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 1st, 2011 at 13:29 | #1

    I don’t think the carbon tax is good public policy because the costs exceed the benefits. However given the politics two things that I found encouraging from the 7:30 interview and media reports about the Garnaut Review recommendations are:-

    i) a good chunk of the revenue should provide income tax relief. Not enough in my view but you don’t always get what you want.
    ii) a suggestion that MRET and solar subsidies should be phased out. Sooner would be better.

  2. Ernestine Gross
    June 1st, 2011 at 13:49 | #2

    Interesting. Prof Garnaut goes out of his way to translate the language of statistics into the language of lawyers.

  3. wilful
    June 1st, 2011 at 14:32 | #3

    Pr Quiggin, without getting too personal, what is your opinion of Pr Garnaut more broadly, as a significant Australian economist?

  4. John Quiggin
    June 1st, 2011 at 14:38 | #4

    Garnaut is one of our top policy economists, and has worked mainly, though not exclusively on trade, particularly with Asia. He’s more enthusiastic about the benefits of tariff reform than I am, but that’s an issue where he is in the majority. It’s notable that, before taking on this task, he had shown no particular interest in the environment. Any sensible economist, without prior prejudices and faced with the evidence before Garnaut, would reach much the same conclusions.

  5. Chris Warren
    June 1st, 2011 at 15:09 | #5

    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.

    I would hope for a better refutation of what some may like to tag as “common error”. Who has proposed this in the terms of “nothing will change”??

    The fact that relative prices change, with the change weighted by emissions intensity does not contradict the position that this relative change will not be reflected much in consumer puchasing if they are compensated.

    As I see it, $26 tonne (1,000 kg), will not drive market forces enough.

    But it will provide government revenue to do other useful things. So the government will look like it is responding to public concerns.

    2.6 cents a kilogram of carbon? Even if an item has an emission factor over 1, it is stil paltry.

    Not that “nothing will change”, but that Australia’s emissions will not fall as needed.

  6. Hermit
    June 1st, 2011 at 15:15 | #6

    There are a couple of regional issues here yet to play out. First the need for India and China to increasingly import coal and gas and second the availability of enough local gas to replace brown coal in Victoria. It seems odd that mostly Australian coking coal props up India’s steel industry while China’s coal production, both thermal and coking, appears to have hit a plateau. Thus we supply both coal and iron ore to Asia while they supply cheap labour and relatively lax pollution controls. After a few years of tough conditions for Australian steel makers some will question whether it is an own goal when we control the key ingredients.

    On the issue of replacing Victorian brown coal and SA’s poor quality black coal baseload with combined cycle gas the problem is that WA and Qld now have most of the good gas reserves. Those who can recall the Whitlam era will remember Rex Connor wanted a gas pipeline from the west. Dwindling southern gas fields also supply Tasmania as does an undersea electric cable which we can presume is largely powered by Latrobe Valley brown coal. $26 is just not enough carbon tax to overcome the huge cheapness advantage of brown coal over southern Australian gas. Thus it seems likely that electricity consumers in SA, Vic and Tas will simply have to pay more with no major (say 50% replacement) alternatives in sight.

  7. Ikonoclast
    June 1st, 2011 at 15:58 | #7

    I am in favour of removing all royalties and excises on carbon based fuels and replacing them with a single carbon tax comprising a revenue neutral component carbon price (to replace said excises and royalties) plus a new carbon price starting at say $40.00 a ton. This effectively adds the $40.00 a ton as the new tax. This structure however would have other benefits. Renewable power would be far more competitive on such a true level playing field as it would pay neither of these components. Also, remove all subsidies for all types of energy renewable or not.

    Nobody has yet supplied me with a single logical argument against this idea and yet it is never publicly considered

  8. wilful
    June 1st, 2011 at 16:16 | #8

    Nobody has yet supplied me with a single logical argument against this idea and yet it is never publicly considered

    I’m in favour of closing down <emThe Australian as a blight on modern society. Nobody has yet supplied me with a single logical argument against this idea and yet it is never publicly considered.

  9. TerjeP
    June 1st, 2011 at 16:26 | #9

    As I said earlier I think the cost of a carbon tax is too high given the benefit. However I’m curious to know other peoples assessment on how high the carbon tax has to be before the cost exceeds the benefit. Would you support a carbon tax at $100 per tonne? What about at $1000 per tonne?

