Making progress in the combat for climate policy

by Tony Wood

This piece is republished with permission from Griffith Review 71: Remaking the Balance, edited by Ashley Hay.

THE PHYSICAL AND scientific evidence of human-induced climate change continues its depressing march towards greater evidential reality. Yet emissions continue to grow and policies around the world remain short of what is needed to address the problem. While some countries are taking urgent action to tackle this more existential crisis, Australia is mired in a debate between a gas-led or a renewables-led recovery from the Covid recession – the climate war continues.

Perhaps a pragmatic review of the status of our climate change policy debate and the challenges ahead can shed some light on possible ways forward for politicians from both sides, and for Australians in general.

GLOBALLY, NEITHER REDUCTION targets for emissions nor progress towards hitting those targets is consistent with the Paris Agreement. For Australia, as a signatory to the agreement, this presents a clear and present danger to our international credibility and domestic policy direction. The key objective of the agreement is to limit the increase in the global average temperature to well below 2 degrees Celsius above pre-industrial levels, and to pursue efforts to limit the temperature increase to 1.5 degrees, recognising that this would significantly reduce the risks and impacts of climate change. The global community, including Australia, is expected to update its targets and policies in the next few years. The Australian Government has also accepted the recommendation of the 2017 Independent Review into the Future Security of the National Electricity Market that it ‘develop a whole-of- economy emissions reduction strategy for 2050’ by 2020. Last September, the Minister for Energy and Emissions Reduction, Angus Taylor, announced that the government is committed to ‘completing the development of Australia’s long-term emissions reduction strategy before COP26’. COP26 is the next international conference on global climate change, now scheduled for November 2021 in Glasgow.

Australia has benefited from its mineral and petroleum resources for many decades. We now export about twice as many emissions through our fossil fuel resources as we produce domestically, and these exports are a valuable source of revenue. As the world moves to reduce emissions towards the global objective, there are obvious consequences for our economy and for jobs in carbon-intensive industries. Australia is not well prepared for such consequences.

Domestically, Australia’s national carbon accounts provide the hard numbers that set out our challenge. Australia’s emissions have fallen from 611 million tonnes of carbon dioxide equivalent in 2005 to 513 million tonnes in 2020, a reduction of 16 per cent. Government projections published in December 2020 show that this average annual reduction of 6.5 million tonnes is expected to slow to an annual average of only 3.5 million tonnes over the next ten years, leading to a low of 478 million tonnes. To meet the current Australian commitment of a 26 per cent reduction by 2030 – that is, annual emissions of 452 million tonnes – more action will be needed.

All Australian states and territories, and many businesses, have already committed to targets of net-zero emissions by 2050. Yet targets without actions and actions without national co-ordination are likely to be at best highly inefficient. Prime Minister Scott Morrison will not make such a commitment at the federal level, but has suggested such a target is absolutely achievable. Achieving a target of net zero by 2050 would require a major increase in average annual reductions to about twenty-four million tonnes year on year.

The good news of the past five years is that emissions from the electricity-generation sector have been consistently falling, and that sector is on track to over-deliver its proportionate (one third) share of the 2030 target. This outcome flows mostly from federal and state government subsidies for utility-scale wind and solar farms and rooftop solar, and from the closure of coal-fired power plants.

The bad news is that emissions from other sectors (the remaining two thirds) – including transport, agriculture and industry – are either flat or growing, and there are no policy mechanisms to drive reductions in these sectors except for the Climate Solutions Fund. This fund, a voluntary offset program that allows for carbon credits to be created, bought and sold, has been a relatively efficient way to secure limited emissions reduction through a tendering process. However, it is insufficient by itself and its very existence requires ongoing funding from the Commonwealth’s budget.

IT MAY BE slow, and it’s certainly not obvious, but the Prime Minister has been repositioning on climate change. In this, he is responding to the step increase in business and community demands. Businesses are responding to pressure from institutional and retail shareholders, regulatory authorities and the growing expectation that action on climate change is inevitable. Community concerns ramped up after the 2019–20 summer bushfires. The recession triggered by COVID-19 may have partly blunted the policy imperative, but it will be there when that recession subsides.

The Prime Minister’s strategy has two arms. The first is to point to the falling emissions of the past fifteen years to support the argument that the government’s 2030 target is achievable and, by implication, that any future targets will be as well. The problem with this claim is that the past success was driven not by current policies but by not-to-be-repeated land-use changes, the now-finished Renewable Energy Target (RET) and coal plant closures. And even if the 2030 target is achieved, the post-2030 challenge will be tough – not only in the electricity sector, but also in the sectors that generate the other two thirds of Australia’s emissions.

