A brilliant career, but certainly not perfect

ROSS Garnaut's influential forecasts on climate change are those of an economist, not a scientist, and may be as rubbery as some of his past forecasts.

BRILLIANT, successful and these days seemingly omnipresent, Ross Garnaut is portrayed as the nation's honest broker in the complex scientific, economic and political considerations of climate change policy.

After a distinguished career that has seen significant contributions to public policy formulation through more than three decades, Garnaut finds himself, at 64, more pivotal than ever. As he grapples with his responsibility it is worth observing he lacks one quality also missing in every other economist: infallibility.

In previous incarnations Garnaut has made recommendations for the Australian economy that appear the polar opposite of his present direction.

For instance, he strongly advocated that one of the great advantages the Australian economy should exploit into the future was our ready supplies of cheap, presumably coal-fired, electricity.

What's more, he suggested that pollution problems from emissions in countries such as China created another advantage for us because we would be able to handle the pollution more easily here.

Our economic future, he argued, could be found in fostering more processing and greater emissions in Australia rather than fuelling them elsewhere through exporting raw materials.

At a recent dinner party a guest who impressed me with her detailed knowledge of the climate change debate was disbelieving when I insisted the government's prominent climate change adviser, Garnaut, was not a scientist but an economist.

It has become a running joke in climate change debates to mockingly run down anyone's opinion if they cannot lay claim to being a climate change scientist. The point being that few of us belong to that cohort and we are all entitled to our opinions.

Still, Garnaut holds an elevated position in the debate and if there is an impression abroad that he is a climate scientist rather than an economist, that is unfortunate.

We need to be clear that he has not been asked by the government to investigate whether there is a climate change problem or whether we should reduce carbon emissions. Rather, he accepts and summarises the findings of others on the science, and provides the economic and policy advice on how to reduce Australia's carbon footprint.

In his first report in 2008 the science was summarised in this way: "The review takes as its starting point, on the balance of probabilities and not as a matter of belief, the majority opinion of the Australian and international scientific communities that human activities resulted in substantial global warming from the mid-20th century, and that continued growth in greenhouse gas concentrations caused by human-induced emissions would generate high risks of dangerous climate change."

Three years later in his update, Garnaut had this to say: "Observations and research outcomes since 2008 have confirmed and strengthened the position that the mainstream science then held with a high level of certainty, that the Earth is warming and that human emissions of greenhouse gases are the primary cause."

So that, dramatically condensed, is the basis from which he has carried out his more relevant work on the economic options. Garnaut is being asked to provide policy advice to deal with climate effects a century from now. Even his short-term aim of reducing Australia's emissions by 5 per cent from 2000 levels has a target that is nine years away.

The influence of his policy prescription will be felt during the next two, three or four decades, shaping our realignment to a low-carbon economy and, presumably, helping to instigate a world energy mix based less on Australia's abundant fossil fuels and more on renewable resources.

Garnaut is far from alone in this challenge; academics, bureaucrats and politicians across the world are grappling with it.

But let's be frank; they are all dealing with a lot of guesswork or, shall we say, informed speculation, not just about the climate science but about medium and long-term economic assumptions. Australia is placing a great deal of faith in the Garnaut recommendations in a field that has always been inexact.

Make no mistake, the former economic adviser to prime minister Bob Hawke is an eminent Australian. Anyone who has followed or studied Australian economic and political developments during the past 30 years will be familiar with his name.

Garnaut has probably been most widely recognised for helping to convince the Hawke-Keating governments of 1983-96 to take the economically far-sighted step of virtually eradicating our tariff barriers.

This tearing down of the protective walls around the Australian economy, which has been taken up by Coalition governments too, has opened and globalised our economy. It was always going to create pain as well, especially in the manufacturing industries, the heartland of Labor's union base.

Which is why Garnaut's courageous advice on this prescription and Labor's embrace of it will always be lauded by economic and political historians. It has seen the demise of industries that could not compete with cheap imports but has opened us up to new opportunities and fresh investment.

Until he was co-opted into the climate change arena Garnaut's most influential work was his 1989 report to the Hawke government, Australia and the Northeast Asian Ascendancy. This is where he mapped out the free-trade agenda and more. Given his substantial influence in present economic policy development, it is a fascinating work to revisit.

This report was produced the same year the Berlin Wall came down, Beijing had the Tiananmen Square massacre and, unbeknown to most of us, somewhere someone (not Al Gore) was inventing the internet. Even now, Garnaut's work seems impressive. But as you would expect with picking economic trends decades in advance, it also got some things drastically wrong.

What he predicted correctly is the core of the report: that our geographic and economic complementarity with Northeast Asia would prove a great advantage. He was among the first to identify the importance to Australia of the economic rise of East Asia but even he could not have predicted how spectacular it was to become.

