Sky News Australian Agenda Professor Garnaut 8 July 2012

Interview with Professor Garnaut Australian Agenda program, 8 July 2012

Peter van Onselen: We're joined now out of Melbourne by the special advisor to the government on climate change policy, Professor Ross Garnaut. Professor, thanks for your company.

Professor Garnaut: Hello Peter.

Peter van Onselen: Can I just ask you straight off the bat, I mean what does it do to the government's overall carbon pricing agenda, if it does drop the price on the floor base.

Professor Garnaut: Well, the floor price in the legislation of $15 may or may not be a binding price. I'd be surprised if the international price, of which we're trading in credits was as low as that in three years time. So it would probably make no difference.

Paul Kelly: That's a pretty optimistic view, isn't it, professor, because given where prices are now,

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there are many people who think that prices will still be fairly low in three years time. I just wonder why you're so optimistic about that.

Professor Garnaut: I don't think so, Paul. If you go over the history of carbon pricing, now is a uniquely low price period. And the European price, the big market with some depth Friday night was in Australian dollars about 10.40. That's particularly low. There's lots of discussions in Europe about tightening targets. This, of course, is a low point in economic activity in Europe. The clean development mechanism isn't the relevant international price and it will be less so in three years time.

Paul Kelly: Professor, what would be the consequences for Australia, having legislated the scheme we now have in place, if this scheme was in fact repealed over the next couple of years?

Professor Garnaut: The big issue, Paul, is how we go about reducing emissions. There's not a difference of opinion about the need to reduce emissions. That's not the act of political debate. You've got the common unconditional target of reducing emissions by 5% on 2000 levels by 2020 against what the Department of Climate Change estimated as business of usual as plus 20%-odd. So that's a fairly big reduction. Both parties are committed to strengthening the target in the context of demonstrated international action. So the question isn't how much we will do in reducing emissions, it's how we get there. There are two ways of getting there: one is through various forms of direct action; the other is through carbon pricing. One is much more expensive than the other. Around the world people are mainly using direct action, the more expensive way. Direct interventions by government is politically instinctively more attractive than market-oriented approaches, just like protection is instinctively more attractive politically than free trade.

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Paul Kelly: Well, just on that point, I mean that suggests that the Coalition may be where the international community is. How do you think the international debate is going to evolve? Do you think that countries like the United States will stick with, if you like, variations of direct action or do you think we'll see a shift back to carbon pricing.

Professor Garnaut: Well, the drift in the last couple of years is between - has been towards a greater component of carbon pricing including, in some places where I didn't expect it so early, such as China. In places where it's already well-established, there's strong commitment to it. There's no debate about it in Europe. British Colombia, which had had a carbon tax, a straightforward tax, no compensation for trade exposed industries, of $25 a tonne decided last week, just a few days ago, to increase it to $30 a tonne and use the proceeds to reduce income tax and company tax. So where it's in place, it's attractive and more places are considering it. California, from the beginning of next year. So that's the drift. But at the moment the main instruments in most places, including Australia, I might add, are expensive forms of direct action.

Peter van Onselen: Well, can I ask you about that, Professor, because, on the one hand, Tony Abbott tells us that he's committed to direct action and the 2020 target of a 5% reduction, but he equally tells us that the pot of money that they are going to put into direct action is substantially lower than the amount of money that the government is spending in relation to its carbon pricing approach. Now, how can that be the case if direction action, as you tell us, as many other economists do as well, is more expensive than the market mechanism of carbon pricing?

Professor Garnaut: Well, we can't make a detailed judgment, Peter, about the Opposition's policies because
Australian Agenda 8 July 2012 Professor Garnaut

they haven't been articulated yet, so it's not fair to say how expensive they will be, but in general -

Peter van Onselen: But he tells us that they won't put one more cent in than, I think it's the just under $5 billion that he's committed to their direct action scheme as it stands as an Opposition policy.

Professor Garnaut: Just the - paying for the income tax cuts without the carbon price alone would be $7 billion out of the budget. So you are behind from the beginning.

Paul Kelly: If we look at the entire package of compensation and industry assistance provided by the government, are you concerned about that, in terms of the quantum for both business and households. Do you think it's too excessive.

Professor Garnaut: No, it's pretty well budget neutral, Paul. It's slightly expansionary. My recommendations, of course, were for it to be budget neutral and it's approximately that. So - and there's a very important governance to mention of the arrangements that there will be a Productivity Commission Review in 2015 of the appropriateness of the compensation for trade exposed industries compared with what other countries are doing. So there's some constraints on the costs there. For the rest, it's - the largest single component is the income tax cut. That's in an efficiency raising form. If there was a large fall in the carbon price in 2015 then that would mean that the tax cuts weren't fully funded but in the whole scheme of the budget and the whole range of variables in the budget that will be a relatively small one.

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Peter van Onselen: Professor Garnaut, can I just ask you for a general overview of how you think the first week of the implementation of the carbon price has gone? I suspect that I'm not going to be able to get you to sing like Craig Emerson did. But, you know, what is take on the way that it has gone.

Professor Garnaut: Well, it's gone pretty much as we would have expected, Peter. The administrative mechanisms are working. There isn't the sort of outcry on administration that we had in the early stages of the GST but that's mainly because this is a smaller adjustment than the introduction of the GST. So business is getting on with the job of complying with it, much as you would expect.

Paul Kelly: I'd like to switch the focus to economic policy to the budget, to fiscal policy. What's your view about the debate about the budget surplus? The government has budgeted for a surplus this year. Some people say that that is a risk, that a fiscal policy may end up being too tight. What's your judgment as to where we are now and what is the best approach.

Professor Garnaut: I think the current budget seems pretty well judged, Paul. As you know, since 2004 I think the general stance of budgetary policy has been too easy, except for the years of the financial crisis when the large loosening was appropriate to hold up activity and employment. But I think right now with the various upward pressures from the continuing boom in resources investment, the downward pressures from the international financial markets, I think that the balance is pretty well right now.

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Peter van Onselen: Professor, can I just ask you one final question, we've got less than a minute on program though. But in terms of if this carbon price is repealed by Tony Abbott, if that actually happens, do you think that getting to the 2020 target of a 5% reduction is achievable.

Professor Garnaut: Yes, it's achievable. It will just be more costly and more damaging to market oriented economic activity in the country but it's certainly achievable.

Peter van Onselen: All right, Professor Garnaut, now we are out of time. We appreciate you joining us on this episode of Australian Agenda. Thanks for your company.

Professor Garnaut: Good, Peter, Paul. Bye.

Australian Agenda

8 July 2012

Professor Garnaut