Weighing the benefits of global action on climate

The stark findings of a new report into the cost of the Paris Agreement provide a reality check to politically driven arguments about where Australia’s economic interests might lie. The Brookings Institution report makes it clear that climate change action has both costs and benefits, and that the costs will be disproportionately experienced by Australia relative to other nations.

The results underscore something first acknowledged by the Keating and Howard governments — that Australia is particularly exposed to global climate agreements. They highlight the long-held position of The Australian that domestic actions should be measured against costs and benefits.

According to the Brookings report, all regions except Australia and OPEC will experience net benefits from the Paris Agreement. China stands to gain the most. While Australia may be responsible only for less than 2 per cent of global carbon dioxide emissions, the impacts will come largely from actions that are outside of our control. The report finds that as the world turns away from fossil fuels, Australia can expect a large fall in investment, a significant capital outflow and the largest depreciation of the real exchange rate of any nation. The implicit tax on Australia’s exports will cause a substantial loss in terms of trade. Employment will fall before rebounding as workers shift from fossil fuel industries into other sectors of the economy. Real wages will decline.

The assumption that global demand for Australia’s fossil fuel exports will fall is yet to be borne out by experience. But a sobering message is that the Brookings analysis is based on existing Paris Agreement pledges that would not see global CO2 emissions decline in absolute terms relative to 2015 levels, let alone follow a path consistent with a 2C stabilisation scenario.

Faced with these facts, the temptation might be for Australia to follow the US and withdraw from the Paris Agreement. The report says withdrawing would provide some economic gains. But it also says that once climate and domestic co-benefits, such as better health outcomes, are taken into account, Australia would be worse off if it withdrew. In addition, the Brookings analysis does not include the possibility of global political consequences or economic retaliation against countries that withdraw, making the suggested benefits of an exit overly optimistic.

Australia walking away from the Paris Agreement would have little impact on global carbon emissions. But because our exports of fossil fuels are taxed whether or not we participate, there would still be a significant impact on GDP. These losses occur because exports of fossil fuels are subject to the CO2 tax in other regions, and the revenue is collected outside Australia. This makes it imperative that Australia acts wisely where it retains control — domestic policy. The starting point should be not to add to economic hardship by rushing into actions that lift energy prices and make Australia less competitive than it otherwise would be.