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Environmental Economics Seminar Series
Department of the Environment, Sport and Territories, 1996
ISBN 0 642 24878 8
New South Wales Minerals Council
It is probably worthwhile saying, in opening, why I am interested in this particular topic. The NSW Minerals Council sounds as if it might be a bit on the sidelines. But, in fact, until recently the organisation was called the New South Wales Coal Association and my role, amongst many, is to represent the interests of the coal industry on climate change matters. I use the words 'climate change' and 'greenhouse' interchangeably. It seems to be common jargon.
I wish to put to rest one initial preconception: the coal industry - and, I think, business at large - is not opposed to taking proactive action on climate change. In fact, we are in favour of doing so. Like everyone else, we have no interest in achieving long-term environmental damage and degradation through failure to take appropriate action now. So Clive's point relating to examining how future generations might be affected by current policies is very much in the line of business. However, our interest is in making sure that the actions taken are sensible.
There is a great deal of divergence of opinion about the economic and scientific facts of the situation. That remains to be resolved. I am not sure whether everyone here would be familiar with the climate change convention. I make an assumption that people do have some working knowledge of the issue. The treaty itself was signed in 1992 and it now has an add-on of a kind, which is the Berlin Mandate. The latter is the instructions for the negotiations to enhance the treaty by 1997. This mandate will lead to a protocol, which is a legally-binding addition to the treaty.
What is the treaty about? It looks at the issue of potential climate change arising from things such as the burning of fossil fuels which generate carbon dioxide and which may enhance the global greenhouse effect. The big question is whether we have a problem. I think that is a matter of contention. The fact is that if we do not know whether we have a problem or not, or if we do not know the magnitude of the problem, we ought to do something about it. The convention urges us to take precautionary action against potential climate change. Business groups and green groups certainly take the view that action should occur; the question is what kind of action should it be.
The convention itself might sound like an environmental convention. After all, we are looking at potentially dramatic effects, such as rising sea levels and the subsequent loss of whole island states. In some cases, it is potentially about environmental and political survival; but really, it is much more about trade and economics than it is about the environment. That is really the most controversial aspect of the convention. We are seeing a whole re-run of the North-South debate in fairly explicit terms in what are supposed to be negotiations and discussions on an environmental treaty.
There is a great deal of desire by countries of the South to lay blame on countries of the North, and in doing so they still use these archaic terms like 'north' and 'south'. I must say I was surprised to see these still in vogue. There is a great desire to lay blame at the feet of developed countries for having created so much pollution which is, of course, causing so much potential dramatic climate change and environmental degradation. The countries of the South are saying: 'It is not our fault. You guys should fix it.' Suddenly we start to see the question of equity looming large in the economic debate.
In terms of context, there are various aspects of the convention. There is the issue of effectiveness. There is the issue of efficiency in fairly traditional economic terms. And there is the question of equity, as it is explicitly set out in the convention.
On the question of effectiveness, we would have to ask ourselves whether effectiveness and equity are linked in any way. The answer is that they are. The convention says that its objectives are: '...to stop dangerous, man-made interference with the climate system'. It goes about this by saying: 'Let us have a look at the science; let us look at the kinds of measures we might take as signatories to the convention. We will report on those measures before our peers and there will be a regular process of review by all the parties to see whether what we are doing towards the objective is adequate. If not, we will enhance those activities under the convention'. That is what the up-coming protocol negotiations are all about - enhancing the convention. It is a dynamic process.
The convention itself is only a framework and no -one really expects that in its current form it will be what is ultimately required, unless it turns out that our fears about the science are unjustified. That may turn out to be the case; it may not. I am not a scientist, therefore I cannot judge. All I know is that we need to do more work and that we need to do some things now without waiting for the science to give us the final answers.
The answer to the question: 'Is the convention effective?' is: 'No, it is not effective in achieving its objective.' The reason for that is that developing countries have no commitments worth talking about to reduce their emissions under the convention. If the developed countries - the so -called Annex 1 countries - which do have definite commitments to take measures to abate potential global warming, go ahead and do things, and the developing countries do not, the whole thing will not work. That is the position we are in now.
You might say that it would be very unfair if developing countries were expected to take on the same kinds of burdens of response that developed countries have taken on. I totally agree with that; it would be unfair. However, there needs to be a way of ensuring that they do respond - at a lesser level, but respond nevertheless.
