with you. I also think that sin taxes are preferable. A carbon tax kills two birds with one stone.

  6. Fran Barlow
    June 2nd, 2011 at 11:53 | #6

    @wilful

    Except that what is proposed is not a carbon tax. Something that would fairly be called a carbon tax woiuld probably be very ineffective.

  7. Chris Warren
    June 2nd, 2011 at 11:56 | #7

    @Ronald Brak

    With 20 million people or so, $8,000 per head equates to 160 billion for Australia.

    If each government spent this “per capita” each year then maybe in 5 years time CO2 will be fixed.

    I am not a strong supporter of trying to get people to change their lifestyles much in advance of broad new world and community standards.

    CO2 is less a problem sourced from private individuals as it is being sourced from fossil fuels in industry and plastics in industry, and transport and cement construction. [1 kg cement = around 900gms CO2 less what a concrete surface reabsorbs over time (5%?)]

  8. wilful
    June 2nd, 2011 at 12:03 | #8

    Fran Barlow :
    @wilful
    Except that what is proposed is not a carbon tax. Something that would fairly be called a carbon tax woiuld probably be very ineffective.

    Fran, I know you do like to belabour this point, but for the first several years, this will walk like a tax, quack like a tax.

    And anyway, I was talking more about a theoretical Australian carbon pollution reduction scheme, that was an actual tax, not just a virtual tax.

  9. Jim Birch
    June 2nd, 2011 at 12:14 | #9

    @TerjeP
    Not scary, something else. It sounds like you want a carbon tax to be not evaluated in terms of it’s actual utility but as part of a some (ideological?) grab bag of “meaningful tax reform” measures. Tax reform/change of any kind is tough to achieve in practice and the more things that get tied to the grand solution the worse it gets.

    But that’s an incidental point. The glaring problem with your analysis is that you are evaluating Australian action as if it’s the only thing happening and that’s clearly not the case. AFAICS you haven’t addressed that at all.

  10. TerjeP
    June 2nd, 2011 at 12:23 | #10

    I have addressed it. I have said if you want to claim the benefits of global action then your CBA needs to account for the global costs of action. Comparing Australian costs with global benefits is not a meaningful CBA.

  11. TerjeP
    June 2nd, 2011 at 12:27 | #11

    @sam

    No Sam. I think global warming is problematic not catastrophic. Just as I think the current tax proposal is problematic not catastrophic. There are people on both sides of the debate who are preaching apocalypse. However it usually has little basis.

  12. TerjeP
    June 2nd, 2011 at 12:28 | #12

    @wilful

    Yes it seems we agree.

  13. Chris Warren
    June 2nd, 2011 at 12:55 | #13

    TerjeP :
    @sam
    However it usually has little basis.

    Just the entire mainstream scientific community.

    Which bit of exponential do you not understand?

  14. NickR
    June 2nd, 2011 at 13:06 | #14

    @TerjeP
    Terge you have convinced me. From now on I am going to chuck all my rubbish straight out into the street not rather than put it in the bin, because that is what my private CBA says. I am assuming you do this already.

  15. Jim Birch
    June 2nd, 2011 at 13:37 | #15

    @Jim Birch

    Let me get this right: Is your 0.0002 degrees Celsius (ignoring the maths problems) the benefit of the Australian tax, or the full benefit of carbon charging everywhere?

    In the former case you haven’t addressed it. As I said, it’s crazy to suggest that Australia is acting in isolation. It clearly isn’t. This is akin to believing that you personally built a public hospital or a highway because you paid some tax. The benefit Australia receives is the benefit of the total CO2 reduction (as it affects us) not just the bit that we paid for.

    As you said, comparing Australian costs with global benefits is not a meaningful CBA. Comparing the proportion of global benefits that can be apportioned to our costs is equally silly.

    In the latter case your “science” is woeful. There’s been enough said on that.