The second arm of the Prime Minister’s strategy builds the case for future emissions reduction on technology and not policy, thereby avoiding setting the firm targets that are poison within the Coalition. This is the political rationale for the Technology Investment Roadmap, released in September 2020. Presumably, the Prime Minister feels he must focus his narrative on a positive technology story without quantifying the costs of either these actions or of inaction. His argument is partly justified by the fact that it is sound economic policy for governments to support early-stage, low-emission technologies that have real cost-reduction potential. The limits of this approach will become apparent when the challenge turns from technology development to large- scale technology deployment.

The government is constrained by its own past political success in killing carbon pricing mechanisms – even though existing policies it has overseen, such as the Climate Solutions Fund and the RET, incorporate explicit and implicit carbon prices, respectively. As a result, the Prime Minister’s language has moved considerably to embrace narratives of lower emissions through economically efficient, low-emission technologies. On this journey, gas retains an important role in providing energy that can be dispatched on demand to balance wind and solar energy. In that context, however, his enthusiasm for a gas-led recovery is at best a distraction or at worst will lead to assets with no value in the future and more, not less, greenhouse gas emissions.

This is a high-wire act for a pragmatic leader who is surely intent on not joining the political corpses of other Australian political leaders on the climate war’s battlefield. Yet Scott Morrison’s ‘selling’ job is easier than that of Anthony Albanese.

THE OPPOSITION LEADER has almost certainly made the right political call to embrace the target of net-zero emissions by 2050. He is on the right side of the broad Australian debate. Yet this call brings its own challenges. Labor probably has only until about the middle of 2021 to develop a clear and compelling economy-wide policy framework through which to achieve that target.

Labor must provide enough substance to be credible but avoid getting bogged down using economic modelling as a precise forecasting tool. Policy- makers are often expected to provide economic analysis to assess the future impact of their proposed policies on issues such as the average cost of living. However, while this may be reasonable within the typical forward estimates period of four years, to suggest precision – and then defend such precision decades into the future – is a fool’s errand.

Labor must also detail the role of government in supporting structural adjustment as the lower emissions economy emerges. In the 2019 federal election there were seats where large numbers of well-paid workers, particularly in carbon-intensive industries such as coal mining, were more concerned about losing their jobs than about tackling climate change – and they were not placated by Labor’s vague promise of a ‘just transition’ to a new economy.

Labor seems captured by its past political failure with carbon pricing, such that Albanese argues a carbon price is now unnecessary. At the same time, he sees the abandoned National Energy Guarantee as the sort of policy he could support, without apparently recognising that it would have included a form of carbon pricing and trading.

Albanese has one big advantage over former Labor leader Julia Gillard, who as prime minister introduced a so-called ‘carbon tax’ – he can harness the widespread support across many areas of industry and the community for a target of net-zero emissions by 2050. His challenge is to build a firm policy framework on that base.

As this summary of the current positions of Australia’s major parties strongly suggests, the problem is not the economics of climate change. Nor is it a battle of ideology about the need or otherwise to tackle climate change as the great moral challenge of our time. The problem, for both sides, is one of classic naked politics.

The current policy stand-off is unlikely to change until the Labor leader believes he can win an election with a credible climate change policy, or the Coalition Prime Minister believes he will lose an election without one.

The COVID-19 pandemic clearly shows that governments can galvanise in response to an immediate big threat and can secure support for that response from the community, business and across the political spectrum. Common purpose means that what normally act as financial constraints can be removed with little resistance. It is true that providing an economic stimulus after a sharp recession can also secure support.

The Australian Government’s fiscal policy decisions in 2020 were designed to stimulate the economy, get people into jobs, and support the sectors and people hardest hit by the economic lockdowns. These actions necessarily have a short-term focus, but they should be consistent with the longer-term goal of a net-zero emissions economy. The concept of a gas-led recovery is a poor fit.

EMISSIONS MUST BE reduced across the economy, and the objective should be to do so at the lowest cost. Intriguingly, both sides of Australian politics now agree on this core premise. Business groups and economists recognise that an economy-wide carbon price is the best way to meet this objective, and there are pathways that we could follow. Yet, at least for now, politics dictates that any such policy is beyond reach.

