Despite the politicking, Australia should ratify Kyoto sooner, not later

On World Environment Day this year, Prime Minister Howard declared that it would not be in Australia’s interest to ratify the Kyoto Protocol on climate change. However, his government still insists that it intends to reach the target set under the agreement. What makes these statements extraordinary is that they were made before the economic assessments of ratifying have been completed and released.

While this ‘politicking’ may have been vaguely excusable in a global environment where the Protocol seemed unlikely ever to come into force, by the time the statements were made this was already not the case. In the previous week, Japan and all the countries of the European Union had ratified, bringing the Protocol within range of becoming operational. At the time of writing, 76 countries have ratified, accounting for 36 per cent of developed-country emissions. If Russia and Poland ratify, as they have stated they will by the end of this year, the Protocol will come in to force.

By the end of this year, Australia could find itself locked outside a carbon-constrained framework that includes the bulk of our trading partners. Although the USA, our largest single trading partner will not be involved, the EU, Japan and South-east Asia, who will most likely be bound by the treaty, together form a far larger bloc.

If the Australian government truly does intend to reach its Kyoto target, it would be far easier to do so from inside the Kyoto regime, with all the benefits it entails. From outside the regime, Australia could not take part in the mechanisms of carbon trading, International Emissions Trading (IET), Joint Implementation (JI) and the Clean Development Mechanism (CDM) with Kyoto Parties. This could only make the cost of meeting the 108 per cent target even higher, something readily recognised in many economic analyses, including those by ABARE.

Many economic analyses to date of the cost to Australia of ratifying the Protocol have been portrayed as resulting in dire economic consequences. ABARE’s original modelling in 1997 formed the basis for Australia being granted the 108 per cent target, one of only two countries to receive an increase. Yet that modelling had serious defects.

First, it was exposed that a fee of $50,000 had to be paid in order to have a place on the advisory panel who designed the assumptions underlying the model. Not surprisingly, the panel was dominated by the fossil fuel lobby. Second, the modelling itself made some extraordinary assumptions, which significantly distorted the results, including that 60 per cent of Australia’s electricity supply would come from renewable sources by 2020. As desirable as this might be, it is clearly an extremely high-cost scenario that was obviously going to paint a gloomy picture.

Despite the clear limitations of this economic modelling, closer analysis reveals that the results are only as bad as people want to make them sound. For instance, under the ABARE model referred to above, 85 per cent of Australian industry would benefit or see no net economic impact as a result of meeting Australia’s greenhouse gas emissions reduction targets, even allowing for the unrealistic assumptions. This is rather different to what the government told us.

Since the findings were announced, the Australia Institute has put the ABARE figures into a perspective which shows they are not at all to be feared. ABARE argued that reaching our Kyoto target would mean a 0.18 per cent reduction in GNP by 2010. Clive Hamilton of the Australia Institute pointed out that given that GNP is likely to rise by 40 per cent by 2010, a 0.18 per cent drop against this would mean Australia would have to wait three weeks before reaching the same GNP as it would without Kyoto.

Losing faith in government modelling, progressive industry groups such as Environment Business Australia (EBA) have commissioned their own modelling. This move has been driven by the very real concern that Australia’s position on Kyoto is already losing us business deals with far-sighted companies looking to secure their future in a carbon-constrained world.

The EBA recently released a report arguing that ratification would be a vital impetus for the development of sustainable industry in Australia. They argue that ratification would help with the modernisation of the Australian economy, would improve our global competitiveness and would build new markets in Asia. Importantly, not ratifying would exclude us from these developing markets.

The Australian EcoGeneration Association is another progressive business association arguing that the domestic regime put in place by the Federal Government is failing to deliver. The Association recently reported that the 2 per cent renewable energy target is likely to provide a windfall to pre-existing large hydroelectric power stations and not assist the development of new renewable energy industries. Without the vital overseas investment that the Kyoto regime would guarantee, Australia’s world-class renewable energy and energy efficiency industries are likely to move offshore or risk losing their competitive edge.

Other voices in this domestic dynamic on ratification include the CEO of BP Australasia, Greg Bourne. In the lead up to the Federal election last year, Bourne publicly called for Australia to move ahead with greenhouse gas emission reductions, arguing that ratification would create rather than cost jobs. Additionally, late last year, John Standford, Executive Director of Allen Consulting, long-time critics of the Protocol, noted that ratification would involve "little economic hardship for Australia". Then there are the new analyses commissioned by the Environment Minister, Dr Kemp, this year, designed to take a fresh look at the economics now that Kyoto is looking like a reality, but which the Prime Minister so wantonly pre-empted.

Without ratifying Kyoto, Australia will find it far more difficult to slow its emissions growth and risks losing important investment opportunities.

Finally, it is important that we consider what will happen after Kyoto's first commitment period. Australia was given a very easy target at the Kyoto negotiations in 1997. If we ignore this target and stay out of the regime, we’ll be in a very poor negotiating position for the next round. If much of the developed world has already moved to slow or halt their emissions growth by 2012, cheap emissions reductions will not be so abundant. There can be little doubt that it will be cheaper in the long run to reduce our greenhouse emissions sooner, rather than later.