New greenhouse gas emissions projections have been released by Australia’s government. They suggest that only a minority of the task to meet Australia’s emissions target will be achieved through domestic action, and the majority by buying emissions units overseas. If that came true, it would be a disappointment for many voters. But the projections may well be too pessimistic, selling short the effect of the carbon pricing policy.
“Putting a price on carbon pollution allows Australia to reduce its net emissions by at least 155 million tonnes (Mt) in 2020 and 390 Mt in 2030”, claims the Minister’s media release. “The amount of net carbon pollution for every Australian will be halved from over 25 tonnes a year today to 13 tonnes a year by 2030.”
Sounds too good to be true? Then you’ve probably overlooked the word “net”. The projections for 2020 have the amount of emissions reductions in Australia not at 155 million tonnes but only at 55 million tonnes, compared to a baseline of fast growth. Emissions within Australia would continue rising. At 2020, they would be about 11% above the 2008-12 average, according to these projections.
To meet the 5% reduction target, another 100 million tonnes would have to be covered by buying emissions credits from developing countries and overseas permits, likely from the European Union. That then results in net emissions falling by 155 million tonnes.
The projections assume a $29 per tonne carbon price in 2015-16 and rising, as per the 2011 Treasury assumptions. That assumption now appears entirely unrealistic, with expert expectations in the $10 to $15 range.
In its projections, the Department of Climate Change and Energy Efficiency also describes a sensitivity scenario where the carbon price is around $12 in 2015. This is roughly in line with current market expectations for the EU emissions trading price, which Australia will be linked to from 2015. Then, according the projections, domestic reductions in Australia relative to the baseline would be only 29 million tonnes, or 19% of the total required to meet the target.
The picture for 2030 is similar. Assuming a linear trajectory towards the government’s 80% reduction target by 2050, around 40% of the abatement task would be achieved domestically, assuming a $48 carbon price at 2030. And the domestic emissions would be around 21 tonnes per person, compared to the net per capita emissions of 13 tonnes cited in the Ministerial press release. No 2030 numbers are given for a low-price scenario.
Australia will very likely be a buyer in international emissions markets, under any sound climate policy. This is in the economic logic of achieving overall emissions reductions at the lowest possible cost. It is also a consistent outcome if Australia takes on commitments for net national emissions that represent a commensurate contribution to an ambitious global effort, like the 80% reduction target at 2050. Australia will remain a producer of emissions-intensive goods for export – think minerals and agriculture. Covering these additional emissions by paying for extra effort in other countries is logical and probably efficient.
The problem is that most Australians are probably not aware that this is the plan. Ask your neighbour: does the national 5% reduction target mean that Australia’s domestic emissions will be reduced by 5%, or does it mean that they will increase by 11%? Few will think it is the latter, and many will be disappointed when they find out.
It is another example of where understanding of climate change policy is extremely limited among the broader population. It suggests a failure of government, media and the research community to effectively communicate the issues. And oftentimes, obfuscation is chosen in preference to clear explanation – see for example Minister Combet’s quotes above.
Thankfully the true picture might not be nearly as bleak as the government’s numerical projections imply. The experience, time and time again, is that modellers and government agencies underestimate the effect of market mechanisms on pollution. One possible reason is that past trends are used as a guide to the future, ignoring the possibility of structural breaks. Another is that modellers and public servants want to avoid being accused of over-egging the pudding, and thus fall back on very conservative assumptions.
The same goes for the projections that are out this week. They may well be overstating the likely underlying growth in Australia’s emissions, and under-estimating the effect of the carbon price. If so, then they are under-selling the likely effect of the carbon price and other policies.
For example, demand in Australia’s electricity grid has been falling in recent years. Yet the projections are for demand to start rising again, even with a high carbon price. In reality, consumers and business see power prices rising, are increasingly aware of energy efficiency options, and are being offered ever more power-saving technologies at ever lower costs.
Meanwhile in energy supply, the costs of renewable energy technologies are tumbling, and with a carbon price are likely to become cost competitive with coal and gas fired power. On the other hand, it is true that expansion in the resources sector and in particular liquefied natural gas projects will drive up energy use and emissions in the industrial sector. Yet these could well be offset by savings elsewhere.
Keeping a lid on Australia’s emissions will require sound climate policy, and a degree of policy stability. Our recent survey shows that corporate Australia is confused about the prospects for carbon pricing. But if the framework or its essence is retained under future governments, then we have every reason to expect that the outcome may be better than projected by the government.