ABARE on the costs of climate change

I’ve been reading the latest ABARE report on climate change, kindly sent to me by my colleague Renuka Mahadevan . While there are some problems with the analysis and even more with the way it’s been reported, the central findings are strikingly consistent with estimates I’ve made about the costs of stabilsing global CO2 levels, most recently here

All the evidence, though, is that we can reduce emissions to levels consistent with stabilising global CO2 levels over the next few decades at a cost of around 5 per cent of GDP – a few years worth of economic growth at the most. Quite possibly, as in previous cases, this wll turn out to be an overestimate.

ABARE studies a number of scenarios in which global CO2 levels are stabilised at 575 parts per million in 2100 and reports the estimated reduction in global product at 2050, which ranges from 1.7 per cent to 4.3 per cent, or from a bit under 1 years per capita growth to a bit over 2 years. That is, in the worst-case scenario (which is somewhat problematic in modelling terms, I think), the living standards in 2150 will be those that would have been reached in 2048 under the base projection.

ABARE is not known for lowballing the estimated costs of mitigating climate change, but if you’re going to do a credible modelling exercise, it’s inevitable that numbers of this magnitude will emerge. This simply reflects the fact that carbon-based fuels make up only a modest proportion of the value of total output, and that the demand for carbon (or more precisely C02) emissions is bound to be at least moderately elastic in the long run.

62 thoughts on “ABARE on the costs of climate change

  1. If we confined a cap and trade system to the electricity market I would think it dead easy to implement and audit.

    For instance for each MWhr that an operator sells they could be granted a licence to emit X tones of carbon (now or in the future). They could use or sell these licences with scope to split sell their allocation. As the years roll forward the number X on new licences would contract until maybe one day it reached zero. It would need to decline at least as fast as the growth in electricity demand in order to ensure a cap in emmissions.

    Granting licences would require no significant new audit capabilities as electricity already needs to be metred. It would entail some electronic book keeping and a means to register transfers of title. The only new audits required would be on actual emissions, which for renewables would be trivial and for the fossil fuel operators it would be a likely audit requirement under any scheme.

    I think you over rate the complexity. It would be far more simple for the regulators than trying to cost and evaluate all the alternate technical solutions up front.

  2. Hi Terje,

    I agree that a cap and trade system would obviously be much simpler to implement if it was restricted to the electricity sector because there are fewer sources and the sector (in the U.S. at least) already has experience with trading for SO2 and NOx.

    However, if we take that approach then we’re sacrificing any other emission reduction opportunities that could come from other sectors at a cheaper cost. In other words, you seem to be agreeing with Ender’s? point that its better in the short term to go with an effective solution (not necessarily ultimate) rather delaying until the most cost-effective solution is found. If that’s the case I couldn’t agree more. The science is compelling and signicant action is warranted now.

    However, even with this approach there are significant issues that muddy the waters considerably. First and foremost is the fact that not all electricity is created equally, which at the end of the day means that there will be winners and losers. I’ll use Canada as an illustration since it’s what I’m most familiar with, but the general principle applies globally as well. In Canada, it is not clear how the emission reduction target for the electricity sector should be set. Unlike Australia (which I assume is virtually all coal-based), in Canada different provinces use different sources — Alberta, is virtually all coal, Ontario is a mix of coal (for now) and nuclear, with some hydro, and Quebec is virtually all hydro. Given this diversity, how should the target be set? Should it be based on a national average, or a regional average? Or is it better to just go with an emission intensity target for coal plants alone and forget about hydro, nuclear, and natural gas? A national target would clearly benefit Quebec and penalize Alberta, while an exclusive focus on coal plants may not do enough to encourage the development of alternatives. Not saying that I have the anwsers, but these are just some of the considerations that come to mind.

    On that note, I’d love to see a more detailed discussion of the transaction costs of Kyoto, or some variant, and how these would compare to a straight carbon tax regime…

  3. Marlowe,

    You raise some excellant points. You are right to identify that my outline also includes a form of bias towards “effective” rather than “cost efficient”. I hadn’t noticed this bias but your examples and comments have made it pretty self evident. So thanks for that.

    The other assumption that I have made, that your Canada example reveals, is that most current energy is CO2 producing and that you want a policy to ensure that most new production won’t be. As such the scenerio I outlined entails the old subsidising the new. However if half your energy is already nuclear it may be just the old subsidising the old.

