Climate Change Mythbusters

If there’s one single lesson about the politics of economic reform in Australia, it’s that the politics are never easy. Climate change is no different. Whether it’s vested interests overplaying their hand, or the Coalition confusing opposition with opportunism, reformers need to fight fear with facts.

Here are ten common myths about climate change.

Myth 1: Climate change isn’t real.
Simple temperature data show that the world is warming. Globally, 2010 was the warmest year on record. If you’re aged under 35, then every year of your life has been hotter than the 20th-century average. In Australia, every decade since the 1940s has been hotter than the preceding decade.

Myth 2: Climate change isn’t caused by human activity.
The vast bulk of scientific evidence points towards human activity as the cause of climate change. For a straightforward overview of the science, see the summary put out by the Australian Academy of Science last year, which stated ‘The role of greenhouse gases in the atmosphere is qualitatively well understood. It is known that increasing the atmospheric concentration of the principal anthropogenic greenhouse gas, CO2, leads to higher mean global surface temperatures.’

Myth 3: Australia is moving ahead of the world.
Already, 32 countries and 10 US states have emissions trading schemes. Other countries have policies that effectively act as a carbon price. In Europe, emissions trading schemes are fostering innovation. For example, Ecogen has devised a technology that will generate heat and hot water, Novacem has developed cement that it claims is carbon-negative, and Sorption Energy has developed an absorption heat pump for use in houses and cars.  As the most carbon-intensive economy in the developed world, the risk for Australia isn’t moving too quickly - it’s being left behind.

Myth 4: The carbon price debate is causing electricity prices to rise
It’s true that electricity prices have increased substantially over recent years. From 2007 to 2010, real electricity prices rose by 32 percent. But this increase is largely due to higher costs of transmission and distribution, as well as uncertainty regarding the carbon price among generators. Capital investment in the electricity sector requires the certainty of a carbon price. Without a carbon price, we are unlikely to see sufficient investment in zero-carbon generation technologies (such as wind and solar) and low-carbon generation technologies (such as gas).

Myth 5: We can deal with climate change without a carbon price.
A central insight of economics is that if you want to reduce pollution, the best way is to put a price on it. Because Tony Abbott’s plan misses that fundamental truth, his plan is both expensive and ineffective. The inconvenient truth for the Opposition is that if you want to subsidise alternatives to carbon pollution, you need a lot of money ($30 billion, to be precise). The only way of raising that money is through taxation. And the most likely source of tax revenue they would turn to is personal income taxation. That means that under Mr Abbott’s plan, your income taxes would need to go up to pay for the Opposition’s grab-bag of subsidies. While the Gillard Government is proposing to raise the price of 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.

Myth 6: Business doesn’t support a carbon price.
Companies like AGL, Linfox, Fujitsu, BP, Better Place, IKEA, Kell & Rigby, Alstom, Pottinger, ARTC and Pacific Hydro have backed a carbon price. In their words “[p]ricing carbon is critical to providing business certainty and unlocking the jobs and investment that will accompany the transition to a prosperous, cleaner and internationally-competitive economy.”

Myth 7: The proposed emissions targets are too timid
Under our climate change plan, Labor has committed to emissions in 2020 that are 5% lower than they were in 2000. In terms of emissions per dollar of output, this represents a halving of our emissions intensity from 2000 levels. We want our economy to grow, so Australians can enjoy higher living standards. But we need to decouple economic growth from environmental pollution. As a nation, we have done this before. Once it was thought that urban air pollution was an inevitable consequence of economic growth. But over recent decades, we have managed to increase the size of our economy while cleaning up the air quality in our cities.

