How far does the Kyoto Protocol get us?

I started my engagement with the climate change issue over 15 years ago. Since that time the largest change in the debate has not been in government or academia, but in the response of industry, particularly the large companies.

With Russian ratification of the Kyoto Protocol we are about to enter into a new international phase of activity to address climate change. The door is now open for carbon trading and this will serve to increase private sector engagement in the climate change issue. But the Protocol is, at best, a first step.

There is a growing consensus that there is a need for deep cuts in greenhouse gas emissions from Australia. The Australian Climate Group as a first-cut has proposed a 60 per cent reduction on 1990 emissions by about 2050.

This was followed shortly thereafter by Dr Robin Batterham, Australia’s Chief Scientist, arguing similarly that deep cuts in Australia’s emissions would be required.

The Australian Climate Group’s thinking was not the result of detailed gazing into some kind of modelling crystal ball but derived from insight derived from some powerful well-established understandings that have emerged from the expert community over recent years.

The first was the understanding that the earth system will take decades, in some respects centuries, to return to a near-stable state even after emissions have been reduced and concentrations (that is the amounts) of greenhouse gas in the atmosphere have levelled out.

At the same time, large-scale industrial investments such as power stations, metal smelters and oil and gas developments represent long-term assets that effectively also embody a commitment to continued emissions. “Climate system inertia” and “technological lock-in” are in some senses the two horns of the climate change dilemma.

Second, there is strong evidence that global warming is not only well underway, but that impacts of that warming are starting to appear, even though the consequences of these impacts on human societies and development are still poorly understood.

In this respect, part of what alarms climatologists is that while a few degrees of global warming may not sound very much, it is. The difference between an ice age and pre-industrial temperatures might be as little as 4 degrees Celsius. Without the natural greenhouse effect planetary temperature would be too cold to sustain life. Below zero degrees all fresh water is frozen. The average temperature of the earth is currently about 15 degrees Celsius. It is within this context that climatologists argue that even a small change of a degree or two over the relatively short period of a century is dramatic.

Another consideration is that any pragmatic assessment needs to accept the nature of the development gap between the developed and developing world. It needs to recognise that some economies of large developing countries have already generated a substantial head of steam.

Irrespective of largely technical debates centring on whether the gap between rich or poor will narrow, and how this should be represented in scenarios of future emissions, there seems to be little doubt that greenhouse gas emissions from developing countries will continue to grow, at least over the next 30 years.

Current global greenhouse gas emissions are already environmentally unsustainable. Consequently if concentrations are to be stabilised the developed world will be required to reduce emissions more deeply than the developing world will need to moderate its emission aspirations.

The fourth consideration is related to the economic growth and development of Australia. Continued dialogue with parts of industry - especially those that are involved in Australia’s key economic development areas such as electricity generation, financing, oil and gas development - reinforced the idea that the current policy uncertainty is also creating investment uncertainty, and perhaps counter-intuitively increases the risk of limiting economic development.

Identification of a longer-term purposeful target provides a general signal that is needed to guide investment decisions. The trajectory for the future needs to be clarified. The current uncertainty over the timing and depth of a carbon-constrained future simply hampers investment decisions.

Creating innovations to reduce emissions provides business opportunities. Opportunities to reduce Australia’s emissions at low cost remain. Rather than demanding that less developed countries increase their burden of abatement so that Australia’s task is less, the nation’s economic interests might be well served through grasping opportunities to reduce national emissions while encouraging appropriate economic development elsewhere - in China for example - thus growing markets for Australian exports.

The developing world, including China is also becoming more concerned about the impacts of climate change (retreating glaciers, more frequent flooding), and post Kyoto could be another factor to drive a market for technologies and products which reduce greenhouse gas emissions.

There is clear and near universal agreement that the most economically efficient method of achieving greenhouse gas reductions is via the implementation of an efficient trading scheme. While economists might argue about the best design for a trading scheme, there appears to be few willing to argue that this is not part of the policy mix.

My own view is that emissions’ trading is more important than simply finding the least-cost solution to emissions reduction.

Scientists and technologists, no matter how well-intentioned or how knowledgeable, are not going to solve the climate change problem. In part we have a problem of entrepreneurship.

We need to find the policy mix that will produce incentives to find innovative emission reductions from the economy. There is increasing evidence that the key to economic success is innovation combined with entrepreneurial skills. Emission trading provides financial incentive for greenhouse abatement provided the approach is pragmatic with the lowest possible transaction costs.

The final consideration was the argument that in accepting the need for deep cuts, there is increasing evidence that there are genuine benefits in acting sooner rather than later. Conventional economics often produces the opposite conclusion: why?

Leaving aside the fact that much of the damage of climate change may not be captured by economics at all, that is it represents an “externality”, there is also the likelihood that the damages or costs from climate change may be occurring sooner than people believe.

Even in the case where it is not possible to attribute the weather-related damage to climate change as opposed to natural climate variability this does not mean that such costs are not occurring. It simply means that we cannot attribute these costs properly. The implication of this is that the discount rates that are being applied to economic assessments of climate change damage are incorrect. This is not an esoteric issue. We cannot, for example, determine how much of the costs of the current drought and water shortage can be attributed to climate change.

Furthermore it is little appreciated that we are facing asymmetric risk. The risk of delaying action is arguably greater than the downside cost of early action - at least on a global scale.

Without earlier action to reduce emissions it becomes progressively impossible to stabilise greenhouse gas concentrations at lower levels. This is well understood by scientists who have calculated the relationships between emissions and the options available for stabilisation of greenhouse gases at nominated levels. This means that should evidence emerge that a CO2 concentration of 450 part per million (estimated to lead to a further warming of 1.2 to 2.3 degrees Celsius over the next Century) will produce unacceptably “dangerous” or costly impacts we may find ourselves faced with enduring those costs whether we like it or not. The world may have crossed the Rubicon unwittingly.

Our knowledge of the global carbon cycle makes it inevitable that Australia needs to acknowledge that deep cuts to greenhouse gas emissions will be required as we chart our course through this Century.

Regardless of the niceties of the Kyoto Protocol, which does not apply post 2012, it is clear that we need to set ourselves on a course for reductions much greater than is likely to come out of the current multi-lateral system.