Cutting greenhouse gas emissions is like buying an insurance policy: we incur a cost to reduce a risk. Every year Australians spend millions on insuring homes, cars and their health, not because they know that something will happen to them, but because of the risk that it might. Households make the decision that insurance premiums are worth paying. As a nation, what premium do we pay for insurance against catastrophic climate change?
Modelling by the Australian Treasury supported by the Centre of Policy Studies (CoPS), shows that to cut greenhouse gas (GHG) emissions to 80% below 2000 levels in 2050, the Australian economy would be 2.8% smaller than it otherwise would have been. How do we interpret this?
Without the carbon tax, Australia’s GDP per head was set to grow at an average of 1.4% until 2050. With the tax in place, growth would average just over 1.3%. The implication is that the level of GDP we would have reached on 1 January 2050 will not be reached until 1 January 2052. In other words, the 2.8% reduction in GDP is equivalent to two years worth of economic growth. Phased-in over 40 years, this is less than 0.1 percentage point shaved off annual growth.
Is 2.8% a reasonable estimate? The main GHG emitting activities are fossil fuel-based electricity generation and the use of motor fuels. In Australia these activities account for around 5% of GDP. Advice from scientists and engineers suggests that the adoption of current alternatives to fossil-fuel-based technologies would approximately double the cost of electricity and motor fuels.
On this basis, if we were to replace 80% of our usage of fossil fuels with alternative energy, it would cost around 4% of GDP. But 4% is a pessimistic estimate for two reasons.
Firstly it is based on the comparison of current costs. If the world embraced the need for deep cuts in GHG emissions, we would expect rapid technical progress in low-emission technologies, reducing their cost.
The second reason is that we would not replace the whole 80% of GHG emitting activities with the more costly alternative energies; we would also reduce overall energy usage.
The aggregate cost seems bearable. But what about the distribution of the cost?
Low-income households are squeezed from both sides. Electricity and fuel are necessities and typically account for a greater proportion of the household budget in low-income households. On top of this, low-income households may not be able to absorb extra costs easily. Regional impacts also have the potential to be uneven. Areas such as the Latrobe Valley in Victoria have an over-representation of emissions-intensive activities.
This is where the recycling of the carbon tax revenue is important. Tax revenues are earmarked for assistance to the so-called emission-intensive, trade-exposed industries and for household assistance. Household assistance takes the form of direct payments (the Clean Energy Supplement for low and middle-income households) and a significant increase in the tax-free threshold to over $18,000. This redistributes the burden of the carbon tax away from those who can afford it least.
Is the carbon tax really about getting people to switch off the beer fridge and get rid of the second car? The elasticities of demand for electricity and motor fuels are typically low, suggesting that to a large extent Australians will cover the price increase by reducing other consumption instead. So it is not the reduction in electricity usage so much as the substitution to alternative forms of electricity generation that will be the real achievement of the carbon tax. Lifting the price of cheap and dirty brown coal electricity generation opens the door for the more expensive, greener options: carbon capture, wind, geothermal and solar.
Many questions remain. Have we chosen a reasonable target? The interim 5% cut by 2020 target has been derided as unambitious. But as householders nervously await their next electricity bills, many will be satisfied that enough is being done. What is the cost of unabated climate change? Should Australia even bother, when our efforts are so small on a global scale?
The message from the economic modelling is that the current target is achievable at modest cost, and that distributional impacts need not be significant if a well-managed program of compensation is implemented.
Philip Dowling
IT teacher
Many people have bought insurance. When they tried to make a claim, many have found that their policy didn't cover what they thought it did, or have their claim dismissed on a technicality.
The fine print in this "policy" needs careful reading.
Other people chose to insure only for eventualities that that they consider reasonably likely to occur, and don't insure for other less likely events.
Gillian King
logged in via Facebook
The payoff from this insurance policy will be danger avoided, which is always hard to see. Businesses spent millions to avoid the dangers of Y2K. Some people still think it was a waste of money.