Garnaut also saw that largely untapped services, tourism and education exports would provide opportunities for Australia. He even promoted the implementation of a mineral resources rent tax that a junior diplomat called Kevin Rudd, who served under him in Beijing, would promote from the prime minister's desk two decades later.

But Garnaut, like just about everyone else, did misjudge the dimensions of the resources boom that was about to sweep across the Australian economy.

He suggested coal exports would expand and perhaps double during the coming decade, and talked about the "meagre fortunes" of coking coal exports, which he said would drop in value. As it turns out, coal exports have trumped all expectations. They doubled during the following decade and have increased more than three times in volume and seven-fold in value, with the growth expectations continuing upwards. Coking coal makes up the same tonnage as thermal coal and at double the value.

On iron ore it is a similar story. Garnaut predicted that after a period of stagnation export growth would resume at a "moderate rate", averaging a few per cent annually. But our iron ore exports have almost quadrupled in volume and increased more than 15 times in value.

In the past two decades our exports have expanded enormously, delivering a healthy trade surplus that Garnaut could only have dreamed of back then.

Even with the dramatic overall growth, coal has increased its share of our merchandise exports from 13 per cent to 18 per cent, and iron ore has surged from five per cent to 17 per cent.

The Garnaut report was optimistic about wool exports, suggesting that with some provisos the prospects were strong. Yet since then our wool exports have halved in value and dropped from nearly 10 per cent to less than 1 per cent of our merchandise exports.

The general thrust of the Garnaut recommendations was to force our manufacturing industries to embrace an export culture and, while exports have been dominated by resources in a way he didn't foresee, the evidence is that manufacturing has been far more successful than it otherwise would have been.

But another misstep was Garnaut's advocacy of hi-tech manufacturing development and even supporting, with heavy qualifications, the misguided idea of developing a so-called multi-function polis in Australia. The idea, taken up by the Hawke-Keating and South Australian Bannon Labor governments, was a humiliating non-event that cost taxpayers at least $100 million.

None of this is to question Garnaut's general competence; many of his forecasts were prescient. But it does show the fallibility he shares with all economists. And it highlights the danger of basing any irreversible policy decisions on long-term assumptions.

More embarrassing for the climate change adviser are his recommendations about the processing of our raw materials, which got special attention. Highlighting the aluminium industry, Garnaut talked up the opportunities for processing our minerals in Australia so we could add value and create jobs along the way.

This was especially important given the forecasts of only modest resources export growth. He suggested processing of our raw materials could make up half of what he called our export deficiency.

The report advocated, in particular, more Australian iron ore being smelted into steel for export. This predicted opportunity has manifestly not materialised, with steel exports stagnating while iron ore has expanded exponentially. What's more, it is the steel industry that feels most threatened by the government's carbon tax policies.

But this is where the real turnaround in Garnaut's recommendations is most evident. In 1989 he said Australia had some advantages to help us down the mineral-processing path. One was cheap energy: "Early stage processing typically uses electrical and other energy intensively. These inputs are available in greater abundance and a lower cost in Australia than in Northeast Asia but should be available at even lower cost." Of course, the abundant, cheap energy he was talking about was primarily Australia's ability to burn coal.

Another advantage he identified was our lack of pollution, which meant we could cope with increased emissions. Listing reasons processing was more suitable for Australia than Northeast Asia, he noted emissions "are difficult to manage well in densely populated environments". In fairness, recognising this advantage did not blind him to our environmental challenges: "The waste emissions that make raw materials processing unsuitable in densely populated Northeast Asian environments require careful management in Australia as well; high environmental standards will need to be set and enforced."

The report was delivered the year after the UN formed its Intergovernmental Panel on Climate Change. So the discussion of global warming had certainly begun and, anyway, Garnaut's report was clearly aimed more broadly at pollution issues rather than specifically greenhouse gas emissions.

This push for minerals processing in Australia has largely failed. Most of our resources are exported raw, then processed overseas, where the emissions are created. Under a carbon tax or emissions trading scheme this trend is likely to strengthen. The added costs of energy and emissions in Australia can only increase the incentive to process elsewhere.

So, through his climate change advice to the government, Garnaut seems to be advocating that Australia take precisely the opposite approach on minerals processing to that which he advocated in 1989. Our cheap energy and relatively clean environment apparently are advantages whose name can no longer be spoken.

In his fifth climate change paper, this year, Garnaut reflected on his underestimates of the China boom. "They were a long way beyond the published expectations of other analysts contributing to discussion of these issues," he wrote. "And yet they invariably fell short of the realities that have now emerged as history.

"From time to time through that decade, and through much of the 90s until the rest of the world began to catch up with the Chinese reality, I worried a little about whether I had been influenced into understatement by repeated criticisms of optimism."