  10. John Quiggin
    June 1st, 2011 at 16:41 | #10

    Your reductio ad absurdam doesn’t work, Terje. By the time you get to $100/tonne, or thereabouts, virtually all carbon combustion would be uneconomical, and what was left could be offset. So, any further increases would have no effect.

  11. Jim Birch
    June 1st, 2011 at 17:03 | #11

    What (specifically) do you think the benefit is?

  12. wilful
    June 1st, 2011 at 17:13 | #12

    terje, the “Australian Cost Curve for greenhouse gas reduction” by McKinsey and Co showed that the overwhelming bulk of emissions could be dealt with for $50/ton.

  13. June 1st, 2011 at 17:37 | #13

    I presume this “carbon tax” is not a tax either but the previously referred to fixed carbon price that effectively acts as a tax until an ETS comes into place. So really its an adjust into an ETS easier mechanism. Tied to the 25k TFT, I can’t see how it can fail to be passed politically. Some grand ramifications for any party that opposes it.
    As that’s what the political noise will be about, the opposition to raising the TFT & eliminating the LITO.

  14. TerjeP
    June 1st, 2011 at 17:43 | #14

    @Jim Birch

    About 0.0002 degrees Celcius relative to the business as usual scenario.

  15. TerjeP
    June 1st, 2011 at 17:45 | #15

    JQ – would you support a $100 price on a CBA basis?

  16. John Quiggin
    June 1st, 2011 at 17:50 | #16

    @TerjeP This is a silly zombie lie. You are making a fool of yourself.

    A global $100/tonne tax would be justified on a benefit-cost basis. And, it’s silly to evaluate an Australian tax in isolation but, even if you did, your number is out by several orders of magnitude. Australia contributes about 2 per cent of emissions, and a global $100 tax would reduce final temperature by at least 2 degrees, giving you an effect of 0.04 degrees.

    I bet you took this figure from one of your denialist friends. As you ought to know by now, they are, without exception, fools or liars, and mostly both.

  17. TerjeP
    June 1st, 2011 at 18:00 | #17

    JQ – the figure is based on a 5% reduction of Australia emissions by 2020 and assumed this to equate to an average reduction over the period of 2.5%. As such it is the benefit in 2020 of the current policy. Not the benefit of a $100 carbon tax. If I misunderstood the question then sorry.

  18. TerjeP
    June 1st, 2011 at 18:01 | #18

    p.s. Obviously if the whole world does this the benefit is a lot higher. But then so is the cost.

  19. TerjeP
    June 1st, 2011 at 18:21 | #19

    To lay this out as a basic CBA so you can fault my numbers as appropriate.

    1. Assume that we cut emissions by 5% by 2020 in steps so average over decade is 2.5% reduction in emissions.
    2. This equated to a temperature saving of 0.0002 degrees.
    3. Assume cost over period is $8000 per household based on treasury modelling.
    4. Stop costs in 2020 but assume father 0.0001 degree per decade anyway till 2100.
    5. Total benefit is 0.001 degree. Or about a two week delay in warming.

    Cost to 2100 $8000 per household.
    Benefit to 2100 warming delay of two weeks.

    Happy to be corrected.

  20. John Quiggin
    June 1st, 2011 at 18:41 | #20

    I’m happy that you’re happy to be corrected

    First big error is in Step 1. Cut is relative to 2000 levels not BAU. There are more errors, but that’s enough to invalidate everything that follows.

  21. Chris Warren
    June 1st, 2011 at 18:43 | #21


    Your so-called cost – is in fact a transfer, and reappears in alternative benefits.

    If you want to be corrected, you will need to provide sources.

    No one corrects statements based on “Assume” this or that.

  22. June 1st, 2011 at 19:24 | #22

    Cost is $8,000 dollars per household? I could cut my CO2 emissions a lot more than 5% with $8,000. I could do it with one head tied behind my back. Oh right, I see, it’s not a cost, just a mistake. Thanks Chris.

  23. Nick R
    June 1st, 2011 at 20:06 | #23

    It seems to me that when conservatives quote benefits of climate change policy in isolation they highlight a serious weakness in their own ideology. A carbon price is a great example of a prisoner’s dilemma, where it is in the individual interests of every country to free-ride on the sacrifices of others, but every country is worse off if they all pursue this self-interest.

    Anybody who chooses to understate the benefits of a carbon price by failing to recognize the co-operative value (either through ignorance or design) is getting caught in the trap. The lesson from the prisoner’s dilemma of course is that the way out is to ignore your individualistic impulse and opt for collectivist action. Thus Terje seems to be making a good anti-libertarian case here.