At this point you might say: 'What is our end point?' If, over time, we have to reduce our emissions and if we do have a real problem here, the answer is that we will have to reduce our emissions to well below today's levels - perhaps half, or even one-third of today's levels of carbon dioxide emissions. If we have to reduce those emissions, what is an equitable outcome?
You might say that such an outcome would be equal greenhouse emissions per capita, world -wide. That might be pretty fair, and perhaps that is the rule we should be heading for realistically in about 200 years time. But it is only fair if each country has the same economic structure. To take a hypothetical example: let us say that at that stage Australia has been very successful in cornering the world aluminium market and is producing aluminium for the whole world - or at least for Asia, which generates very large carbon dioxide emissions. Should we bear the whole burden for those emissions? Or should our customers who, after all, want the product, also bear a share? It is not quite so simple.
Intuitively, the notion of equal emissions per capita is probably justifiable, but we also need to recognise that some fairly major adjustments may be necessary to that simple rule. So the whole question of effectiveness leads on to some very fundamental equity questions in the long run.
The second issue is the one of efficiency. Those of us in business would certainly argue that solutions must be found at least cost. At the moment we are in a phase of so-called no-regrets actions, where we believe that there are a whole lot of things we can do to reduce greenhouse gas emissions at essentially zero cost - in fact we can take actions that are commercially beneficial. But depending on what we need to do ultimately, those no-regrets actions may be insufficient. We would have to go beyond no-regrets in taking actions which have real economic costs to the people undertaking them.
In that case, it is really most important that resources are not wasted on doing things that are economically inefficient. It also raises a very important equity issue for developing countries because it is well recognised now that the abatement opportunities - that is, the opportunities for cutting greenhouse gas emissions - are cheapest, as a general rule, in developing countries. But it is pretty clear that we cannot ask the developing countries to take the lead or take the whole burden of reducing emissions just because that is the cheapest place to do so. We therefore need some sort of compensation mechanism so that, if it is cheaper to do in the developing countries, we can effectively pay them to undertake things in a more cost-efficient way. Once again, equity issues pop up as an outcome to efficiency questions.
It is also true in a general sense that if we waste resources on greenhouse, then we will not be able to apply limited resources to other environmental issues. One of the reasons why developing countries are not particularly concerned about abating greenhouse gas emissions is that they have a hell of a lot of problems relating to other kinds of pollution which they need to solve. So equity pops up again in the sense of allocation between environmental issues.
Finally, there is the question of equity as it is actually built into the convention. Equity is very explicitly built into the text in a number of ways. At the risk of boring you, I will quote a couple of bits. One of the key provisions is contained in Article 3 of the convention, which says that parties shall protect the climate system in accordance with their common but differentiated responsibilities and respective capabilities. This mantra of 'common but differentiated responsibilities' is quite critical. It says that we have a common responsibility to stop potentially dangerous climate change but we have differentiated responsibilities in the sense that we do not all bear the same responsibility for the current level of greenhouse gas in the atmosphere.
It also refers to 'respective capabilities' by saying there is an ability to pay in here as well. The wealth of a country should be taken into account in the carte of measures that they might undertake.
There are other provisions: for example, in Article 4.2(a), which refers to commitments by developed countries. It refers to the need for 'equitable and appropriate contributions' to the global effort by each of the developed country parties. So we have this notion of equity, not only between developed and developing countries but also within the developed countries. The debate is just as fierce - in fact, probably much more fierce - about allocation of burdens among developed countries than about the allocation between developed and developing countries. Developed countries recognise the need to take the lead on response measures and the fact that a lesser burden should be borne by developing countries.
There is another provision which is very dear to the heart of the coal industry and which was specifically put in by Australia, with the concurrence of the other parties. Article 4.10 refers to special consideration being given to countries which are dependent on fossil fuels- associated energy-intensive products. That really says that if you are a country like Australia, which has a high level of fossil fuel exports and a high level of mineral processing, special consideration should be given to you in relation to the burdens that that creates.
There are other important aspects of equity in the convention which do not relate quite so clearly to the sharing of burdens. These are the notion of joint implementation and issues of technological and financial transfers. The notion of joint implementation is that if it is cheaper to undertake a given amount of abatement in one country as against another, then the two countries can get together to minimise the costs.