Myth 8: Labor has been inconsistent on carbon pricing
In the 2007 election, both Labor and the Coalition promised voters a price on carbon. Labor has always argued that in the long-run, the best way to do that is through an emissions trading scheme, in which the government sets the number of pollution permits and the market determines the price. In the last term of government, we attempted to do this through the Carbon Pollution Reduction Scheme, which had a fixed price for the first year, and a price cap for the next four years. Now, we are proposing that carbon pricing should be implemented with a fixed price for the first three to five years. The economic reality is that these schemes are fundamentally very similar. The backflip in the climate change debate is Tony Abbott’s, who won his job as Opposition Leader by being a self-described political ‘weathervane’ on the issue of climate change. Mr Abbott supported carbon pricing in the 2007 election – but has now staked his leadership on denying both mainstream science and mainstream economics.

Myth 9: A price on carbon will be costly for business
In his address to the National Press Club, Greg Combet pointed out how small the price impacts are likely to be, using the example of a $20 per tonne carbon price and the assistance package that applied under the former CPRS.
At $20 in the steel industry, the average carbon price after 94.5 per cent assistance for the core pollution intensive activity would be around $2.60 per tonne of steel, out of a price per tonne of steel of around $800.

In the aluminium industry, the average carbon price after assistance for the core pollution intensive activity would be around $18.70 per tonne of aluminium, out of a price of around $2,500 per tonne of aluminium.

In other words, the carbon cost relating to the core pollution activity for steel would be one third of one per cent of the value of a tonne of steel and three quarters of one per cent of the value of a tonne of aluminium.

Another reason why costs are likely to be low is that market mechanisms harness the ingenuity of entrepreneurs to serve environmental ends. When the US used an emissions trading scheme to tackle acid rain, the costs ended up being one-third of what had been projected, because those setting up the scheme didn’t predict all the creative ways that firms would reduce pollution.

Myth 10: Carbon pricing will be costly for households.
The Federal Government has committed to spending at least half the revenue from a carbon pricing scheme on assistance to households. Because we are a Labor Government, this will be focused on those most in need. Only Labor can be counted on to improve the environment, foster economic growth, and look after the neediest.

(Cross-posted at the ALP blog)
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Jon Stanhope

ACT Chief Minister Jon Stanhope has just announced his resignation. Here's my media statement.
A Lasting Legacy

Jon Stanhope retires from the position of ACT Chief Minister with Canberra as strong as it has ever been. Our unemployment rate is the lowest in Australia, our schools are first-rate, and our natural environment is a treasure for all Canberrans.

Mr Stanhope has been willing to make hard decisions about schools, roads, and health care. He has introduced new innovations such as ‘Chief Minister’s Talkback’ – making government more accessible. We have Australia’s first prison built to meet human rights obligations, focused on getting the crime rate down through better rehabilitation programs. Mr Stanhope has stood up against discrimination wherever it raised its ugly head. Under his government, economic growth and social equity have gone hand-in-hand.

If there is a signature ‘Stanhope Style’, it is his deep understanding of Canberra’s history, geography and community. Few others can aspire to Mr Stanhope’s knowledge of our city and its diverse heritage. His pride in his home is unmatched.

Throughout his time in office, Jon Stanhope’s government has been marked by its unity and purpose. Though Mr Stanhope will be missed, I am confident that Katy Gallagher will be a worthy successor. Ms Gallagher will lead the Labor team to the 2012 election with a spirit of optimism and a determination to make the essential investments to keep our city strong.

I wish Jon Stanhope and his wife Robyn all the best for the next phase of their lives. Whatever opportunities Jon chooses to pursue, I am sure Canberra will continue to benefit from his passion and energy.

Andrew Leigh
Federal Member for Fraser
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Talking up a Storm

It’s gone largely unremarked in the press, but Julia Gillard has been giving some terrific speeches over recent months. For pure oratory, some of the best include:

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Norfolk Island

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Climate change

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Sky News Am Agenda

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My AFR article today is on executive salaries.
CEO Pay a Balancing Act, Australian Financial Review, 3 May 2011

‘The other side just doesn’t get it’ is a common refrain in Australian policymaking these days. But nowhere is it truer than in the CEO pay debate. One side points to skyrocketing salaries, with the average pay of a top-100 CEO rising from $1 million to $3 million since 1993 (about twice as fast as the pay of other workers). The other side argues that investors put their life savings on the line, and asks why society should prevent shareholders from choosing the remuneration package they want for their managers.