Other approaches have been followed, and we can learn from them. Over the past decade, we have seen two markedly different attempts towards a national climate change policy with some form of emissions-pricing mechanism. The Gillard Labor government introduced a fixed-price emissions trading scheme that existed from 2012 to 2014. Tony Abbott successfully labelled this scheme as a tax and then made ‘axing the tax’ a key part of his successful 2014 election campaign. Labor has not yet recovered from this defeat.

Greg Hunt, as Minister for the Environment in the Abbott government, established the $2.55 billion Emissions Reduction Fund (ERF, now relabelled as the Climate Solutions Fund) to pay directly for emissions- reducing projects, and the safeguard mechanism to avoid unconstrained emissions. Although criticised for funding some projects that do not deliver additional reductions, the ERF has contracts to deliver about 200 million tonnes of reduction at a cost of well under $20 per tonne. Projects include regeneration of vegetation, reduced emissions from landfill sites and changes in savannah-burning practices.

The safeguard mechanism was intended to ensure that emissions reductions purchased through the ERF were not displaced by significant increases in emissions elsewhere in the economy. It was intended to constrain the very biggest emitters (that generate more than 100,000 tonnes per year of carbon dioxide equivalent) from exceeding agreed baseline levels. This mechanism has never been used as a real emissions constraint in the way its creator probably envisaged.

Sector-based policies have had greater success in delivering emissions reductions and surviving political battles. The RET was created as an industry policy to subsidise the growth of renewables and help drive down their cost. It has been so successful in growing renewables’ share of the sector that its specific role is unlikely to be renewed on the grounds that it is no longer necessary. In a similar vein, the ACT and several state governments have programs to support renewable energy within their boundaries. They too have delivered.

Governments have also provided direct funding for low-emissions projects through the Australian Renewable Energy Agency and the Clean Energy Finance Corporation. This approach can push technologies down the cost curve and, as indicated above, there are sound economic reasons to support early-stage technologies. Yet this approach provides neither the necessary carrot nor the stick that drives their deployment to achieve either economy-wide or sector-specific targets.

Climate-change policies, the rejection of which provides political opportunity – or those that challenge the strongly held views of those with influence – are unlikely to be successful. Sector-based approaches and/or having governments pick winners can reduce emissions but will always come at a higher cost than giving the incentive to the widest possible range of stakeholders.

In the absence of first-best policy, progress can and should still be made, messy and inefficient though it will be.

At a federal level, the Coalition government could build a framework that connects the 2020 Technology Investment Roadmap, the Climate Solutions Fund, the safeguard mechanism and a 2035 target to form its proposed long- term emissions-reduction strategy. A combination of commercial obligations, sector-based targets and stronger evidence – even alarm – could emerge before the next federal election, and this could prompt the Prime Minister to adopt a more substantial policy. There are elements of this framework that Labor could support while retaining its clearer commitment to a 2050 target and more concrete policies in government.

Labor could craft a compelling narrative for real action on climate change that incorporates a move away from fossil fuels and addresses the real concerns of workers in carbon-intensive industries. If it can do that, a policy mechanism that delivers an economy-wide price on emissions is more likely to be successful. In that case, a Liberal Opposition leader would be likely to provide enough bipartisan support for such policy to stick.

Renewables will not deliver the full potential of their efficient level of emissions reduction without some form of policy driver, and barriers such as connection to the transmission grid remain. State and territory governments have not yet developed policies to meet their own emissions-reduction targets and their intentions to do so are unclear. A form of state government- supported national climate policy, such as the National Energy Guarantee for the electricity sector, seems to have been killed off by the federal government’s bilateral deals with individual jurisdictions. We are left with a mixture of renewable energy support mechanisms and coal closure ideas. This is messy and inefficient, but at least it does no other harm to the long-term objective. And so, there will be progress. It will be lumpy – faster in some sectors  than others – and it will cost more than it should. But there will be progress. Australia’s best hope for the near term is a combination of sector-based, technology-driven, third-best policies that will deliver progress for a while. Yet this approach will become less efficient because emissions will not be reduced in the lowest cost areas of the economy. Furthermore, emissions from sectors that remain uncovered will progressively become barriers to the overall objective. Long-term environmental and economic success will depend on returning to first-best policies when we learn from the consequences of the alternatives.

When the political need is for good policy, effective policy-makers respond to deliver great outcomes. However, it is a truism that, most of the time, political opportunism trumps good policy, and there are few better examples than Australia’s climate war. Despite the current impasse, there is a real prospect of building pressure for a political response to climate change. The question is whether, this time, policy-makers can respond to deliver a first-best policy solution in the interests of all Australians.