Let us say, for example, that we have just built a coal-fired power station and we have to shut it down because Australia must reduce its CO2 emissions. That will lose not only the investment that has been put into the power station but also the costs of continuing to operate it. It may be that in another country there is a power station at the end of its useful life, where the investment has been recovered. Perhaps we could do a deal by which we could say: 'World-wide we need to reduce emissions by X amount; it will cost us more to shut down the power station in Australia than to shut it down in the other country, so let us do a deal. We will minimise our costs and achieve the same global effect'. That is one aspect of joint implementation (JI). There are many variations on this which one could undertake.
There is another aspect of JI - that is that it can assist developing countries particularly in the adoption of technologies which otherwise might not have been available.
In terms of the question of equitable burden sharing, which is the term that business and government use to an increasing extent to describe these provisions in the convention relating to equity, there are two ways in which this can be done.
The first is in the period up to 2000 in which we undertake the so-called no-regrets actions. There is an aim under the convention that we should try to return our emissions to 1990 levels by the year 2000. The question is - for developed countries only - how are we all going in meeting that aim? Australia is currently projected to be three per cent over; Germany, while to my knowledge it hasn't yet published the figures, will clearly be under; the UK will be under; the United States and virtually every other country will miss the target.
You might well ask yourself why Germany is doing so well and Australia is not. You can apply the equitable burden-sharing principles in that case to make a judgment which is not based solely on the numbers. There are a whole range of caveats built into the convention, which allow individual national circumstances to be taken into account. If you look at the case of Germany you will find that the reason for its good performance is that a large number of highly polluting industries in the old East Germany have been shut down and when you combine East and West Germany you get an overall performance for Germany which drops it below the target. But that is purely a result of an economic merger; it really does not have much to do with any specific greenhouse actions the Germans might have taken.
On the other hand, Australia has undertaken - or will undertake by 2000 - quite a range of measures which will have the effect of reducing its emissions. I think we could fairly argue that we have done more than many other countries which may end up with a better performance on the numbers in relation to that year 2000 target. Burden sharing can be used as a way of adjusting and assessing our performance in this period in which we are taking no-regrets type actions.
If we need to take much more stringent measures in the future which do have sizeable economic costs, how should these burdens be shared? This comes down to our next question: what is the burden? That is not such a simple question because there are at least three aspects of 'burden'. Clearly, I have been talking about it in terms of the economic costs of mitigation measures - the costs of reducing greenhouse gas emissions and enhancing sinks.
There are a couple of other aspects, however. One is the burden of the impacts of greenhouse. If it does turn out that we have a big problem here and there is global warming with the accompanying sea level rise and desertification, clearly some countries - notably developing countries - are likely to suffer significant impacts and that would need to be taken into account. That is a bit difficult at present though, because we have not only a poor understanding of the signs but also a terrible understanding of the impacts and an even worse ability to assess their economic effects. That remains something for the future, which we must bear in mind.
The next aspect of burden is adaptation. We do not just have to suffer impacts; we can do something about them. Some trivial examples might be building dykes to counter sea level rises. Clearly there will be a cost there in preventing the impacts of climate change. The adaptation to climate change and the costs of dealing with the impacts will vary from country to country and that should be taken into account as well. That is very much for the future.
The burdens which may result from mitigation measures are now; the burdens which might result from adaptation lie further in the future and hence their factoring into the equation will have to come a bit later, unfortunately.
What is the burden in terms of economic cost? Is it an absolute number of dollars? Should every developed country suffer, say, $10 billion of burden? That is obviously not the answer because the United States would find that an easy burden to bear, while Australia would find it extremely expensive. You cannot define equitable burden sharing in terms of absolute dollars.
It would probably be not a bad idea to define it in terms of percentage change in an economic measure such as GDP. That would mean that the US, with its huge economy, might suffer a one per cent reduction in GDP as a result of taking certain abatement measures. Australia would also suffer a one per cent reduction in GDP and we would regard that as equitable.
However, there is one more complicating factor, and that is the implicit population growth. Australia has a fast-growing population and you may ask why we should bear a greater change per capita than a country with a low-growth population as many in Europe have. This comes back to a question I introduced at the beginning: where the hell are we heading? If ultimately we are looking for a situation in which we have equal greenhouse gas emissions per capita as being the equitable outcome, then clearly we have to factor in population to the equitable burden sharing equation.
We would argue that change in GDP per person is probably a pretty fair rule to apply. It is not the only answer, though. I have talked about developing countries, so ability to pay must come into the equation as well. We could not expect a very poor country such as Bangladesh or many in Africa to bear the same reduction in GDP per person as a country such as Australia, let alone a country such as the United States.