  24. Alice
    June 1st, 2011 at 20:18 | #24

    You just cant win Terje….maybe its that huge heavy wooden spoon you carry in your pocket but it does get a tad tiresome. Mr contrarian?

  25. Chris Warren
    June 1st, 2011 at 20:25 | #25

    Ronald Brak :
    Cost is $8,000 dollars per household? I could cut my CO2 emissions a lot more than 5% with $8,000. I could do it with one head tied behind my back. Oh right, I see, it’s not a cost, just a mistake. Thanks Chris.

    Unfortunately the $8,000 is not mine.

    But if you want to brag about some super-duper ability to cut your emissions by 5% please explain if this cutting of your emissions by 5% is for a day, a week, a year, or for how long.

    So what mistake are you trying to point to???

  26. Fran Barlow
    June 1st, 2011 at 21:07 | #26

    While I share Chris Warren’s concern that an explicit $26 isn’t enough — particularly as not all sectors or substantial emitters are covered and some are to be compensated if Garnaut is accepted — it’s worth noting that most of the assets that would be the subject of the restructure must consider the longterm average price, and the putting in place of a mechanism to ramp up action, in circumstances where there would be institutional pressure to do so, makes $26 somewhat less inadequate in practice than it might appear in theory.

    Yes it would be better if they were starting at $40 and foreshadowing $(AUD2011)100 by 2020 (at least as the price for those who fail to hold the requisite permits) and including all sectors and giving at worst trivial compensation to EITEs, but unlike 2009, this looks plausible.

    I’d prefer the compensation for those around the current LITO to be more generous (albeit largely in semi-illiquid non-discretionary benefits) but this is a very rightwing government and one supposes that that would never have flown.

  27. June 1st, 2011 at 21:25 | #27

    Chris, you pointed out that the $8,000 TerjeP mentioned was a transfer, not a cost.

  28. optimist
    June 1st, 2011 at 22:35 | #28

    …just listened to Garnaut tonight. He was at pains to point out that Australia does itself no favours to be seen in the international community as the stubborn kid with the highest per capita emissions who won’t play ball. He emphasised that doing our fair share was a no regrets approach. Someone asked whether his “independent agency” monitoring the exposure of industries to carbon price would recommend a carbon duty on imported goods and he commented that the far more likely scenario was carbon duty on Australian exports coming from the likes of Europe and the US.

    I guess there is no international policeman at the end of the day and unenforceable agreements still have value in the way the nations of the world cooperate and trade. Bring on Durban…

  29. Chris Warren
    June 1st, 2011 at 23:02 | #29

    Ronald Brak :
    Chris, you pointed out that the $8,000 TerjeP mentioned was a transfer, not a cost.

    I think you (deliberately) missed the point.

    The fact that something is a transfer, and not a cost, is independent of the amount.

    Please indicate where I suggested $8,000 ????

    It’s still not clear how you think you can reduce CO2 a lot more than 5% using “$8,000”.

    This also appears to have been a deliberate misunderstanding.

    I suppose you have noted that Terje has not provided any link or reference for his claim, and like most of his ilk, simply runs up a minute amount over a long period to artificially inflate the data.

  30. TerjeP
    June 1st, 2011 at 23:10 | #30

    JQ – Current emissions are about 575 MtCO2e business as usual puts emissions in 2020 at 700 MtCO2e. My figure assumed a cut of 5% below the current level not 5% below business as usual. However as you point out my assumption flawed as the cut is not 5% below the current level but 5% below the 2000 level. However the 2000 level was 550 MtCO2e so the magnitude of my figure is not out substantially. Figures from page 7 here:-


    Having said that my figure of 0.0002 should have been 0.0005 so all up let’s triple the benefit and say that the policy will in 2100 delay warming by six weeks.

    On the cost side Chris is right that $8000 is a transfer not a cost. However there are deadweight aspects to any transfer. I’d put them at 40% others at 20%. Assume 10% to be generous and allow for the fact that there will be some tax cuts.

    Benefit in 2100 is a delay of warming by six weeks.
    Cost this decade is $800 per household.

    With NPV adjustments I’d still say the CBA fails and fails easily.

    Nick points out that the benefits will be higher if other countries join in. That is true. However the costs will then also be higher. $800 per household across all of Australia is bot the same cost as $800 per household across the whole world.

  31. TerjeP
    June 1st, 2011 at 23:18 | #31

    The basis for the $8000 is the treasury costing. It is actually $860 per annum and I’ve multiplied by nine years to 2020 and rounded.


