ANU Crawford School - Australia's Climate Policy Options

Thursday, 31 March 2011

8:46 AM

Opening Remarks

Tom Kompas (Director of the Crawford School of Economics), Blair Comley (Secretary of DCC&EE), Will Steffen (Executive Director,
ANU Climate Change Institute)
Chaired by Frank Jotzo (Director of Centre for Climate Economics and Policy)

BC: We all talk within our own communities, and infer from this how the rest of the world thinks about the climate problem.
Industry and green groups will therefore have vastly different, but equally sincere beliefs about the prevailing view.

Is the world acting? Some people apply the following tests:

Test one: do we have a top-down, legally-binding international agreement? Sub-set of test one: is there an absolute emissions
reduction target for every country?
Test two: does every country have an emissions trading scheme or explicit carbon tax? (Ignores some countries' existing preference
for command & control measures based on past successful experience.)
These analytical frameworks aren't the ones these same people apply to domestic policy. E.g. They will argue that Australia
reducing emissions by 5% from 2000 is a big effort because of the difference to BAU. This is true – but why doesn't this argument
apply to other countries?

Just because assessing countries' different efforts (the implicit prices) is difficult doesn't mean we shouldn't attempt it.
(Acknowledges Cameron Hepburn from Vivid Economics and the work they're doing.)

Question from audience: Are Australians happy to be followers; to wait until China acts?
BC: Doesn't want to directly address leading/following. But international action is good for comparing analytical frameworks and
building trust: Monitoring, Reporting, Verification is critical. We trust our own data, but not always that in other countrie s.

WS: General remarks about the ANU centre.

Q: Problems of independent advisors and their role in the public debate.

WS: He's had bigger problems dealing with the media than the public, Government, or industry groups. The media are the weak
chain; twisting things, false use of the "balance" principle.

Carbon pricing & Australia's mitigation commitment

Frank Jotzo, Steve Hatfield-Dodds (CSIRO Scientist, "thought leader"), Warwick McKibbin (Prof. of International Politics, RBA Board
Member), John Quiggin (UQ, Economics/PolSci)
Chaired by Salim Mazouz (Founding Director of EcoPerspectives – consulting)

FJ: Australia's a very rich country (PPP per cap). Should remember that we are seen this way internationally. With carbon pricing
and the revenue distribution, about 1% of Aus GDP is up for grabs. MPCCC model creates argument for limiting compensation
because the price is fixed (i.e. no uncertainty). Fixed price originally proposed in original Garnaut report as viable second -best. (WM
rebuts: says it goes back further (early 90s?).) FJ thinks it's the best way to achieve a broad-based and lasting consensus.
If we start with a low price, we should increase it quickly; shouldn't start with a low price and low increase. Forecast EU ETS average
2013-20 = 32€ (Deutsche Bank) .
If Australia reduces (absolute) emissions by 5% vs. 2000 levels, China will have lower emissions intensity by 2015 (under the ir
40-45% target).

SHD: Understanding the "signs" of climate change (what goes up, what goes down) would do wonders for public debate. A carbon
price decouple domestic emissions from the national target. (Domestic = what we emit. National = emissions less (internationally
purchased) offsets.)
Signs: Carbon emissions fall, but income rises (by less than BAU, but still a rise). Prices rise, but affordability improves.
Average income, employment, efficiency will improve. National total and pp emissions will fall, as will investment risk. Energy
prices are really the biggest thing that should cause us headaches.
Communication: referring to the "costs" of policy risks a reference point error, triggering loss aversion. Should emphasise that
incomes will not fall. Framing and reference points effect (affect?) the policy stance of 5-23% of people.
Sign of change is more important than the magnitude in people's minds.