At the moment commitments are limited to Annex 1 countries. Non-Annex 1 countries do not have any commitments. But some countries are wealthier than others. Is the ability to pay the same in Spain as it is in Germany? Is it the same in Australia as it is in the United States?
This then raises the question of whether there should be a continuum, where every country should bear some part of the burden, and where equity is determined not only in terms of the percentage reduction in GDP per person but also in terms of some measure of ability to pay. This challenges the division of the convention into Annex 1 and non-Annex 1 countries. It is actually a critical issue in terms of equity under the convention because the current arbitrary division has a very clear cut-off between those who have no responsibilities in practical terms (non-Annex 1) and those who do (Annex 1).
A country such as Korea needs to graduate from having no commitments to having some commitments, but maybe not at the same level as countries like the United States or Germany. That is quite a challenge to the policy-makers, and one which they currently do not really want to take on - or rather, the countries that might graduate don't want them to take on.
What are the sources of this economic burden? It comes from a number of places. It may come from domestic measures - for example, if we shut down coal mines or coal-fired power stations that would clearly have economic costs; it may come from measures taken by others - for example, if a European country decided that it would use Russian gas instead of Australian coal for electricity generation or heat source, that might be no-regrets for them but it would be very regretful for us. So others can impose burdens on us via the impacts on trade.
It is also worthwhile noting that there are impacts on developing countries from abatement actions taken by developed countries. If we in developed countries reduce economic growth it will impact on economic growth in developing countries because of the reduction in their markets. Once again, an equity impact.
There is also the question of burdens on developed countries arising from the actions of developing countries through so-called carbon leakage when industries relocate from developed to developing countries. For example, the Australian population might see aluminium smelters, instead of being built in Australia, being built in Asian countries which have no obligations under the convention.
What can we do about it? What kinds of rules could be devised to look at this issue of equitable burden sharing? One rule which has been put up under the convention is that we should have equal targets. A popular rule has been a 20 per cent cut in greenhouse gas emissions relative to 1990 by the year 2005. But economic analyses very clearly show that if developed countries adopted that kind of rule there would be great variation between them in the economic costs. In particular, Australia would probably end up among the two or three worst off countries in the OECD.
Obviously there would be great advantages for those countries that would be relatively less worse off, particularly some European countries, in having such a rule adopted. From a trade and economic point of view, versus Australia, they would gain. As I said earlier, this debate comes down very much to trade and economics. It is really not so much about the environment at all. So a simple rule like that really does not work.
Other problems are involved with these simple rules relating to equity. Let us say that Australia decides to supply LNG to Asia. In producing that LNG for export we are generating a lot of CO2 emissions. At the same time, the country we are selling it to is probably reducing its greenhouse gas emissions by, perhaps, replacing a coal-fired power station with a gas one. Unless that sort of circumstance is taken into account there is something rather unfair in that rule.
Then there is the question of population growth. Australia's population growth is greater than that of other countries. In part that is driven by our policies on migration on humanitarian grounds. Should Australia be penalised for a humanitarian policy on migration? There are many of these examples which illustrate that simple rules present us with all kinds of problems in terms of the need to make adjustments.
Typical adjustments which have been mooted are things like adjusting targets for population, adjusting targets for exports and imports of energy-intensive goods and, of course, the issue of fossil-fuel dependency and how there might be relative impacts as a result of the actions of other countries.
It is very doubtful that we could achieve full equitable burden sharing through these kinds of simple targets. Far more sophisticated mechanisms have been mooted, such as tradeable quotas. This then raises a whole additional area of economics where equitable burden sharing can be tackled by means of an international tradeable quota system. The equity issues arise in the initial allocation of the quotas and the whole system itself is an example of a solution to an equity problem.
Finally, I turn to the issue of implementation. If we could agree on a rule and we could agree on definitions, if we could agree on the science and the need to do all these things, how the hell would we enforce it? You simply cannot impose a target without some sort of supra-national authority to ensure that there are penalties for breaches. Similarly, in the case of quotas or international carbon taxes, there will have to be international transfer mechanisms so that there is compensation between winners and losers.
If a country has to implement a particular target or quota scheme or tax, there is the question as to how the burdens would be distributed within that country in terms of equity, jobs and compensation. That is another very big area which would be central to the political debate in a country like Australia, if it adopted targets, taxes or quotas.