I'm speaking this afternoon at an ANU conference on climate change.
Clean Environment, Dirty Politics
Speech delivered to the ‘Australia’s Climate Policy Options’ Conference
Australian National University
31 March 2011
Andrew Leigh MP
Federal Member for Fraser
I acknowledge the traditional owners of the lands on which we meet today, the Ngunnawal peoples, and pay my respects to their elders past and present.
As the federal member representing the northern half of the ACT, I’m pretty proud of this city. In fact, last year, I gave a speech at the Sydney Opera House arguing that ‘Canberra is the Best City in Australia’.
But one of the things that makes this city so extraordinary – the close connection between city and natural environment – is also what makes the Bush Capital particularly vulnerable to climate change. Over the next five decades, climate models suggest that dangerous climate change could subject Canberra to:
- a 50% increase in high or extreme fire danger days;
- more frequent droughts;
- more hot days; and
- less water in our dams.
Each prediction is necessarily imprecise, but together they add up to a degraded natural environment, and greater costs to households. Canberra’s devastating bushfires in 2003 delivered a damage bill of a third of a billion dollars to what was then just a $16 billion dollar economy. Increase the probability of extreme fire danger days and you increase the expected cost of bushfires.
One way of regarding climate change mitigation is as a form of insurance. As Rupert Murdoch has noted:
‘Climate change poses clear, catastrophic threats. We may not agree on the extent, but we certainly can’t afford the risk of inaction.’
Just as we know that asbestos is very likely to cause malignant mesothelioma and bad cholesterol is very likely to increase the risk of a heart attack, we know that society’s greenhouse gas emissions are very likely causing global warming.
Will Steffen has pointed out that we know with 100% certainty that climate change is occurring and 95% certainty that it is human induced.
The science is slightly less confident is the extent of risk for individual regions. Yet if carbon emissions continue unabated and we reach ‘tipping points’, the risks are high.
When speaking with sceptical electors, I often use the medical analogy. If your child was sick, and 95 out of 100 doctors told you that the child needed a life-saving drug. Would you follow the advice of the other five doctors?
The best way of achieving action on climate change would be through a broad consensus across the political spectrum. Yet as one premier noted on World Earth Day 1990:
‘Regrettably, too many people on the conservative side of politics still view environmental consciousness as some sort of left wing conspiracy. Amongst both the Liberal and National Parties there is still a cringe when the environment is mentioned from a subconsciousness aversion that arises, I believe from a misconception that there is some fundamental philosophical inconsistency between environmental consciousness and democratic capitalism.’
That was Liberal Premier Nick Greiner. I hope that Premier O’Farrell can follow this advice and lead the Liberals down the path of action – accepting the advice of both mainstream scientists and mainstream economists.
In teaching environmental economics, the case study we often use to support market-based mechanisms is acid rain. When US President George HW Bush proposed the use of market-based mechanisms to deal with acid rain, electricity generators warned that costs would skyrocket. Today, the program is regarded as a success, having achieved its emissions targets at around one-third of the projected costs.
One reason the costs were lower than expected is that firms used a variety of approaches to reduce emissions. Some retrofitted emissions control equipment. A number switched to cleaner fuels. Others retired their dirtiest generators. Because each firm took the lowest-cost approach, the social cost was minimised.
For environmental economists, this result merely reaffirmed theoretical work going back to Arthur Pigou in the 1930s and Ronald Coase in the 1960s. By the time Coalition climate change spokesman Greg Hunt penned his 1990 university thesis (‘A tax to make the polluter pay’), the economic theory was widely recognised.
Hunt pointed out that ‘An attraction of a pollution tax regime is that it produces a strong incentive for firms to engage in research and development’. For consumers, ‘goods which do not generate [pollution] in their production will become relatively cheaper and therefore more attractive’.
Discussing the politics surrounding pollution taxes, Hunt argued out that ‘a pollution tax is both desirable, and, in some form, is inevitable’. He also suggested ‘even if some of the Liberals’ constituents do respond negatively, a pollution tax does need to be introduced to properly serve the public interest’.
