On emissions, cleaner costs more than dirtier

by Tony Wood

Published by the Australian Financial Review, Wednesday 8 May

Labor seems to have decided that attaching specific costs to its climate change policy objective – to reduce greenhouse gas emissions across the economy by 45 per cent below 2005 levels by 2030 – was difficult to do and unnecessary in the overall campaign. Securing the moral high ground on climate change would be enough.

Not surprisingly, the Coalition parties decided to focus all their attention on proving Labor’s target is economically irresponsible – and they needed some modelling to do that.

Labor would be well-served by being clear on two things. First, a 45 per cent target will cost more than the Coalition’s 26 per cent target – cleaner costs more than dirtier. So, Labor must prosecute the case that justifies the higher target. Second, despite Labor’s claims, of course a 45 per cent target can be modelled using the sort of tools that Brian Fisher of BAEconomics uses. But the results should not be taken as a forecast of the future costs that would arise from meeting that target.

The Coalition has its Emissions Reduction Fund that may very well deliver more, reasonably cheap reductions, but it’s paid through the Commonwealth budget. Further, the Coalition has yet to table a set of policies that credibly its 26 per cent emissions reduction target. The Liberals’ rejection of the use of international credits seems extraordinary for a party usually in favour of free trade. And finally, there’s the reported and surprising claim by Prime Minister Scott Morrison that the Coalition’s plan has no impact on the economy because taxpayers will foot the entire bill.

The modelling dilemma arises because the results of economic models are determined by the assumptions. This means that an economic model can be valuable in comparing the likely impacts of two different policies under the same set of assumptions. But even more valuable is that the modelling can help focus the attention of decision makers on the plausibility of the assumptions to which the outcome is most sensitive. For example, since Labor’s policy requires more renewable energy and significant use of international credits, then the assumed future cost of each will strongly influence the comparison.

There is another complication. In 2019, neither of the major parties is proposing a single, economy-wide policy to achieve their emissions reduction target. A policy framework with separate, vaguely defined approaches for each sector of the economy is much harder to model.

It is worth recalling that neither John Howard nor Kevin Rudd were called upon to show the modelled results of their 2007 election proposals. Details emerged only after the Labor Government did the hard yards on specifying what its policy would look like. And even then, it seemed Labor spent just as much effort on the name: The Carbon Pollution Reduction Scheme.

So, how can voters assess their choices on one of the key issues for this election?

The major parties seem to prefer an unproductive debate on cost, while the Greens have arguably the best policy (an economy-wide carbon price).

Labor is happy to talk costs because if the debate is focused on that, Labor can avoid having to explain how it can deliver a 45 per cent target within the straightjacket the party has made for itself (exclude agriculture, stay vague on transport, offer to negotiate protection for big exporting industries, and impose 45 per cent on electricity only).

The Coalition may have more modelling ready to reveal before the election, but don’t expect any more credibility than we’ve seen so far. As Josh Frydenberg once reminded us, economic modelling was invented to make astrology look good. The Coalition parties are forced to talk about acting on climate change, without really embracing the consequences of that position. They must maintain focus on the cost of Labor’s target since they really can’t object to the policy itself – after all, the National Energy Guarantee was theirs.

Industry is generally staying very quiet. They just want to get something that looks like credible climate change policy, even though they will negotiate hard over protection from the target and its costs.

For the voters, neither side is offering a perfect, bullet-proof solution and the quoted numbers don’t help. It comes down to which has greater credibility to implement climate change policy that delivers the right environmental outcome at affordable cost.