  16. sam
    June 2nd, 2011 at 13:55 | #16

    What does catastrophic mean to you? In a BAU scenario, the end of the 21st century sees a 6 degree celcius rise in global temperature. If you go back in time 15 000 years or so, to the middle of the last glacial period it was about 6 degrees *colder.* At this time, the areas of New York and London were covered under about 2 miles of ice. The world looks very very different with a 6 degree temperature difference.

    A 6 degree *rise* results in sea level rise flooding most major cities, much more severe weather events, the extinction of much of the world’s biota (certainly all coral reefs), and the uninhabitability of densely populated parts of the earth’s surface.

    There’s no reason to believe the warming stops at the end of the 21st century either. A 6 degree rise assures the eventual release of all methane stored as clathrates or in the arctic permafrost, meaning a final rise of at least 11 degrees celcius. This is enough to make about half the earth’s surface too hot for year-round human habitation.

    There’s a reason the IPCC doesn’t spend too much time on the BAU scenario. It doesn’t bear thinking about. The eventual effect on humanity would be more catastrophic than a regional nuclear war.

    I want to pay to avoid this scenario. Not only that, I want to force you to pay for it as well.

  17. TerjeP
    June 2nd, 2011 at 14:57 | #17

    As I said, it’s crazy to suggest that Australia is acting in isolation. It clearly isn’t. This is akin to believing that you personally built a public hospital or a highway because you paid some tax.

    If we were doing a CBA for a hospital we wouldn’t tally up the benefit to the entire community and compare it to the per capita cost. We would compare total benefit to total cost.

  18. June 2nd, 2011 at 14:59 | #18

    Chris, let’s see, $8,000 x 5 = um… $40,000. With a 7% return on that money that that would come to $2,800 a year. As each Australian emits about 18 tons of CO2 a year on average (through fossil fuel use and land clearing, not bodily) that means the government could afford to spend about $155 dollars per ton of CO2 to suck it right out of the air and sequester it. Since lower estimates for suck and sequester start at around $55 a ton of CO2, I think you’re right, Australia could fix CO2 for $40,000 a head. In fact, since I can fill a ship with Australian wheat for about $250 a ton at the moment, I could dump it in the ocean and sequester carbon at a cost of about $135 per ton of CO2. However, if I did that, I think Amadou Toumani Toure, President of Mali, would have every right to come and punch me in the neck. Fortunately, mallee roots and other non-edible stuff should be cheaper than wheat. Of course, it should be much cheaper to just put a price on carbon than to go straight to the large scale suck and sequester.

  19. Chris Warren
    June 2nd, 2011 at 15:23 | #19

    @Ronald Brak

    All good in theory. But our political processes are such that any necessary solution will be impossible to implement.

    If the worlds desertification can be halted at 350ppm, so we can accept Quiggin’s assumption that this is “zero”, then maybe Garnaut’s $26 is a first step in the right direction.

    However I suspect the compounding damage started (imperceptibly) at much lower levels.

  20. NickR
    June 2nd, 2011 at 15:33 | #20

    @TerjeP
    I suspect you are simply obfuscating here. The benefits of a carbon tax are uniform (same reduction in ppm for everyone) and the per capita costs to per capita benefits is just a rescaling of the total costs to total benefits (just divide through by n). If you want to look at total costs this is fine, just make sure you add in the total cooperative (external) benefit into you calculations. This will give the same policy recommendation.

    So when the government values a project such as a hospital they correctly seek to internalize any external costs and benefits. This is an advantage that governments have over the private sector. All you are saying is that the private sector can’t handle the problem. This alone is a good reason to ditch hard-line libertarianism.

  21. sam
    June 2nd, 2011 at 15:56 | #21

    @NickR
    Too right Nick. TerjeP, laying the merits of the actual numbers you used aside, your CBA is not comparing apples with apples. The benefit in delayed warming you calculate accrues to every household on the planet, the cost falls only on Australian households. That’s a pretty big omission.