    So the “effective” versus “efficient” question is more signifiant (and in some regards more subtle) than I at first considered. 😦

    Something to think about.


  4. I’m still hoping Prof. Quiggin or others will weigh in on whether or not a KP/WTO clash is possible, and if so how would one go about determining the appropriate level of tariff to place on a particular good? Also, would it be better to limit to limit tariffs to energy-intensive products (e.g. steel) or could a variable tariff be placed on all goods from non-Annex B countries?

    The reason I’m interested in this question is that I think that if tariffs are defensible from an international trade perspective, then the question about universal participation in any international GHG mitigation framework becomes moot to a certain extent — you either pay the tariffs on your goods, or you can pay to reduce your CO2 emissions and/or buy credits in a KP-type setup, or pay a carbon tax in that kind of setup.

    Given the U.S. behaviour on other trade issues (e.g. steel, softwood lumber, etc.) they clearly aren’t afraid of using tariffs to defend their interests regardless of the rulings of the WTO, which is my roundabout way of saying that I’m not convinced by arguments which claim that the U.S. won’t sign onto the KP because of fears that it’s economic competitiveness would damaged vis-a-vis countries that didn’t have to make any emission reductions.

  5. I think the usa and many countries would prefer an internal carbon emissions market over an international one. The later transfers funds out of the nation whilst the former transfers it within the nation.

  6. The question of internal vs international market raises the same issues I mentioned before; namely, that a market restricted to internal players sacrifices the potential for cheaper emission reduction opportunities elsewhere. In this case the motivation is based on balance of trade considerations and not on the problems associated with ensuring the robustness of the trading regime (i.e., credit trading vs carbon tax). Is it better to reduce at 20$/tonne internally by switching from coal to natural gas (assuming parts and labour are obtained domestically), or is it better to buy Russian credits at $10/tonne? I’d suggest that it all depends on what criteria one uses to define ‘better’.

    I absolutely agree that the question of wealth transfer is a critical one, which IMO is why so many countries are, at the end of the day, against any kind of international wealth transfer. This is why CDM projects and Russian hot air, in particular, receive so much opposition. But at the end of the day there has to be some kind of reckoning, no matter what the details of the system are, so that people/companies/nations internalize the costs of that wealth generation. The most equitable approach IMO in the long run is to assign emission permits on a per capita basis — after all what gives me the right to emit more than anyone else? But the reality is that we aren’t starting with a blank slate, so historical emissions have to be used in the short-term in the allocation process; otherwise the political feasibility of the whole thing is close to zero IMO.

    I also agree that it is probably more acceptable politically for any revenues from a carbon tax to remain within a country. I’d suggest that the it only needs to be international in its application, but not necessarily in terms of its collection and redistribution (e.g., collected by the UNEP or Global Environmental Facility) — the amount of money involved and the potential for waste are simply to large…

  7. Looking at who might be winners and who might be losers under an international trading regime such as Kyoto probably goes a fair way towards explaining how the politics has played out to date. Nations like Australia that nave zero nuclear at present probable have a vested interest in some alternate approach besides Kyoto.

  8. I understand that the world produces 50 cubic kilometres of CO2 every day. It sounds like a big pile to me.

    In Australia I think we should convert to hot rocks ASAP in Australia and use coal for the production of plstics, fertiliser etc.

  9. Ender: “Coal produces approx 900 tons of CO2 per GWHr. In 2002 Australia generated 225 000 GW of electricity – 80% of this from coal = 180 GWhrs. This would generate 900 X 180 000 = 162 million tons of CO2 that would have to be sequestered.

    So we would have to put in the infrastructure sufficient to collect, transport and pump 162 million tons of CO2 per year and this is just for Australia!! And it would have to grow at 2% or 3% per year to keep pace with Australia’s electricty demand growth. So if we used 225 000 GWhrs in 2002, in 2037 at 2% growth we would need to be sequestering 324 million tons of CO2 per year.”

    Don’t forget the additional energy required to construct the sequestration infrastructure and to capture, transport and store the CO2.

  10. Ian – completely agree. CCS is just the Claytons emission reduction scheme. You know the one – one that everyone knows will not work but will promote anyway because it makes us look green. Right up there with ‘green’ nuclear power.

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