  32. John Quiggin
    June 2nd, 2011 at 05:59 | #32

    Chris, I’m pretty sure you have got Ronald Brak’s point wrong. He was agreeing with you, not disagreeing.

    Terje, you’re just digging yourself deeper. You’ve totally missed Chris’ point that the “cost” is the total revenue, not the welfare loss. That’s a fail in basic welfare economics. A plausible value for the welfare loss, assuming revenue is repaid mainly through income tax cuts, would be around 10 per cent of total revenue.

    And, to spell out my point, 5 per cent below 2000 is about 525, which is about 40 per cent below BAU, not 5 per cent. That’s another order or magnitude error.

    There are more errors in your calculations, but these two errors alone have you out by a factor of around 100.

  33. Fran Barlow
    June 2nd, 2011 at 06:28 | #33


    Is there a reliable place where one can get the effective (i.e. shadow + explicit) price on emissions being proposed by the US, India, China, EU, Russia etc

  34. John Quiggin
    June 2nd, 2011 at 06:49 | #34

    As I mention in the post, Garnaut has numbers for most of these.

  35. Chris Warren
    June 2nd, 2011 at 08:19 | #35

    Yes, the joker in the pack is the guy who injected the $8,000 (guess who), not the guy who made subsequent vague ongoing statements re $8,000. Clarification would help.

    Anyway if you look at Terje’s belated link, you will see yet again how bizarre and confused he is.

    The so-called ‘Treasury modelling’ is based on $30 per tonne. So why on earth would you post comments based on this, when the number is $26 per tonne?

    The $8,000 was a scungy fabricated figure for the sake of propaganda.

    The more interesting comment from the ABC report is:

    But the documents also show a carbon tax will not guarantee that any emissions outcomes will be reached, possibly forcing the Government to buy international permits in order to meet its national commitments to cut carbon emissions by 2020.

    That is the take home message. It suggests the carbon price should be higher.

    The very idea that rich OECD, white, ex-Colonial states can somehow buy international permits is anathema. It is based on the notion of offsets and this offset-theory completely misunderstands the seriousness of the problem.

    Tony Abbott, the Nationals and Liberals (and their international counter-parts) are sending the globe on a one-way trip to climate catastrophe.

  36. John Quiggin
    June 2nd, 2011 at 09:12 | #36

    To spare you any further trouble, Terje, here’s a really simple version of how the exercise should be done. The target is a 40 per cent reduction of emissions relative to BAU. Australia is about 2 per cent of global emissions, so that makes around a 1 per cent reduction in global emissions relative to global BAU. To keep everything simple, lets suppose that reducing global emissions to zero would cut the global temperature increase by 2 degrees. So, the Australian contribution would cut the increase by 0.02 degrees, 100 times your estimate.
    Your cost estimate is done the wrong way anyway, but, as I’ve already noted it overstates welfare cost by something like a factor of 10.

    So, your implied benefit cost ratio needs to be raised by a factor of 1000. Assuming you intended the exercise seriously in the first place, you ought now to drastically increase your estimate of the optimal carbon tax (given a quadratic loss function, by a factor of around 30).

    I’m not going to debate your analysis any further in this thread, as I will shortly have a post showing how this can be done properly.

  37. TerjeP
    June 2nd, 2011 at 09:14 | #37

    A plausible value for the welfare loss, assuming revenue is repaid mainly through income tax cuts, would be around 10 per cent of total revenue.

    JQ – if you read my comment two up from yours I think you will find that I acknowledged the point Chris made and used a 10% figure te same as you. How does this constitute digging deeper?

  38. wilful
    June 2nd, 2011 at 09:14 | #38

    One thing that is becoming clear to me, I have always favoured a tax as opposed to a trading scheme, because I think the rentiers will be right into a trading scheme and the greatest beneficiaries will be people who work in big glass buildings in Sydney and melbourne, but a greater benefit of a tax is that it can be tied to genuine tax reform, it can be used as teh vehicle to further Ken Henry’s reform program, which will greatly enrich all Australians in the long run.

  39. TerjeP
    June 2nd, 2011 at 09:16 | #39

    I’m not going to debate your analysis any further in this thread, as I will shortly have a post showing how this can be done properly.

    Good idea.

  40. TerjeP
    June 2nd, 2011 at 09:19 | #40

    Wilful – I’ve always said I would support a carbon tax if it was modest confined to energy and it was part of meaningful tax reform. What is on the table now is looking a lot better than the original CPRS but could still be improved. The details should be out soon.

