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GHG Mitigation Policy – lessons for Australia from the OECD

October 26, 2009

The OECD has recently published a signficant and far-reaching report “The Economics of Climate Change Mitigation: Policies and Options for Global Action Beyond 2012.”  It draws on the body of analysis available and undertakes quantitative analysis, in order to provide a view as to the mitigation measures that need to be put in place to meet global emissions abatement targets.  It specifically points to a workable construct for a post-2012 global framework.

I raise a few points here that I think have some pertinence with current debate in Australia about mitigation policy formulation.

There is an interesting section on ‘incomplete mitigation policy coverage’.  Here are key points:

 – Exempting energy-intensive industries from policy action could increase the costs of achieving the illustrative 550 ppm CO2eq scenario by over half in 2050 compared to a situation where all sectors were to participate.

 – If policies only target C02 emissions, rather than all GHGs, costs also increase significantly.  If the illustrative stabilisation scenario were to be achieved through CO2 emission cuts only, the costs in 2050 would amount to 7% of world GDP rather than 4% of world GDP as reported above.

 – An incomplete country coverage of GHG mitigation policies would not achieve much.  All but the laxest (e.g. 750 ppm CO2eq) of GHG concentration targets are found to be virtually out of reach if Annex 1 countries act alone, either because they simply do not emit enough to make a big enough difference – for concentrations below 650 ppm – or else, because of the very high costs of action concentrated on such a narrow base.

So the haggling over allocation and coverage (gases, sectors – note e.g. recent amendment proposals of the Liberals) that is currently taking place in Australia has clear ramifications. 

If Australia  puts in place many such exemptions, is free-riding acceptable?  Will other nations not mind if a seemingly inconsequential player in the game ducks some hard decisions?  Or will others take the same approach, thus leaving everyone worse off, or impose border tax adjustments or tariffs on products from those countries that do not adequately price carbon? 

In terms of some key justifications for ‘generosity’ towards specific industry sectors under carbon pricing, one of the salient issues is trade impacts, and the phenomenon know as ‘carbon leakage’. 

Unless only a few countries take action against climate change, for instance the European Union acting alone, leakage rates are found to be almost negligible (….) if all developed countries were to act, this leakage rage would be reduced to below 2%.

Clearly, this contains some lessons in the context of the extensive deliberations and possible treatment of EITEs in the Australian CPRS.  First – it leads to inefficiencies and higher costs in the economy and, second, the arguments put forward on importance of leakage are not necessarily so great.

The paper notes that Australia, as a relatively high carbon-intensity economy, will be a buyer in an emissions trading market that is linked to other cap-and-trade, or CDM-type offset project mechanisms.  While linking will provide some aggregate relative cost savings, they are not substantial.  Also, effects will not be uniform across the range of participating countries.  Australia has already clearly indicated a willingness to link to international Kyoto project mechanisms (e.g. CDM) – thus inferring that they may represent an attractive emissions risk management proposition for those entities in Australia willing to take a medium-to-long-term portfolio management perspective.

A word of warning is expressed around the means to tap the large, cheap abatement available in emerging markets:  the current, or expansion options, for CDM will continue to suffer from technical and administrative difficulties.  Also, these mechanisms may engender a culture of dependency in emerging markets, meaning that they will remain unwilling to move away from the ‘upside only’ prospect that current market tools offer. 

However, the existing Kyoto mechanisms and the opportunities to extend them to sectoral, no-commitment, or programmatic options clearly point to an ability to secure the required broad international and sectoral coverage so that cost-effective and deep cuts can be reached.

The publication also analyses low-emissions R&D policies. it views

the rationale for policy intervention to be particularly strong in this area, due both to their large potential impact on future mitigation costs and the multiple market failures undermining them

The analysis supports previous research on public low-emissions public R&D investment policy.  It states the need for it to complement strong market price signal policies.

Setting a world carbon price path to stabilise overall GHG concentration at about 550 ppm CO2eq in 2050 is estimated to quadruple energy R&D expenditures and investments in installing renewable power generation.

 ….and for public investment to substantially include riskier, potentially higher-impact technology, rather than incremental energy efficiency R&D.  This might considerably drive the low-cost, scaleable outcomes required – reflecting findings in e.g. Blyth 2008.

If R&D were to lead to major new technologies – especially in transport and the non-electricity sector more broadly, where marginal abatement costs are higher – future mitigation costs could fall dramatically, by as much as 50% in 2050.

These findings may work to validate the Australian Government’s lead in supporting R&D in clean coal (particularly Carbon Capture and Storage – CCS) technology. This technology is touted as a major possible contributor in the medium-term to greenhouse gas emissions reductions, but policy interventions to support it are often criticised as high-risk and expensive.

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