WM: Making the same points since early 90s: Which price do we care about? What policy framework should we learn from? How
should we allocate property rights?
Price: Three years of certainty is not nearly enough for electricity investment. We needs to worry about the carbon price 20, 30, 40
years from now; analogous to the long-term real interest rate.
Policy Framework: Monetary policy. Credible commitment to target over the medium-term. Pleased Garnaut has taken up the idea
of a "Central Bank of Carbon." (See earlier work by McKibbin and Wilcox?) Readjusting fixed price every few years.
Rights: Tax = revenue. Allocating (long-term) property rights can give that revenue to the market. But! No futures market for taxes.
Futures markets need "things" –> property rights. Allocating property rights should be regarded as a separate issue to who trades
those rights. Is against risk-free loans for companies: sees the integration of property rights into the pricing framework as
important.
Climate policy should be focussed on emissions reduction, not income redistribution; makes it more complicated.

Lectures, Conferences, etc Page 1

Climate policy should be focussed on emissions reduction, not income redistribution; makes it more complicated.
Has one minute left for his talk. Would be willing to trade it, but he has no property rights and there is no market ;-)

JQ: Australia doesn't have climate policy options any more. Not going to be resolved by better communication. Has become a
cultural issue. Therefore all that matter is getting a policy up that can pass both houses of Parliament. Gobs of money for l ower
income households hard to unwind; good idea. Heavy emitting industries had their chance a year ago and blew it when their
attractive scheme failed.
People understand that companies pass taxes on to consumers, therefore more justification for compensating households than
firms.

Q: How can we better get across a message with clear guiding principles:
JQ: Just act. Communication won't help much any more.
WM: Opportunity was lost some time ago. Giving households long-term rights would have been a terrific sell. Screwed it up by
treating this issue as a political football. Go back to treating it as a long-term proposition.
FJ: Agrees with JQ, but doesn't see Government giving away discretionary policy control over carbon revenues. Perhaps turn th is
into a tax reform issue?

Do companies need an adequate "balance sheet effect" (free permits)?

WM: If your price is fixed in the world market you can't pass costs on to customers (i.e. small open markets)

Questions on policy from Richard Denniss, Andrew Leigh, and others. Clever policy, short-term vs. long-term, repealing public
legislation.
JQ: If the price is clear and positive is will be hard to unravel.
WM: Emphasises the importance of long-term price again. Managing risk in the market.
JQ: Disagrees with WM. Says there are plenty of markets where people invest without 40yr+ certainty. There is some bickering
between the two. JQ won't look at WM.
SHD: "Smart" policy is not the same as "first-best" – may have to accept third-best or fifth-best. Thinks short-term prices over 5-10
years can make a big difference with a lesser political battle than setting long-term prices.
FJ: Once it's demonstrated that the sky isn't going to fall it will be difficult to undo the taxes.

Steve's views on John's presentation; EU ETS as success story vs. FITs; measurement issues; will the conditions for emissions trading
be there is 3-5 years?
JQ: Smart economics is where prices do most of the heavy lifting. Only way to communicate is to things is to do them. What
matters is the political situation, not the economic reality; in 3-5 years other countries will have moved and we'll have more trading
partners. Also the prophets of doom will have been disproven.
WM: EU ETS shows you how you can make mistakes. Over-allocation, variability. Open question what the marginal benefit of the
ETS is vs. FITs and solar subsidies. Investing in a 5th-best solution (e.g. EU common currency without credible government backing.
Result: Euro about to explode) makes our life harder when we have to fix it; better to get it right now. Grateful that the Eu ropeans
are making all these mistakes for us to learn from.
SHD: People resist uncomfortable ideas. If you don't like the idea that Government action is required to fix things, that cau ses you
to reject science that suggests this course of action. "Cultural warriors." Industrial and fossil-fuel emissions we know very well,
LULUCAF poorly known; should be different policy settings. Repeal of any scheme unlikely.
FJ: We can mitigate by joining an international agreement, or creating our own arrangement (with local countries?).

