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The business case for reducing greenhouse gas emissions

A combination of science and economics provide compelling reasons for policy initiatives and decisions by businesses and households to reduce emissions of greenhouse gases. The arguments are strongest…

There is a compelling business case to reduce emissions, both here and globally. AAP

A combination of science and economics provide compelling reasons for policy initiatives and decisions by businesses and households to reduce emissions of greenhouse gases.

The arguments are strongest for a global strategy. They are more nuanced for an individual country such as Australia to take unilateral action.

Most of the policy focus is on anthropogenic emissions or pollution associated with the combustion of fossil fuels, and particularly in the production of electricity and transport which we value, and with deforestation.

Under past behaviour, and business as usual, we treat the atmosphere as a free dumping ground for greenhouse gas emissions.

There is a strong consensus, but not unanimity, of scientific views that the global build-up of greenhouse gas emissions since the industrial revolution is causing climate change and will cause more climate change in the future.

Similarly, there is a consensus, but not uniformity, of views of economists and others that climate change will cause economic costs.

Costs of climate change are associated with rising sea levels and the need to relocate some people, costs of adapting agriculture to changes in temperatures and rainfall, development of new and more expensive water, the need to build more robust structures to withstand adverse weather events, and loss of ecosystems and biodiversity.

We refer to the costs of climate change as the external costs or pollution costs not currently considered in decisions to combust fossil fuels and clear forests.

Global society would be better off if we recognised explicitly the external or pollution costs of greenhouse gas emissions.

Including the external costs of pollution, along with the private costs now faced by businesses and households, in decisions to combust fossil fuels and to deforest would redirect the choice of products to produce and consume and change production processes from socially less valuable products and processes to socially more valuable products and processes.

This process of raising global welfare will involve a less carbon-intensive global economy with less greenhouse gas emissions.

We do not have perfect and costless knowledge, and there are some who contest the science of climate change and others question the magnitudes of estimates of the external costs of climate change.

Science and economics in the past have had different theories, interpretation of facts and so forth on almost every issue. And so may this contest of knowledge continue.

In a realistic world of uncertainty, governments, businesses and households have to make decisions.

Taking decisions to reduce greenhouse gas emissions to reduce the probability of future climate and the associated costs of adapting to a changed climate might be seen as a large insurance payment to reduce a high probability future cost.

Because greenhouse gas emissions and climate change is a global pollution problem, the ideal solution is a global policy to place a common price on the pollution across all countries and all activities which generate the pollution.

Such an agreement would minimise the cost of reducing pollution, and all countries would gain.

In the absence of a global agreement there is an incentive for individual countries to free ride on others.

That is, by not reducing its own pollution and incurring the costs of changing production methods and the mix of products produced and consumed for a less carbon-intensive economy, a single country still enjoys the benefits of less climate change due to the pollution reduction decisions of other countries.

This line of argument has been invoked by some to delay Australian policy to reduce greenhouse gas emissions until most of the other polluting countries do the same.

Counter-arguments favouring Australia adopting policies to reduce its greenhouse gas emissions sooner rather than later include the following.

First, other countries, including the European Union and New Zealand, and arguably China, already have in place policies to reduce emissions.

Second, Australia could and should facilitate a desirable global agreement, or encourage other countries to move more quickly, by providing a demonstrated and effective example.

A third set of arguments is that there will be early mover advantages in developing policies and technologies to reduce emissions and a less carbon-intensive economy.

Fourth, for some Australians, but clearly not all, the warm inner glow from recognising the external costs of greenhouse gas emissions and contributing to a global effort to reduce future climate change has value.

Again, there are a range of legitimate views about the importance and magnitudes of these benefits, and especially relative to the costs of changing our purchases and production methods to reduce greenhouse gas emissions.

If Australia moves before other countries, some argue it will be ineffective because of “carbon leakage” and result in unnecessary adjustments to the energy intensive trade exposed industries (EITE).

These effects can be offset by sensible policy design.

This could take the form of a consumption base rather than a production base, or if a production base, then appropriate compensation of the EITE as proposed by Ross Garnaut.