Garnaut summary and responses

I’m going to use this post to put down a summary and some responses to the final Garnaut Review as I read it. Comments welcome, but may become obsolete as the text changes.

I’m mainly working from the Final Review, which is being published as a book by Cambridge. But some of the most importnat material, such as details on the proposed compensation package, is in Annexes to the Summary, so I’ll jump to that where necessary.

Part 1: The global shift

Ch1: Straightforward and well-presented summary of the science. Conclusion

the evidence is now so strong that it is appropriate that we move beyond the civil court parameters of ‘balance of probabilities’ that I applied in 2008 towards the more rigorous criminal court conclusion of ‘beyond reasonable doubt’.

I agree. Conversely, at this point, those who deny the scientific evidence are either consciously perjuring themselves or deluded by those in the first group. Virtually all the prominent figures on the anti-science side are in the first group.

Ch2: Carbon after the Great Crash Even under business as usual, can expect little growth in emissions from developed countires as a group. Hence focus shifts mainly to China and India, which makes problem more difficult. Recent research casts more doubt on overshooting scenarios, suggests increases in global temperature will be very hard to reverse. Positives are a slowdown in population growth (though recent revisions to UN projections are a bit more pessimistic) and big expansion in global gas reserves (I plan to write more on this later. Overall, it’s very good news, but there are plenty of problems to manage).

Ch3: What’s a fair share? Generally, a glass half-full view of the combined impact of Copenhagen and Cancun. Post-Kyoto hopes for a broader internationally binding agreement have been abandoned. On the other hand, most countries have made commitments for substantial reductions. Draws on experience of trade negotiations to suggest non-binding commitments may be more ambitious leading to better outcomes even with some backsliding. Contract and converge (to a common entitlement per person) is still the central program. Australia must make large reductions in emissions per person, but benefits relative to Kyoto-style targets because population growth is taken into account automatically.

Ch4:Pledging the future Most countries have made pledges to reduce emissions in period to 2020. Could be consistent with 450 pm path if larger cuts are made after 2020. Europeans are well ahead of everyone else, particularly Norway, UK, Germany, France. In this context, as I’ve observed previously the UK announcement of a cut of 50 per cent, relative to 1990, by 2025 is an indication of what can be done. China has made substantial progress already with a variety of measures

What once seemed unattainable targets to Chinese economic authorities are now viewed with confidence. Officials have been pleasantly surprised at the rate of decrease in costs and are now talking confidently of reaching the high point of the emissions intensity reduction.

Indonesia and Brazil have made big steps. India has a clean energy tax of about $1/tonne on coal (the brevity of discussion about India suggests that they are not doing much as yet). Australia, US and Canada laggards “people in these three countries who want to avoid action to look to the other laggards for comfort. ” Nevertheless some hopeful signs. Again, gas looks like the potential saviour in the short and medium term. Regulation through the EPA is yielding aggressive regulatory measures. In the absence of a proper market price, has adopted a shadow price of $21/tonne for regulatory purposes (I calculate this at about $A20 at current exchange rates, $A30 at PPP). Conclusions
* Reaffirm unconditional 5 per cent target and range of conditional targets

When you next hear someone say that he is worried that Australia might get ahead of the rest of the world in reducing greenhouse gases, take him by the hand and reassure him that he has no reason for fear … It would be a reasonable aim to be making good progress in catching up with the average of the developed countries. And we do have a chance of getting ahead of the pack in the way we go about reducing emissions. With carbon pricing we can do as much as others at lower cost. That is one way of getting ahead of the world that shouldn’t frighten anyone.

Part 2: Australia’s Path

Ch5: Correcting the great failure Argues for a market based approach, drawing on 1980s agenda. ( I’m less enthused than Garnaut about that agenda, but the point that resistance was driven primarily by rent-seekers in the business sector is correct, and has hit home with important opinion leaders like the Fin. ) Argues for independent setting to “minimise reliance on recurring judgments by government”. Variois mechanisms, all reasonably described as market-oriented. Initially fixed price rising over time, eventually replaced by trading scheme.
Arguments for starting price in $20-30 tonne. Modelling suggest $26 is what we need to achieve a 5 per cent reduction. Consistent with trading price of emissions in EU and US regulatory price, a bit above CDM credit price, below UK non-traded sector price. Argues for 4 per cent a year increase based on Hotelling rule with 2 per cent real discount rate and 2 per cent risk premium.

My comments: This is the most important single choice in the whole scheme, and I think Garnaut has it about right. Impact on household electricity prices will be modest, especially compared to recent increases driven by distribution costs, so main impact will be through substitution on production side. $25/tonne (approx =$25/MwH for black coal) is about the price where for existing plants, gas-fired electricity becomes cheaper than electricity from black coal plants, and brown coal becomes dearer (though there are a lot of differing estimates on this). Given a commitment to rising price over time, most new investment will be in gas and wind, and brown coal stations will face early shutdown. Politically, it seems high enough to keep the Greens onboard, but low enough that Abbott will look silly when the supposedly massive adverse effects turn out to be undetectable.

6 Better climate, better tax

Likely revenue of $11.5 billion from a $26/tonne tax. Using this for well-designed tax reform could halve GDP cost of reform, or deliver 15 per cent cut (below 2000) at cost that would otherwise be needed for 5 per cent cut. Proposal is to allocation 60 per cent to households through tax reform and higher benefits payments, 30 per cent to business, about 10 per cent for “carbon farming” and 15 per cent for innovation. Budget neutrality achieved by folding in existing innovation funding and through savings from offsets.

Jumping to the Summary, proposed tax changes are

In line with these principles, an amended version of the income tax reform proposed by the Australia’s Future Tax System review (Australian Government 2009) could be implemented. In particular, the raising of the tax free threshold to $25,000, the removal of the low income tax offset and potentially the seniors’ tax offset but not at this stage proceeding with the other changes to thresholds and rates. Then simultaneously adjusting thresholds and or rates to effectively net off the value of the cut in tax for higher income earners (say, for example, those earning more than $80,000). These changes should be designed to leave higher income earners no worse off as a result of tax changes

As Garnaut says, this seems to offer big improvements in efficiency at the bottom end of the tax scale, with only a modest increase in progressivity at higher levels.

Includes brief refutation of a common error

It is sometimes suggested that providing households with assistance would cancel out the benefits of introducing a carbon price. It is said that, if we impose a carbon price that costs a household $100 and then provide that household with a tax cut worth $100, nothing has changed. These suggestions are wrong. The carbon price, even with the tax cut, alters the relative prices of more and less emissions-intensive goods and services. High-emissions goods become more expensive relative to low-emissions goods. Demand for the former falls, while demand for the latter rises. And putting a price on emissions encourages producers to use less emissions-intensive processes to produce goods and services.

85 thoughts on “Garnaut summary and responses

  1. 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.

  2. 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.

  3. @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?

  4. 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.

  5. @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]


  6. @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.

  7. @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.

  8. @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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