Garnaut Climate Change Review Update

Ross Garnaut
Chaired by John Quiggin

RG: Issues that gave rise to debate in the update papers:

Science has firmed, toward the pessimistic end of projections. We should stick to the science in peer-reviewed journals though,
even if there is a publication lag, because the debate is difficult enough as it is with the current science.
Great Crash of 2008 has changed the way we discuss economic policy.
Very important that China and India (and other developing countries) are approaching emissions reductions, even at such low p er-
capita levels.
Copenhagen fiasco: What came out what inchoate at the time, but order was given to it at Cancun. 2°C ≈ 450ppm.
We are bending the curve from BAU. Not enough to meet 2°C, but it's a start. US heading toward its commitments.
Emissions-intensive trade-exposed industries is a difficult, messy, but very important issue. We will seriously distort our political
economy and the politics of our own policy-making if we get it wrong. Measurement is a difficult problem, but we need to devote
the resources to it.
Original purpose with electricity paper was to show that the carbon price effect on electricity would be small in comparison to the
other price rises, but as he got into it he started to wonder whether the other price rises needed to be happening.
Rubbishes the editorial in the Australian for not having read his electricity paper carefully.

Q: Effect of carbon prices on innovation; Should we just get on with making policy or hold out for first/second-best; has your role in
this debate changed - are you taking sides; can politicians superimpose themselves on the electricity regulation process?
RG: Carbon price is not necessary for innovation, but it will be an incentive. Not enough to rely on carbon price alone, need public
support. Past flawed innovation policies are no argument against this. Renewable energy targets pretty awful in encouraging
innovation. Gives all the incentive to the lowest cost renewable energy rather than ... ?
We don't have much time left to act, and we would need to see fatal flaws in a policy to avoid implementing something now tha t
lets us improve upon it later. But we can't start again.
Doesn't see his role in the debate as having changed; rather, others have changed their positions.

Lectures, Conferences, etc Page 2

Australian Climate Policies

John Daley (Grattan Institute), Richard Denniss (The Australia Institute), Leo Dobes (Economist, Climate Change Adaptation)
Chaired by Steve Hatfield-Dobbs

JD: His is a completely inappropriate presentation for economists, since it'll tell us something that we all know: markets work b etter
than other frameworks (grants, rebates, standards). Based on a paper coming out next week (Thursday morning?). What can help
Australia meet its targets for 2020 (160 Mt below BAU)?

Grants and rebates haven't delivered much reduction, and rebates are by far the most expensive form of CO2e reduction. Market
and efficiency measures have delivered far more, and efficiency measures are cost-negative! (Similar trend for future.)
Market measures have delivered more reductions than legislated at lower costs than expected.
Grants struggle to spend the money. Usually less than 20% after 10 years. Bidders overpromise, Government needs to pick winni ng
technology and firms, tender process slow, and winners often drop out if there are financial or technology problems.
Rebates: $5 billion over last 10 years for insulation, solar PV, water heaters. Activities chosen for political popularity, reward actions
that would have happened anyway.
Efficiency is great, but slow: has taken at least 5 years to agree to regulatory standards.
Need to talk about the fact that emissions reduction will cause us pain, but market measures are by far the best (cheapest) way to
do it. That is the history of Australia over the last 15 years.
Going after tech stuff with price schemes or FITs will be better than picking the best solar plant proposal.

RD: "I don't have slides, so I always finish on time. Power corrupts, Powerpoint corrupts absolutely."
Complementary policies: how can we talk about carbon prices but not about subsidies for fossil fuel industries ("Contradictory
policies" – paper by Denniss and Macintosh). Why does the airline industry not pay fuel tax? First step toward complementary
policies is therefore to remove the contradictory (perverse) policies. Need to have good policies. Agrees with JD about what's come
before. No-one's been angrier about subsidies to solar PV than Andrew Macintosh. We'd be better off putting fake panels on
people's roofs.

LD: No-one is asking "What happens after mitigation?"