  41. Simon Musgrave
    June 2nd, 2011 at 09:33 | #41

    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.
    Am I being stupid, or does that really add up to 115%?

  42. TerjeP
    June 2nd, 2011 at 09:38 | #42

    Assuming you intended the exercise seriously in the first place, you ought now to drastically increase your estimate of the optimal carbon tax (given a quadratic loss function, by a factor of around 30).

    Yes I was serious. I’m not following you regarding a quadratic loss function.

  43. sam
    June 2nd, 2011 at 09:46 | #43

    TerjeP, if the taxes that are cut are really inefficient payroll taxes, surely the net distortion could actually be negative?

  44. wilful
    June 2nd, 2011 at 09:47 | #44

    @Simon Musgrave
    No you’re not, that deserves an explanation. The additional 15% comes from “Less market offsets and Existing innovation expenditure” i.e the money that the government is already putting in to the area. Which is of course funded from general revenues (i.e. taxes) …

    Refer p.19 of here: http://www.garnautreview.org.au/update-2011/garnaut-review-2011/summary-garnaut-review-2011.pdf

  45. sam
    June 2nd, 2011 at 09:48 | #45

    Also, do you really think levying $800 on every household in the developed world to actually *avoid* catastrophic warming would not be worth it?

  46. wilful
    June 2nd, 2011 at 09:48 | #46

    moderation for single links for regular commenters these days? huh? hellooo wordpress.

  47. John Quiggin
    June 2nd, 2011 at 10:16 | #47

    Simon, there’s a clawback because the figure includes some existing schemes and allows for some offsets. That’s what the slightly opaque sentence about budget neutrality means.

  48. Jim Birch
    June 2nd, 2011 at 10:23 | #48

    “and it was part of meaningful tax reform”

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

    AFAICS you’re being completely disingenuous, and, the reasoning you are using is, to use a biological term, reptilian. The whole idea of the tax is not that Australia is going to somehow solve global warming single handedly. That’s plain crazy; it’s a straw man.

    The success of mammals in general, primates more so, and humans in particular, is based to a major extent on cooperation. Cooperation means relinquishing personal resources for group good, on the basis that if everyone (or enough individuals) participate, everyone is better off. Humans have evolved a range of biological capabilities that facilitate cooperation including sophisticated communications, friendship, love, morality, free-rider detection, capacity for selfless action, culture, and so. This enables a wildly powerful range of activities compared to what happened before. Lizards don’t dance, trade, care for the old, or make anything more sophisticated than a burrow. They aren’t an economic model we should emulate.

    What you are proposing is that we revert back to the kind of what’s-in-it-for-me level of functioning that characterises insects and reptiles. Specifically, the Australian tax works by the virtue of global cooperation. The tax is not justified on the basis of us acting alone; it is based on everyone – or enough of the world – doing something similar. This changes the maths completely. To deny this human potential on ideological grounds is manifestly crazy. Take a look around: cooperation works – even when it hurts a little.

    If we revert back to dinosaur thinking, we get what the dinosaurs got. This should be pretty obvious. If you argue on the basis that we are acting alone, you should demonstrate that this is the case. You haven’t, and you can’t, so your argument collapses.

  49. June 2nd, 2011 at 10:29 | #49

    How could I decrease my carbon emissions by over 5% with $8,000? Quite a few ways, although investing in a solar hot water system or putting it towards solar PV is so glaringly obvious I won’t even write the words solar hot water system or solar PV in this post. The effectiveness of many of the following methods will depend upon the habits of the person using them, but I’m sure everyone who isn’t a hunter gatherer will be able to find something that would work for them.

    1…Invest the $8,000 in a large scale wind turbine. On average this investment would produce over 25 kilowatt-hours a day in Australia. This alone would be enough for me to go carbon negative, an effective decrease in emissions of over 100%. In an accounting sense, that is. I wouldn’t actually start respiring in reverse. And I could use the 7% or so return from my investment to fund other methods of reducing CO2 emissions.

    2…Buy a bicycle.

    3…Install insulation.

    4…Paint the roof white.

    5…Use the money to endeliciate chicken and pork so I won’t be tempted to consume the flesh of cows and sheep. Or alternatively, use the money to win the affections of a militant vegetarian significant other.

    6…Put the money towards a new, extremely fuel efficient car.

    7…Use money to buy bed. Install bed at work. Eliminate commute.