Arguments that Australia will be disadvantaged if other countries don't act ignore the actions currently underway in most countries. For example, the US reduced GHG emissions more than other countries in recent year; South Korea voted unanimously to implement a carbon price; China has quadrupled its solar rollout; Saudi Arabia spending $109bn on solar to provide 1/3 electricity by 2032. Other examples are here.. http://bit.ly/JYZ2y6
We're not the only one - everybody's buying this insurance!
Philip Dowling
IT teacher
Gillian, I don't suppose the recession and high levels of unemployment in the USA had any impact on GHG production perchance?
Of course, Spain spent a lot on solar energy infrastructure. Check the finance pages today.
Philip Dowling
IT teacher
Incidentally the Y2K bug was a waste of billions of dollars of money, except in a very few isolated cases (such as where Scada type systems were operating). It also had the effect of destroying the credibility of IT professionals with management and finance departments for years. It also led to a savage reduction in IT budgets for years and high unemployment for many types of IT employees.
Mike Hansen
Mr
Total and utter rubbish.
The Y2K bug was a real problem that was dealt with in a systematic way by IT vendors and departments the world over because they were not in denial. Most of the remediation work was done from 1997 onwards so very few major organisations or software vendors were caught unprepared.
Alex Cannara
logged in via Facebook
Right, and it helped the economy by bringing old Cobol hackers out of retirement and causing many systems to get old faults fixed and performance improved.
It was the responsibly-managed non-event to the dot com greed meltdown.
;]
Mike Hansen
Mr
Absolutely a non-event. Partly because may of the CIOs and IT managers in the late 90s were the programmers who wrote the problem code in the first place - so no one was in denial. And the problem was not difficult to solve - it just involved working through a lot of code and upgrading a lot of systems.
At the time, my mate ran an IT recruitment company (before it all went online) and he was advertising for retired assembler programmers - effectively by then a lost skill - to come out of retirement to work on Y2K.
I consulted on a number of large projects and all bar one were wrapped up by early 1999. Unfortunately the press were still writing scare stories about planes dropping out of the sky right up to 1/1/2000. When that did not happen (and it was never going to happen - Boeing can design planes but cannot handle fixing a software problem where years are held in 2 digits!!!), the clueless started the myth that Philip now repeats.
Gary Murphy
Independent Thinker
Yes - created 45000 construction jobs
http://cleantechnica.com/2012/02/06/twin-solar-thermal-plants-commence-operation-in-spain/
Not to mention all of the jobs involved in manufacturing all of the mirrors and other components.
Alex Cannara
logged in via Facebook
No insuring industry will have enough reserves to cover the effects of emissions now beginning to take their huge tolls. The financial meltdown will be peanuts in comparison.
Gary Murphy
Independent Thinker
Are you talking about this?
http://en.wikipedia.org/wiki/File:Extreme_weather_in_the_US_1980-2011.png
How about this:
http://en.wikipedia.org/wiki/Climate_change,_industry_and_society
"An industry very directly affected by the risks is the insurance industry.[11] According to a 2005 report from the Association of British Insurers, limiting carbon emissions could avoid 80% of the projected additional annual cost of tropical cyclones by the 2080s.[12] A June 2004 report by the Association of…
Read moreAlex Cannara
logged in via Facebook
Well Gary, we have some property in So. Florida that'll be great for deniers to retire to!
If the pythons & 'gators don't get 'em, the storm surges will.
;]
Bernie Masters
environmental consultant at FIA Technology Pty Ltd, B K Masters and Associates
"Cutting greenhouse gas emissions is like buying an insurance policy: we incur a cost to reduce a risk." When I take out an insurance policy, I expect the insurer to pay out 100% of the insured amount when things go wrong. The problem with the federal government's 'insurance policy' is that there is no meaningful payout, should the climate changes we're experiencing be caused by human use of fossil fuels. The best that Australian policy holders can expect is at most a 20% reduction on Australia's 1.8% contribution to global CO2, ignoring of course the huge increases in atmospheric CO2 from China and other developing countries.