People are using risk-management to address adaptation; presumes certain knowledge of risk, where there is none. Different
strategy: absorb shocks with a resilient economy. "Socio-economic resilience" requires micro-economic reform (a "no-regret"
option).
Avoid 'climate proofing', deterministic approaches, and promote 'real-option' thinking. Applicable to almost every sphere of
activity. Can be done by individuals as well as government.
For governments: compensation risks huge fiscal churn. Should be limited to genuine market failure.

Q: Solar-PV was supposed to bring tech forward, not reduce CO2e; Is adaptation more important than mitigation, or just
underappreciated; other schemes to encourage energy efficiency.
JD: Solar PV program not just inefficient (which may be the wrong measure), but also ineffective – most of the money isn't given
away, and the programs fall over. There are schemes to encourage business energy efficiency, but the jury is still out as to whether
they're working.
RD: PV policy goal: is it abatement? No. Is it bringing tech forward? No – Australia is far too small a market to achieve that. It's
about symbolism and misunderstanding. Suggested alternative schemes: mandates. We have mandates for seatbelts, health
insurance, superannuation, etc.
LD: Obviously mitigation is necessary, but you need to think the strategy through.

Power Sector and Land Use

Iain MacGill (Director, CEEM), Lorraine Stephenson (Lightning Consulting Services), Andrew Macintosh (ANU Centre for Climate
Law and Policy)
Chaired by Steve Hatfield-Dodds

IM: Most of the energy sector sits in the energy policy framework, not the climate policy framework. One framework for policy
intervention is to look at correctable market failures, and the energy sector can exhibit all forms of market failure. The NEM is
Australia's largest environmental externalities market. The health costs may outweigh the operating costs!
Not all objectives of the NEM are reflected in the market design. Lack of environmental and sustainability goals in a design choice.
In SA we've gone from 0-20% wind in about 5 years. Market working fine.
LS: We're not going to run out of coal and gas any time soon. Our alternatives to coal-fired power are relatively expensive in
Australia. Investors will want 30-40 year regulatory certainty for new power generation assets. Should we be paying for abatement
ahead of the abatement curve (i.e. paying a premium) to account for the learning effect?
AM: We got a big freebie with the Kyoto rules on deforestation, and we'll probably make up much of our Kyoto target with that.
(The reason we use 2000 as a target rather than 1990?) 50-100 Mt savings pa if we stop logging native forests. There are perverse
impacts from the incentives to reforest, though, because they negatively affect the albedo (?) – so why are we crediting them?
Perverse impacts on biodiversity, water, employment, local communities.

Q: Why isn't the coal power industry using "co-firing"; suggestion for the compensation of power industry; is Australia likely to build
more coal power plants/can we meet out power needs with renewables & gas?
LS: Co-firing is used at about 5%, but many plants don't find it easy to do. Once you start trying to get biomass, it starts to beco me
expensive (rather than being a free waste product). Hard to upscale. At $20 CO2e price we probably wouldn't get another coal
plant without CCS (also because of politics), but we'd have to upgrade transmission infrastructure. Thinks we should compensate

Lectures, Conferences, etc Page 3

plant without CCS (also because of politics), but we'd have to upgrade transmission infrastructure. Thinks we should compensate
the current asset owners in a way that encourages them to reinvest. Also as a practical means of getting people on board: once-off,
up front, lump sum compensation though, nothing ongoing.
IM: Coal isn't a great fuel, except that it's cheap. Probably won't see new coal plants, but tough to get the old ones to leave. Iain
opposes the idea of compensation, because that implies you're correcting a wrong and taxing pollution isn't wrong. Also send s bad
investment signal ("Government won't stick us with the bill.")