Hunt’s thesis represents the view that most small-l liberals held for decades. The UK Conservatives are proud champions of their nation’s emissions trading scheme. As recently as 2007, the Liberal Party of Australia’s election platform promised: ‘To reduce domestic emissions at least economic cost, we will establish a world-class domestic emissions trading scheme in Australia (planned to commence in 2011).’
Scientists like to point out that climate change is dominated by tipping points. Tony Abbott’s one-vote ousting of Malcolm Turnbull as Liberal Party leader in 2009 is perhaps the best example of such a tipping point. Some of us still hope that the climate in the Coalition party room might experience another change in the future.
The benefits of market-based mechanisms over command-and-control is that by pricing carbon, we can unleash the creativity of the market.
This is already happening in Europe. For example:
- Tesco (the world’s third-largest retailer) has opened its first zero-carbon store, and is aiming to be carbon-neutral by 2050.
- Sorption Energy has developed an absorption heat pump for use in houses and in cars.
- Ecobutton has developed a software program that allows computers to hibernate more efficiently (and tells the user the amount of CO₂ emissions saved).
- Ecogen technology will generate electricity while generating heat and hot water, thus significantly reducing the carbon emissions of the household.
- Cement manufacture is an emissions intensive industry. So Novacem has developed a cement that it claims is actually carbon-negative. That means it absorbs more carbon than it emits, because it is based on non-carbonate raw material.
- Airline travel is something that people demand more of as their incomes rise – yet it is highly emissions-intensive. Airbus recently developed ‘Sharklets’ - specialised wing-tips which are designed to reduce fuel consumption, emissions and engine maintenance, while improving the range, take-off performance and rate of climb of the plane and assist in achieving a higher altitude.
Under a market based mechanisms it is entrepreneurs and households who decide the best path to reducing emissions. Because even the best-intentioned governments are unlikely to anticipate all the possible channels for abatement.
For all the scepticism of science and economics in the Coalition, it’s easy to miss the fact that they have actually signed up to the same emissions reductions targets as the Government. But they have committed to achieving those targets using an extremely inefficient policy. On our calculations, the Coalition would need to spend an additional $20 billion buying permits on the international markets in order to meet the 5% emissions reductions goal.
The only way of raising that $20 billion is through taxation. If the Coalition didn’t raise consumption or company taxes, they would probably need to get the revenue from personal income taxation. That means that under the Opposition’s plan, income taxes would need to go up to pay for the Opposition’s various subsidies. Put simply, while the Government is proposing to price carbon pollution, the Opposition’s scheme will most likely raise the price of work. While we want to tax polluters, they want higher taxes on workers.
If we are successful in legislating a carbon pricing scheme this year, this difference will come into stark relief. The Opposition has pledged to scrap a market-based mechanism, and replace it with their much less efficient way of reaching the 5% emissions target. In addition, they will also need to reverse the government’s assistance package. If our assistance package includes an increase in the pension, the Opposition will cut the pension. If our assistance package includes income tax cuts, the Opposition will raise income taxes. If our assistance package improves incentives to move from welfare to work, the Opposition will reverse those improvements.
The Government’s scheme is based on an essential lesson from first year economics: the best way of addressing a negative externality is to put a price on it. But as many speakers today have discussed – the design details are critical. For households, we need to craft an appropriate assistance package. For businesses, it will be vital to ensure that emissions-intensive trade exposed industries remain competitive. And for energy generators, it will be important to provide certainty as they go about transforming themselves into cleaner producers.
The politics of climate change is never easy. But as an economist-turned-politician, I have to say that arguing for good economic policy in the face of a ferocious scare campaign is exactly why I ran for parliament. If we can make this reform, Australia’s economy will be better off. Our environment will be better off. And, as a result of engaging with citizens in an honest debate about our nation’s future, our politics will be better off.
Because of that, conversations like this one are a vital investment in a better polity. Thank you all for being part of it.
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