    8…Pay a a group of male strippers $8,000 to perform at regional managers’ meeting and make the boss the butt of jokes. Eliminate commute and a great deal of consumption. Or possibly get promoted and use extra income to buy a prius.

    9…Use the money to grow trees in the back yard and then drive the wood down to the Murray Mouth and dump it in the water so it will sink in an area of alluvial deposition. (I have heard rumours that wood floats. While I find this hard to believe, I will be prepared to weigh it down, just in case.) My calculations show this is carbon negative, although I will get better results if I drag logs onto public transport rather than drive them down.

    10…Use the money to buy a nearby star operated liquid heating device or a sunlight electricity making type thing.

    And so on. If anyone wants more examples, feel free to ask for them.

  50. NickR
    June 2nd, 2011 at 10:43 | #50

    This seems to be a very good point Sam. A revenue neutral carbon tax should reduce deadweight loss if it replaces a more distorting tax, which may be the case in your example.

    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.

    Further to my previous point, you do seem to be arguing that on a national level (which can be easily generalized to a personal level) individual self interest is unable to address this very pressing problem, as it is not in our immediate national interest to cut emissions in isolation. It surprises me that somebody with such clear libertarian views would be so keen to make this clear.

    Lastly Terje I hope you are not getting a siege mentality here. Even though I disagree with most of what you write I always find you posts particularly thought-provoking.

  51. TerjeP
    June 2nd, 2011 at 10:56 | #51

    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.

  52. TerjeP
    June 2nd, 2011 at 11:00 | #52

    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.

  53. TerjeP
    June 2nd, 2011 at 11:04 | #53

    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.

  54. sam
    June 2nd, 2011 at 11:41 | #54

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

  55. wilful
    June 2nd, 2011 at 11:48 | #55

    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.

  56. Fran Barlow
    June 2nd, 2011 at 11:53 | #56


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

  57. Chris Warren
    June 2nd, 2011 at 11:56 | #57

    @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%?)]

  58. wilful
    June 2nd, 2011 at 12:03 | #58

    Fran Barlow :
    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.

  59. Jim Birch
    June 2nd, 2011 at 12:14 | #59

    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.

  60. TerjeP
    June 2nd, 2011 at 12:23 | #60

    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.

  61. TerjeP
    June 2nd, 2011 at 12:27 | #61


    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.

  62. TerjeP
    June 2nd, 2011 at 12:28 | #62


    Yes it seems we agree.

  63. Chris Warren
    June 2nd, 2011 at 12:55 | #63

    TerjeP :
    However it usually has little basis.

    Just the entire mainstream scientific community.

    Which bit of exponential do you not understand?

  64. NickR
    June 2nd, 2011 at 13:06 | #64

    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.

  65. Jim Birch
    June 2nd, 2011 at 13:37 | #65

    @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.

  66. sam
    June 2nd, 2011 at 13:55 | #66

    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.

  67. TerjeP
    June 2nd, 2011 at 14:57 | #67

    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.

  68. June 2nd, 2011 at 14:59 | #68

    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.

  69. Chris Warren
    June 2nd, 2011 at 15:23 | #69

    @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.

  70. NickR
    June 2nd, 2011 at 15:33 | #70

    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.

  71. sam
    June 2nd, 2011 at 15:56 | #71

    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.

  72. Fran Barlow
    June 2nd, 2011 at 15:59 | #72

    @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.

  73. wilful
    June 2nd, 2011 at 16:35 | #73

    @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.

  74. wilful
    June 2nd, 2011 at 16:42 | #74

    “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.

  75. sam
    June 2nd, 2011 at 16:47 | #75

    @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.

  76. Alice
    June 2nd, 2011 at 17:36 | #76

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

  77. TerjeP
    June 2nd, 2011 at 18:07 | #77

    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.

  78. June 2nd, 2011 at 18:21 | #78

    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.

  79. sam
    June 2nd, 2011 at 18:55 | #79

    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?

  80. sam
    June 2nd, 2011 at 18:59 | #80

    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.

  81. Ernestine Gross
    June 2nd, 2011 at 21:32 | #81


    ” 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]


  82. Nick R
    June 2nd, 2011 at 21:54 | #82

    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.

  83. sam
    June 2nd, 2011 at 22:39 | #83

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

  84. Fran Barlow
    June 3rd, 2011 at 19:37 | #84

    @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.

  85. Alice
    June 3rd, 2011 at 20:08 | #85

    @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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