International Climate Policy

David Victor (School of International Relations, UCal. Video-link), Mark C. Lewis (Energy Research, Deutsche Bank), Cameron
Hepburn (LSE/Oxford/Vivid Economics)
Chaired by Stephen Howes (Development Policy Centre, ANU)

DV: Updates on America

Issues surrounding international credibility, "Gridlock and Global Warming". Three points:
Progress at international level and international credibility. Hasn't been much progress, and not much credibility. Price lev el now
less important that expectations for the future. Need to spend more time at the international level getting Governments to ma ke
commitments based on what they can actually do. Respond to reality that changes in temperature will be >2°C
Not much is happening in the USA. No expectation of action – not just the current political make-up, but also because the debate
has polarised people and they are away of what's at stake (i.e. the free emissions credits). Rent-seeking is getting messy.
But if you widen the focus, a bunch is happening on energy security, emissions from coal-fired power plants (targeting air pollution
more so than CO2). Should see over 1/3rd of coal plants shut over next decade, replaced by renewables & gas. Doesn't reach
Obama's Copenhagen target, but gets close.
Picture at state level is highly variable. Northern states have cap & trade schemes, but at very low levels. Most of the acti on is in
California e.g. cap & trade, low carbon fuel standards.
Also moves in some places to connect to international schemes.
If the US were to have a national carbon price scheme, it would almost certainly include some sort of trade protection; would n't get
get enough votes otherwise. Not obvious that the good approaches for such a scheme would be followed; could be deeply toxic f or
developing countries.

ML: Design flaw in EU ETS: no way to modulate supply (of permits) based on changes in demand (e.g. in response to RETs). The
average residual abatement (ARA) requirement is the minimum of what actually has to be reduced, after taking banked credits,
CDMs, etc into account. The current ARA can probably be covered by fuel switching (coal –> gas), though this analysis was made
pre-Fukushima. Increasing the level of ARA (to 30-40%) would exceed fuel-switching, so that the cost of abatement is aligned with
the long-run cost of abatement (capital investment) rather than the short-run cost (fuel switching).
Germany will probably close down 7GW of nuclear power (10% of German power production) very soon, in response to Fukushima.
Nuclear power investment internationally, which already had cost problems, can probably ruled out for the next five years at least.
Instead, gas prices will increase.
Crazy that Australians bring the "Why should we move first?" argument; as if Europe doesn't exist.

CH: Clean-tech is a structural revolution; traditional marginal cost analyses have only limited application.
There is a massive proliferation of (different) climate change policies around the world (a large number of which are probably
ineffective or "me too" policies). How can we compare them? Using implicit prices (not shadow prices). C.f. Vivid Economics /
Climate Institute report. Productivity Commission is doing an update of that.

Q:Use of international units of compliance / sale of Australian units overseas

ML: Political reasons are the impediment, rather than state of the international carbon market.

Why is the proposed Australian carbon price so high compared to Europe, when we can abate at much lower costs?
CH: AU$25 is roughly equal to what the EU has now, so could be seen as an expensive place to start. But in the long run, it m ay not
be; short-run focus may not be sensible. OTOH, Australia still has "low-hanging" fruit. How those effects balance up, and whether
Australia should have a carbon price commensurate to Europe's is an open question.

Australia's Climate Change Strategy in the Global Context

Erwin Jackson (Climate Institute), Harry Clarke ((Micro)Economics, La Trobe Uni), Peter J Wood (Mathematics, ANU)
Chaired by Howard Bamsey

EJ: Australia's national interest is (should be) the strongest feasible global mitigation outcome – lower than 450ppm-e. Countries'
ambition is likely to come under review in 2013-14. Legally binding outcome is end game; may reduce short term ambition, but
should build longer-term confidence. Little chance of treaty in short-term. Transparency key to trust building.
Challenge for Australia: overemphasis of UNFCCC/treaty as proxy for international action. There are heaps of separate domesti c
policy interventions, which is what actually reduces emissions. Need to act as if treaty exists – leap of confidence. Key elements of a
pollution price package: ensure domestic transformation, act in good faith, build credible global markets, and conduct Research,
Demonstration & Development (RD&D).

HC: (How) should we rebate taxes for exporters? Border taxes theoretically better for preventing carbon leakage than free permits.
But argument about instruments is silly, because effect on competitiveness is tiny. Aluminium has one of the largest effects, but it's
still modest. The effects are more important from a political economy point of view (acceptability), but the noise about the
economic effects is larger than the actual impact.