  22. Fran Barlow
    June 2nd, 2011 at 15:59 | #22

    @Ronald Brak

    I’d be interested in pricing doing the same task with algae. While recent papers I read suggest that the EROEI for algae-to-biofuels makes it hard to justify, if all we are doing is creating biomass mountains for dumping — perhaps at depth in the ocean — then all you need to do is to select strains of algae for yield. You use waste water from sewage or similar and grow your algae, harvest it, dry it and pack it in something inert and cheap — perhaps salt from a desal plant — compress it into packs and jettison it at sea.

    At a depth of 1000m the lack of light, oxygen, the cold and serious pressure ought to keep the stuff stable indefinitely. If you could get this done at $25tCo2 (half Quiggin’s figure) then Australia’s annual 500Mt would cost $12.5bn. That sounds a lot more than is politically likely at the moment but it’s an interesting thought. I’d like to know if that is realistic.

  23. wilful
    June 2nd, 2011 at 16:35 | #23

    @Fran Barlow
    Fran, I appreciate taht taht’s jsut a thought experiment, but if that’s our solution to climate change, well we may as well just shoot ourselves right now, humans are too wilfully stupid to deserve this planet.

  24. wilful
    June 2nd, 2011 at 16:42 | #24

    “taht taht’s jsut”

    What (waht) is the name for this type of typing error? I’m a shocker for it. Thank goodness for autocorrect on Word.

  25. sam
    June 2nd, 2011 at 16:47 | #25

    @Fran Barlow
    I realise it’s somewhat tangential to the point you’re making here, but for transport fuels EROEI is not so critical. A value greater than 1 is of course desirable but as you can’t directly power an aeroplane with nuclear fission, geothermal, photovoltaics or whatever, a biofuel with EROEI <1 might still be the best bet.

  26. Alice
    June 2nd, 2011 at 17:36 | #26

    @wilful
    The name is a double transposition error Wilful. Its only bad if you are an accountant and numbers get swapped.

  27. TerjeP
    June 2nd, 2011 at 18:07 | #27

    your CBA is not comparing apples with apples. The benefit in delayed warming you calculate accrues to every household on the planet

    I looked at total cost and total benefit. Total cost was $800 time the number of Australian households. Total benefit is a delay in warming of about 6 weeks in the year 2100. It is apples for apples. I think the numbers are very crude, and JQ has offered to give a post with more considered numbers, however there is no conceptual problem with what is being compared. If the whole world implements a carbon tax then the benefits will be much higher but so will the costs. The point is we should not look at the current policy debate and presume that the cost is justified because it saves the planet. It doesn’t. It merely delays warming a tiny, tiny fraction. To “save the planet” is a more expensive solution involving many countries. This is not to say we should not act alone, it is just that we should be mindful of both costs and benefits and we should compare like for like. I have not excluded the benefit that leaks to the rest of the world as they free ride off us, I have happily included this.

  28. June 2nd, 2011 at 18:21 | #28

    Fran, my initial thoughts are that algae won’t be able to compete with land grown biomass for carbon sequestration. There are a few reasons why. Firstly, algae people haven’t had a huge amount of success in getting their costs down in recent years, wood already comes in compact form and grass is easy to bundle up, and solid algae, or solid algae waste, is probably too valuable to dump in the ocean. A log is fairly low in nutrients, as it only has one layer of living cells and the rest is dead wood from which most of the nutrients have been extracted by the living part of the tree. But algae is all alive with no dead wood, and so is very rich in nutrients. It would probably be much more profitable to use solid algae as people food, animal food, or fertiliser than to dump it in the ocean to sequester the carbon in it.

    This might change in the future if suitable breakthroughs occur. Experiments with seeding oceans to create algal blooms to soak up CO2 weren’t very successful because very little of the CO2 entered deeper water. But if a type of algae could be made that excreted dense specks of carbon that would sink, that would be pretty useful. Maybe Craig Venter will manage to whip some up in his lab.

