Climate calculus under pressure

Economist Warwick McKibbin says Bill Shorten’s carbon cost pledge is ‘completely uncertain’.

Illustration: Eric Lobbeke

The Labor Party is caught with the arrogance of being the election favourite for too long. The economist whose research Labor belatedly invoked this week has dismissed Bill Shorten’s assertion that Labor and Coalition climate change policies “cost the same”.

Interviewed by The Weekend Australian, internationally recognised economist Warwick McKibbin criticises both sides for inadequate emissions reduction policies — but he says the Opposition Leader’s pledge to use international carbon permits to ensure there is no economic cost differential with the government is ­“completely uncertain” as a proposition. This knocks out the core justification used by Shorten this week to defend the economic cost of his climate change policies.

Labor has not done the analysis or the modelling of the economic impact of its 45 per cent 2030 emissions reduction target, announced three years ago.

The upshot is that it has relied on the 2015 McKibbin analysis commissioned by the Department of Foreign Affairs and Trade, with the economist telling The Weekend Australian he is “surprised” Labor has not spoken to him despite relying on his work, now four years old and subject to substantial price changes in the marketplace since then.

McKibbin, who is based at the Australian National University, calls out the pathetic nature of Australia’s flawed climate change response. He brands Labor’s recently released policy using the current safeguard mechanism to cut pollution as “a third-best response but better than nothing”. He says the Morrison government’s hasty revamp of the Abbott government’s Emissions Reduc­tion Fund is “not very effective” and while “it will have an impact at the margins, if you are looking at long-term cuts in emissions then it becomes very expensive”.

Asked this week how he could justify his claim that Labor and Coalition climate change policies will cost the same — given Labor’s target is a 45 per cent reduction as opposed to the government’s 26 per cent — Shorten said: “Because we are costing our 45 per cent reduction with international offsets, so in fact it does cost the same.” The international permits become the vital factor in Shorten’s policy. In releasing his mechanism on April 1, Shorten said Labor would “open up access to international carbon markets that allow businesses to trade in those markets” — a policy widely welcomed by the business sector.

Questioned about this and the rising cost of international permits since his 2015 analysis, McKibbin says it is “extremely difficult” to estimate the future cost of buying permits. “This depends upon the relative cost of abatement in the future; that is, the domestic cost versus the cost of international permits. And this is completely uncertain,” he says.

Shorten’s claim was based on the modelling assumptions, McKibbin adds. His problem, however, is “if the price of international credits (is) higher than the abatement costs in Australia then there will be no international credits available because they will be too expensive.”

Slight problem? No, major problem. Hence, Shorten’s assertion about the “same” climate change cost is “completely uncertain”. The moral here is that if you are invoking the work of a prominent economist to justify a central election claim — because you have no other evidence — then it helps to have spoken to him.

Labor’s arrogance as an election frontrunner is extraordinary. Shorten’s initial denial on superannuation taxes was more such evidence. Shorten presumably thinks the government cannot touch him on the costs of respective climate change policies. Yet he sounded rattled replying to journalists during his main doorstop on Thursday.

“You keep going on cost,” he said. “I want to say to you, let’s get this straight. What is the cost of taking no action? … You know, these News Corp climate change deniers and, of course, their ally, the Prime Minister, a coal-wielding, climate-denying, cave-dweller on this issue. They all say ‘look at the cost’. Well, they never mention the cost of extreme weather events, do they?”

McKibbin, significantly, holds no brief for the government. Asked which side has the more credible policies, he says: “I would say it is a line ball. It really depends upon the policies implemented. Having said that, Labor appears to be more committed and more ambitious to deal with the climate issue, and that is an important part of the policy design.”

McKibbin warns it is “enormously important (to have) a bipartisan and flexible policy in order to generate fresh investment and benefit from new technology”. Yet this campaign reveals no end to the domestic culture war over climate change, with the grief this will bring to households and business.

It is noteworthy the Greens say they will oppose having international permits in any Labor scheme, with spokesman Adam Bandt saying the ALP must “give up” on such permits — suggesting more trouble in the Senate if Shorten forms a government.

Scott Morrison’s campaign argument is that Labor’s targets will damage the economy, thereby reinforcing the Prime Minister’s overarching attack on Shorten’s tax, economic, spending and industrial relations policies. But Shorten has a powerful pitch — he campaigns as the only major party leader prepared to take decisive action on climate change.

The McKibbin 2015 analysis came in two reports — the first on international action and the second on Australian action under different scenarios. Labor has a problem but it can also take heart from the conclusion: its higher targets have a higher economic cost but the difference is manageable.

McKibbin modelled four scenarios with emissions reduction targets by 2030 of 13, 26, 35 and 45 per cent. The report says: “A post-2020 target will cause a small slowing of economic growth. By 2030, all impacts are no more than 1 per cent of GDP.”

He found that under all four scenarios average annual GDP growth would be above 2 per cent.