In reforming executive remuneration, it’s important not to forget the role that great managers play in underpinning economic growth. In a classic 2003 article, economists Marianne Bertrand and Antoinette Schoar showed that many of the systematic differences between firms could indeed be traced back to managers. A manager in the top quartile increases the rate of return on assets by about 3 percent. One in the bottom quartile reduces the rate of return on assets by about 3 percent. The authors quote former Citigroup CEO John Reed: ‘In the old days I would have said it was capital, history, the name of the bank. Garbage – it’s about the guy at the top’.

In the early-1980s, there were real concerns that one of the constraints on growth for Australia was the poor quality of managerial talent. You don’t hear the refrain as often these days – partly because we do a better job of training business leaders, but also because our nation has been willing to hire non-Australian CEOs where they’re the best for the job.

Yet aligning pay and performance is critical. People rightly worry when they hear stories about corporate bosses receiving multi-million dollar severance packages and extraordinary perks (my favourite is the Nabisco CEO who sent a corporate jet to pick up his dog from Colorado, describing him as ‘G. Shepherd’ in the manifest). Such excesses send ripples beyond any one firm – affecting the way many people view executives in general.

In this environment, the Government’s executive pay reforms aim to steer a middle way between the twin extremes of doing nothing (as many in the Liberal Party would prefer), or abolishing tax-deductibility of salaries over $1 million (as the Greens Party advocate).

Four elements to the package – which arose from a Productivity Commission report into executive salaries – are the two strikes rule, rules ensuring the independence of remuneration consultants, a ban on closely related parties from voting on a pay package, and rules against hedging incentive remuneration.

The two strikes rule says that if a sizeable minority of shareholders (more than 25 percent) vote against a remuneration report two years in a row, then that will trigger a motion to spill the board. Of course, majority voting still applies to any spill motion and the reappointment of directors, but the measure provides a check on pay packages that are opposed by a significant share of those who own the firm.

Second, the rules on remuneration consultants require that both the remuneration consultant and the company board formally declare that remuneration recommendations are free from undue influence. Consultants will also have to disclose how much they were paid, and any other ties they have to the company.

Third, bans on closely related parties means that executives and their family members will be prevented from voting on their own pay packages. This reduces both actual bias, and the perception of bias, which is vital to maintain public confidence in corporate Australia.

Fourth, the government is stopping executives from unwinding incentive remuneration by prohibiting them executives from hedging their incentives. Ordinarily, it’s good to see people using futures markets to reduce risk, but in this case, the impact is perverse. For the same reason we don’t let football coaches self-insure by betting on the other side, it’s a bad idea to allow CEOs to hedge incentive pay.

There will always be individuals who say that they weren’t consulted or that there wasn’t enough time to respond to proposals, but the reality is that Parliamentary Secretary to the Treasurer, David Bradbury has overseen a pretty extensive consultation process, including hundreds of written submissions and a spate of stakeholder meetings.

Economists often worry about the ‘equity-efficiency tradeoff’ – the potential for growth-enhancing policies to increase inequality (and vice-versa). Yet by better aligning pay with performance, we face the best of all possibilities – a reform that can both increase company performance and curtail the worst corporate excesses.

Andrew Leigh is the federal member for Fraser.
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What I'm Reading

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Capital Hill on ABC24 26 April 2011

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Belconnen Community Meeting

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Cnr Gungahlin Pl and Efkarpidis Street, Gungahlin ACT 2912 | 02 6247 4396 | [email protected] | Authorised by A. Leigh MP, Australian Labor Party (ACT Branch), Canberra.