It's really makes no sense for Australia to be placing such a significant economic impost on itself when most of the rest of the world isn't doing the same thing. And it makes even less sense when the ordinary Australian receives compensation for energy price rises, negating any imperative on their part to reduce their personal energy usage.
Folly!
Gary Murphy
Independent Thinker
"And it makes even less sense when the ordinary Australian receives compensation for energy price rises, negating any imperative on their part to reduce their personal energy usage."
Did you read the entire article - it clearly states that the main benefit is in making renewables more economically competitive.
There is still incentive to reduce electricity usage - it still costs money. Saving money by using less electricity does not lead to a reduction in compensation.
Lincoln Fung
Economist
Climate change is a global problem that requires a global solution/actions. In that regard, Australia's carbon tax cannot and will not be regarded as an insurance until global actions are ensured.
What are the assumptions in the modelling about other countries actions? If it assumed all will act, then it means there should be no carbon leakage. But if other coutnries won't act, then carbon leakage will occur and changes in international competitiveness may result in greater losses to Australia.
Further, what assumptions were used for itnernational carbon trading?
The interpretation in the article is one of potential explanations.
How much does it mean of 2.8% lower in GDP in terms of dollars? That would be tens or hundreds of billions a year, isn't it?
Comment removed by moderator.
Sean Lamb
Science Denier
"Modelling by the Australian Treasury supported by the Centre of Policy Studies (CoPS), shows that to cut greenhouse gas (GHG) emissions to 80% below 2000 levels in 2050, the Australian economy would be 2.8% smaller than it otherwise would have been. How do we interpret this?"
That the Australian Treasury does not employ very good modellers and does not understand how essential energy generation is to all aspects of the economy. Futher, they do not have any conception what the costs of non-fossil fuel energy generation would be and believes, erroneously, that you can extrapolate the costs of achieving easy savings to determine achieving deep cuts.
I would go into more details, alas The Conversation is beginning to censor AGW sceptic views.
Which is entirely their right.
Helen Westerman
Editor at The Conversation
Sean, your previous comment was removed - by me - as it directed personal insults at the authors.
Archie Archie
consultant
So we've made some reasonable assumptions here on the economic effects of the carbon tax.
How about somebody making some reasonable assumptions, and telling us exactly what type of changes in climate and temperature we will see by 2050 thanks to this tax? Go on, anyone....
Mike Hansen
Mr
Is that you Andrew?
Gary Murphy
Independent Thinker
http://en.wikipedia.org/wiki/File:Global_Warming_Predictions.png
from http://en.wikipedia.org/wiki/Global_climate_model
Archie Archie
consultant
Instead of hilarity or links, how about just answering the question? Don't be evasive, don't resort to links that provide general information. Tell me, how much will "Australia's carbon tax" alter global temperatures? Australia's temperatures? In what beneficial ways will "Australia's carbon tax" measurably alter the environment?
And if you can tell me how much the carbon tax will reduce temperatures, or increase them, or whatever, can you tell me at what level we should stop altering the climat?
Alex Cannara
logged in via Facebook
Just for fun, Two-Archie, consider that temps aren't the only, or even perhaps, the main issue. Sea rise and acidification are far more relentless and challenging to essentials of human and other life.
Thus, for instance, the reality that we've moved oceanic pH more than half way to challenging the base of most all oceanic food chains has far wider and more expensive implications that just plain old warming.
Ma Nature doesn't care how dumb or crass we are. And, the bill will come sooner for…
Read moreMike Hansen
Mr
Archie Archie. It is hard to take someone using a fake name seriously. Particularly when everyone else has been courageous enough to identify themselves. Unless your parents actually called you Archie Archie in which case I apologise profusely.
Byron Smith
PhD candidate in Christian Ethics at University of Edinburgh
An article by Prof Jones answered this question just last week.
https://theconversation.edu.au/little-by-little-the-benefits-of-australian-climate-policy-8259
But such an accounting approach is ethically myopic. If we applied the same logic to other areas, no one would bother giving money to charity since what measurable difference is my tiny contribution going to make? No one, using this logic, would bother to avoid littering, since my little piece of rubbish is inconsequential. We engage in all kinds of projects simply because they are the right thing to do as a responsible citizen. In many cases, those who choose not to are rightly looked upon as freeloaders.