The conclusion was that the government’s 26 per cent target saw the cost to GDP of 0.58 per cent by 2030, compared with a 1 per cent GDP cost under the 45 per cent Labor target.

“The difference in GDP between the 1 per cent and 0.6 per cent is about $60 billion,” McKibbin says. “And that $60bn figure is not a major impost on a $2 trillion economy.” It is not a major impost, but it is an impost.

The point is that the cost difference between the Coalition and Labor targets is material and is upwards of twice as large under Labor. Having endorsed the McKibbin model, Shorten has to live with the consequences. Did he know what he was doing? Surely not.

McKibbin says: “If you use international permits then it is possible to reduce the cost by 50 per cent” — the proposition Shorten has seized upon. But the McKibbin qualification — and it is a big qualification — comes at this point: “That depends upon the price of such permits” — and McKibbin warns that enters the zone of never-never-land uncertainty, to borrow a Labor phrase.

There are three other fundamental features that arise from the McKibbin analysis. First, McKibbin found what most other studies have also concluded, namely that “Australia and Canada face larger economic impacts than other developed economies, including the US and EU, in achieving similar emissions reductions relative to a historical base year”.

That is, climate change action has a greater cost for Australia, which, by implication, raises the question: what is the justification for those politicians in demanding high Australian targets or asking the Australian people to carry a greater burden than people in most other developed nations?

Second, McKibbin says the economic harm to Australia arises mainly from what the rest of the world does — not what Australia does. He said in 2015: “The impact on Australia from the Paris Agreement largely depends on the actions of the rest of the world in reducing their demand for our fossil fuels and our carbon-intensive exports. Around 80 per cent of the loss in GDP in Australia is caused by the policies of other countries.”

This assessment comes in McKibbon’s first 2015 report on the international system, and this finding of the GDP damage to Australia is separate from his second report, which looks at the GDP damage arising solely from various scenarios that Australia adopts.

In a recent opinion piece McKibbin warns that the GDP damage from global restructuring could be significant for Australia. He suggests a reduction in real wages relative to trend of about 2-3 per cent by 2030. He says GDP by 2030 is estimated “to be 2 per cent lower than otherwise, of which 0.4 per cent of that is due to Australia’s policy”. In short, the climate change impact on this country from the rest of world will be serious. Our economy is exposed because of its fossil fuel nature.

Third, McKibbin says, looking at Australian decision-making, that policies are probably more important than the targets. “What matters are the policies that both parties use to reach their targets,” he says.

By implication, this is a critique of the Coalition for the past five years, given its chronic inability to agree on policy.

Morrison, who has campaigned strongly during the past week, tried to make a virtue of such chaos. Campaigning in Tasmania, he said: “See, we’re not going to have an emissions intensity scheme. We’re not going to have a carbon tax. We’re not going to have a carbon price. That’s not what we’re proposing.”

The government is left with its re-funded and renamed Emissions Reduction Fund with its $3.5bn budget to purchase emissions reductions with taxpayer funds. Labor, with its range of policies, looks far better equipped to deal with climate change but that’s essential given its higher 45 per cent target.

Whenever possible the government refers to the climate change report from BAEconomics led by Brian Fisher, former head of the Australian Bureau of Agricultural and Resource Economics, whose recent analysis contrasted the government and Labor targets.

The report found the government’s 26-28 per cent target would result in the economy growing at 2.8 per cent a year over the decade, compared with the trend of 2.9 per cent. It found cumulative GDP losses at $69bn, with the average real yearly income for a full-time worker to be about $2000 lower than trend and about 78,000 fewer jobs.

By contrast, it found under Labor’s 45 per cent target that the economy would grow at 2.3 per cent over the decade compared with the 2.9 per cent trend. This meant cumulative GDP losses of $472bn, and a fall in real annual wages of about $9000 a year by 2030, with job losses at 336,000.

Morrison rejected the report’s findings for the government but accepted them for Labor. He said the Fisher report was based on an economy-wide carbon price and this was not government policy.

Given the discrepancies between the McKibbin and Fisher results, it is timely to take heed of McKibbin’s warning: “There needs to be a healthy debate on the economics of climate policy and not an attack on the credibility of any model builder. Yes, the models will disagree — but a bad model with transparent assumptions is better than arbitrary analysis based on wishful thinking.”

Shorten was right when he said the climate change debate in Australia over the decade “has been dysfunctional and dishonest and divisive”. Labor has had the courage to run on ambitious targets but it has an obligation to put the economic consequences of its policies to the public.

The Opposition Leader said that “in climate change there will never be enough figures to satisfy the climate sceptics”. Forget the sceptics. This election is not about the sceptics. Labor proposes a radical policy change certain to have a far-reaching impact. It needs to satisfy the public. Voters are entitled to know the economic impact of Labor’s policies, and to not be treated as fools.

The government has done an impressive job treating them as fools with its own policy gyrations during the past four years.

“I don’t think either side of politics has the necessary
long-term policy to effectively make deeper cuts beyond 2030, if this is what is required,” McKibbin says.