Lectures, Conferences, etc Page 4

PW: Climate change action as multiple-stage games.

Q: What was your methodology, Harry? Did you look at our report?
HC: I did, but I don't trust other people's reports :-P Just looked at industry level.

Parliament and the Politics of Climate Change

Anita Talberg (Commonwealth Parliamentary Library), Andrew Leigh (ALP Member for Fraser; formerly Economics, ANU), John
Hewson (Former Liberal Leader; Prof. of Economics), Lenore Taylor (Fairfax's National Times correspondent)
Chaired by Frank Jotzo

AT: Survey about politicians' attitudes/awareness of climate change (PDF). Conducted during Rudd era, late 2009. 26 interviewees,
systematic stratified sampling. 20-min semi-structured phone interviews.
Underlying attitudes rather than policy stances. Expertise: little/no 29%, Some 63% (self-rated 53%), Good 9% (self-rated 47%!!).
96% agree cc is occurring. 88% thought at least partly caused by humans. 90% unlikely to go away by itself. 43% of LNP were
deniers.
On most issues, LNP/ALP not statistically separable – except for attitude on leading globally, where Greens/ALP strongly for and
LNP strongly against. LNP members also had much lower concern about climate change; could be predicted by political party, belief
in science, and importance of issue for them politically (not other variables!)
Attitudes broadly in line with population, but also partisan.

AL: Tony Abbott believes in tipping points – at least for Malcolm Turnbull. Political speech more so than speech about politics.

JH: "Please excuse my confused remarks, I'm still struggling to explain the carbon footprint of a birthday cake." Used to believe that
good politics was just good policy with a bit of a lag. "TAbbott has had more positions on the climate change than the Karma Sutra."
Worst case is where polls keep going down for Govt. Oakeshott, a man of great principle, may switch sides, force an election, and
get TAbbott in.
Gillard is bleeding to the left. Announcing the tax without details is a free kick to Abbott; lets him use fear and ignore any real
debate. Back in the mid-70s, as a young politician, Hewson could not wait for interest and exchange rates to be set by the market.
Eventually it came. So too will it be with climate change.

LT: Debate went off the rails last year when the Coalition turfed Turnbull and stopped supporting the market mechanism, and – by
extension – any serious treatment of the issue at all. The LNP policy is there to be seen to be doing something. ALP, OTOH, did the
political equivalent of running away with their hands over their ears by not going to a DD election after the CPRS was defeat ed, and
not prosecuting the case at all at the 2010 election.
If you believe the anti-action brigade, apparently Greg Combet signed a secret deal at Cancun to give 10% of our carbon price
revenues to some secretive UN cabal.
The debate over this issue has devolved to a political fight to the death. But sensible parties should not abandon the field and let
them fight it out, because otherwise the pressure on the independents will be to great and everything will go off the rails again.

Q: How do we drive a new industrial revolution in Australia?

AL: Markets.

Why are deniers given so much space in the media? Is it the role of individual journalists or the organisations? Ditto for the gap
between the science and the reporting.
LT: Bizarre form of balance. Not the way she defines it. Scientific debate outside the realms of real-politick.
AT: 80% of pollies rely on the media for info on climate change.
AL: Decision to release principles then follow with detail is deliberate. We don't want to get caught up in hypothetical traps. Would
prefer to talk about principles.

Is there a chance TAbbott will get enough rope to hang himself? If you're in the ALP and are worried about CC, why would you not
support nuclear?
LT: TAbbott isn't getting more popular, but he's under much less pressure since the MPCCC announced its proposal. Nuclear often
gets raised as though it were free – but it's still bloody expensive (to build).
JH: Abbott may never be popular, but he can win. Carbon tax and the way it has been handled have been a lifeline for him. He'll be
the best leader of the Opposition in our history. Wouldn't govern well, but will lead the opposition to a government admirabl y...

Lectures, Conferences, etc Page 5