    Biomass dumped into the ocean depths won’t stay stable indefinitely, perhaps a large amount will get trapped in sediment, but I think much of it will either enter a cold and slow moving ecosystem or dissolve into the water, but provided it isn’t dumped in an area of ocean upwelling, the carbon should remain in the ocean depths for thousands of years.

  29. sam
    June 2nd, 2011 at 18:55 | #29

    @TerjeP
    Assuming your numbers are right, total cost is $800 per *Australian* household. Total benefit is 2 weeks of delayed warming for every household in the *world.*

    Do you see my point now?

  30. sam
    June 2nd, 2011 at 18:59 | #30

    Further, if the whole world implements a carbon tax, it is true that both the costs and benefits will be higher. However, then the costs will be $ per household for every household in the world, and the benefits will be in reduced warming for every household in the world. This is the only true apples to apples comparison.

    I think you should reconsider your position.

  31. Ernestine Gross
    June 2nd, 2011 at 21:32 | #31

    @NickR

    ” All you [TerjeP]are saying is that the private sector can’t handle the problem. This alone is a good reason to ditch hard-line libertarianism.” [Term in square brackets is added to convey the context]

    Exactly.

  32. Nick R
    June 2nd, 2011 at 21:54 | #32

    @sam
    I think we have come full circle here Sam, see my post #50. Terje seems to be doing a Basil Fawlty on us, digging deeper and deeper in order to avoid admitting his mistake. I reckon that in a parallel universe he would quite rightly dump on the argument he is making here, assuming he wasn’t already deeply committed to it. All that is required here are simple concepts such as a prisoner’s dilemma and the internalization of external costs, and anybody who misunderstands these (either wilfully of ignorantly) has no business commenting on economics.

    Having said all this, there is no shame in making a mistake. It is the clinging to preconceived notions when they are shown to be untrue that is so unbecoming.

  33. sam
    June 2nd, 2011 at 22:39 | #33

    @Nick R
    Oh well, I might leave it there then.

  34. Fran Barlow
    June 3rd, 2011 at 19:37 | #34

    @Ronald Brak

    But algae is all alive with no dead wood, and so is very rich in nutrients. It would probably be much more profitable to use solid algae as people food, animal food, or fertiliser than to dump it in the ocean to sequester the carbon in it.

    That’s conceivable, though one of the tricky parts of the cheapest approaches to algae production — open raceway ponds — tneds to be the loss of control of which species dominate, so output is quite variable. This doesn’t matter if you only want as much biomass as possible, but it does if you want specific nutrients at a specific volume to be able to process in a specific way. There tends to be a trade-off between lipids (good for diesel fuels and heating and even cosmetics) yield, and starches (good for alkane fuels). What you most want to do is to minimise energy inputs — especially fossil hydrocarbon or other highly dispatchable energy and of course costs (especially the costs of extracting those nutrients and the associated losses).

    If all you do is produce the algae, dry it, pack it securely, and then dump it, most of that can be very low tech, consume very little energy input per tonne, perhaps be carried out on relatively cheap land with subpotable water making the total cost fairly low. If this can be had under the ruling Co2 price then we have the makings of a viable sequestration scheme. Perhaps pyrolisis to biochar might work?

    I’d like to see some proper numbers on this.

  35. Alice
    June 3rd, 2011 at 20:08 | #35

    @Ernestine Gross
    Which we all know Terje wont do……he has accepted unquestionably the ethos of libertarianism and will sink to any lengths to support it, even if it means contradicting his own arguments. Must be hard to adhere to a philosophy so rigidly and erroneouslybut it seems Terje has made an unusually narrow choice in signing up for a “libertarian model” that has yet to be tested or proved….and to the extent it has been tried (perhaps for the scions of Wall Street banks and the de-regulation that was gifted them) – has proved an abject failure. Nothing quite so religious as being a disciple to a dying philosophy. However Terje, stand up and take your place in history…with other utopians.

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