Australia's Climate Change Policy Statement - our economy, our environment, our future

By Paul O'Donnell and Felicity Cuthbertson.

Key Points:
An emissions reduction target and a cap and trade scheme will be introduced no later than 2012 according to the climate change policy statement released by the Government in July 2007.

On 17 July 2007, the Government released its much anticipated "Climate Change Policy - our economy, our environment, our future". The policy statement's ultimate objective is to "contribute to achieving global reductions in emissions that will avoid dangerous climate change while maintaining the strength of Australia's economy.

The policy statement's emphasis on Australia's small overall contribution of greenhouse gases illustrates the Government's long held view that until major emitters, such as China, commit to reducing emissions, nothing Australia does alone will materially affect the climate. A contrasting view, however, is that Australia ranks highly in terms of emissions per capita.

Fundamentally, the policy statement endorses the key design features of the emissions trading scheme set out in the report by the Prime Ministerial Task Group on Emissions Trading, as we have previously discussed here.

Further, the policy emphasises the importance of additional programmes such as energy efficiency and research and development though it appears to offer few new initiatives and rather is a restatement of the old.

Key features of the climate change policy

• According to the policy statement, the Government will set up a long-term aspirational emissions reduction goal (over at least 30-40 years) with a complementary emissions trading scheme to assist in achieving this goal, which will be set up no later than 2012.
• The Australian Treasury will be charged with completing the economic modelling required to set the goal and the long-term responsibility for emissions trading while the Department of Prime Minister and Cabinet will coordinate the implementation of the trading scheme.
• The Government will introduce Commonwealth legislation to provide for streamlined national mandatory emissions and energy reporting in 2007. This method of reporting may be made available for private sector use in the voluntary carbon market.
• The policy statement discusses the development of low emissions technologies and energy efficiency for both Government and households. Such programmes include allowing small business and households to calculate their emissions and purchase offsets. Also discussed is the possible inclusion of transport fuels into the emissions trading scheme and establishing emissions standards for vehicle engines.
• The policy statement recognises the importance of continuing to fund greenhouse science research activities and supporting climate change science and applied climate science. The Government will also create the Australian Centre for Climate Change Adaptation with funding of $126 million over five years which will use science and research to establish the necessary plans for adapting to the effects of climate change.
• Establishing an effective international response to climate change should be combined with the domestic action taken by Australia, according to the policy statement. The international response should be based on three principles - that major emitters are included, the scheme takes into account different national circumstances and it be flexible and utilise existing market based responses.

Economic analysis

An illustration of the complexity of the economic analysis that is required in setting an emissions reduction target and an accompanying scheme, and what those results may indicate, is provided by the study completed for the California Climate Initiative.

California is in the process of implementing ambitious climate policy goals to reduce greenhouse gas emissions by 80 percent by 2050, which will influence the sorts of policies that are introduced across other state or federal policies.

Electric Power Research Institute ("EPRI") released its summary for policymakers "Program on Technology Innovation: Economic Analysis of California Climate Initiatives: An Integrated Approach, Volume 1: Summary for Policymakers" in June 2007.

According to past research done by EPRI, the finer details of a policy matter in terms of limiting the overall cost of a climate policy.

The EPRI report used 20 different implementation scenarios of various combinations of policy options for regulating emissions, such as the introduction of a cap and trade scheme and direct regulatory control of emissions.

The results however demonstrate the inherent difficulty in forecasting the costs of policy initiatives, as the estimated costs of meeting the 2050 emission reduction target ranges from $104 billion to $367 billion depending on the assumptions adopted. Perhaps not surprisingly, the costs increase with the increased stringency of the emission reduction target and increase more rapidly over time than do annual emissions reductions.

This research showed that a broad cap and trade model was likely to be the most cost effective policy mechanism to reduce greenhouse gas emissions. The results showed that direct regulation of emissions or policies that only cover particular industries could increase the costs of the reductions by up to 60 percent. In contrast, economic costs could be reduced by up to 40 percent by including a price "safety valve" in a cap and trade mode but this is likely to mean that the emissions reduction target would not be met.

For further information, please contact Paul O'Donnell.