Speaking of previous articles in the Conversation, you might also find this one worth a look, since it argues for why Australia's contribution matters on a variety of levels.
https://theconversation.edu.au/australias-contribution-matters-why-we-cant-ignore-our-climate-responsibilities-1863
Chris O'Neill
Telecommunications Engineer
"No one, using this logic, would bother to avoid littering, since my little piece of rubbish is inconsequential."
This is known as the litterbugs defense. When you point this out to a denialist, they immediately go into denial about it. They just can't help themselves.
Chris O'Neill
Telecommunications Engineer
I wonder how long comments will be allowed on this article before they are suddenly and without warming cut off. That's what happened in "Plain speaking on the carbon tax and electricity prices", about 30 hours or so after it was published.
Leo Lane
logged in via Facebook
Insurance covers the insuree for risk.
There is no risk to cover, as it cannot be shown that human emissions have any measurable effect on climate.
There is no risk to be covered, and no money is retained to make any payout that might be necessary.
The reduction in emissions is said to reduce temperature by .0038 degrees by 2010. This means that it has virtually no effect.
Payments will be made from it as bribes to attempt to gain votes for the Labor Party. Judging by the polls, they are bribing only people who already vote for them.
Funds will also be paid to the unelected, unaccountable United Nations, which will distribute it to undeveloped countries, on the basis that they refrain from generating power to give them a civilized life.
This article is baseless, and attempts to excuse an inexcusable burden on the Australian community.
Alex Cannara
logged in via Facebook
Rontflmao Leo!
Who's paying you to not understand how reality works, Leo? Or are you just being paid to chaff here?
How about we all chip in and buy you a meter stick, a pad and waterproof pen and you can start monitoring high tides. Then we can buy you a pH meter and rent a rowboat and you can go measure ocean acidification. Take a urine-sample bottle with you so you can bring back a water sample (relieve yourself elsewhere) too.
Then we'll find a reliable lab to assay the isotopic content…
Read moreBernie Masters
environmental consultant at FIA Technology Pty Ltd, B K Masters and Associates
Let's try to get our collective heads around this figure of 2.8% as refered to by the author as "to cut greenhouse gas (GHG) emissions to 80% below 2000 levels in 2050, the Australian economy would be 2.8% smaller than it otherwise would have been." Australia's 2011 GDP is $6.4 trillion according to Wikipedia. To keep the maths simple, let's assume the 80% reduction in GHG emissions started in 2010, so that gives us 40 years to reach this 80% reduction target. If the cost of starting to do this in…
Read moreGary Murphy
Independent Thinker
"There is no risk to cover, as it cannot be shown that human emissions have any measurable effect on climate."
OK - let's play Spot the Correlation. Here's a graph of CO2 vs global surface temps:
http://en.wikipedia.org/wiki/File:Atmospheric_carbon_dioxide_concentrations_and_global_annual_average_temperatures_over_the_years_1880_to_2009.png
And here is a graph of solar irradiance vs global surface temps:
Read morehttp://en.wikipedia.org/wiki/File:Changes_in_mean_solar_irradiance_and_mean_global_surface_temperature_on_Earth_since_the_year_1978…
Mike Hansen
Mr
I switched off when you claimed Australia's GDP was $6.4 trillion.
Wikipedia is not the problem, it is your understanding of economics.
I am guessing you got your data from here.
http://en.wikipedia.org/wiki/Economy_of_Australia
"Australia's total wealth is 6.4 trillion dollars"
and in the sidebar
"GDP -$1.57 trillion (2012 est.)"
Woops.
Chris O'Neill
Telecommunications Engineer
"Should Australia even bother, when our efforts are so small on a global scale?"
What Australia should do is ask China what it wants us to do to avoid demotivating them in their efforts to minimize greenhouse gas emissions. If they say they don't care what we do then there may be an argument that we shouldn't bother but otherwise it would be irresponsible of us to not care what they think.