Australia and the carbon tax - an outsider’s perspective

In the wash-up after ‘carbon Sunday’, leading UK-based climate change strategist with global engineering firm MWH John Hobson* has this advice to offer Australia as it enters into negotiations to legislate for a carbon-price mechanism.

Australian governments have recently advised that a sea level rise of 0.79 m may be seriously underestimated and has modelled a cost of more than $226bn worth of damage to coastal infrastructure and light industry if sea levels rise in excess of 1.1 m. The risks of delaying action are known. Even if we were to stabilise our greenhouse gas emissions at the current rate, levels in the atmosphere will continue to rise for a long time. If, today, we could magically stabilise the levels of greenhouse gases in the atmosphere at their current levels by reducing our emissions, the temperature of the earth will still continue to rise for some considerable time. Therefore business as usual is not an option. We must act to reduce our emissions to limit this temperature rise. Mankind has no choice. And we are talking about major changes. We have to make the change to a low-carbon economy, reducing our CO₂ emissions by 70-80%.

Attempts to reach international agreement on implementing measures to combat climate change have so far failed. Our best hope is for a significant number of countries to make a unilateral start. The major concern is that to move early will disadvantage a country’s economy. No country has yet to travel all that far down the road to converting to a low-carbon economy. And without international agreement, it would be risky for countries to travel too far in isolation. But we must make a start. Some countries will have to lead and others will follow. And on that note, Australia must be congratulated for unveiling the biggest carbon reduction scheme outside of Europe. Australia has an important role to play; as it currently has the highest carbon pollution levels per person in the developed world due to its extensive coal-dependent electricity system. If Australia can lead the way with change, it is to be hoped that other countries will follow. In this way, risk to a country’s economy should be minimised.

The UK has reduced carbon emissions by more than 20% in just over 20 years. During this time its economy has continued to grow. Global science-based product firm Dupont cut carbon emissions by a similar amount while its profits have grown enormously. During the early phase of conversion to a low-carbon economy, pursuing ‘low-hanging fruit’ is a win-win for reducing carbon emissions. In time, economies and organisations will become more efficient. However, it is not obvious that this will continue to be the case in the longer term, as more substantive measures will be required to continue the conversion. There will undoubtedly be parts of an economy that will suffer but this will be balanced by the significant investment required in energy saving and renewable energy generation. Whether, in the end, economies will gain or lose will depend largely on human ingenuity. Since the need to convert is not an option but a necessity, it makes sense to reward ingenuity over how we make the conversion. A carbon tax certainly does this.

Although the UK government has taken a number of measures to reduce carbon emissions - a carbon tax, membership of the EU Emissions Trading Scheme (ETS), a second ETS directed at organisations rather than large energy-consuming installations and subsidies for certain types of renewable energy generation - it is not clear that these have been responsible for our reduction in emissions. Most of the UK’s reduction has been due to a transition away from traditional manufacturing. Most of this would have happened without government intervention. And to some extent it seems that emissions have been exported to countries like China. This could be seen as damage to the economy but, as I said, so far the UK economy does not seem to have been damaged (other than by the recent well-documented problems in the financial sector). Because of this, however, it is not clear that our per capita carbon footprints have reduced by much, if at all. In a true carbon footprint we are responsible for the accumulation of emissions created throughout the entire supply chains associated with the goods we purchase, no matter where these emissions take place.

The UK government has estimated it will take £200 billion of investment to convert to a low-carbon economy. This is approaching 1% of GDP annually for the next 40 years. But the cost of inaction is likely to be higher. The EU is aiming to give its emissions trading scheme real teeth by 2013, including the auction of allowances. The UK intends to introduce a variable carbon tax to support the price of carbon in case this scheme does not work, probably at around £18 per tonne. The aim is that, if the price of carbon is guaranteed, private investors will have the confidence to invest in renewable energy. Some of the money raised should be used to assist those most affected by the tax and probably the smaller part directly in investment in renewable energy. The aim is for the private sector to do this. The purpose of the tax is to help create an investment-friendly environment. The UK is also aiming to provide additional support for renewable energy and to introduce more favourable feed-in tariffs for small-scale generators of renewable electricity, including by households.

So what is the correct level for a carbon tax? The damage done by CO₂ has been estimated in the region of AU$50 to AU$75 per tonne; but this is not necessarily the correct level. Ultimately, the answer is that the tax should cost whatever it takes to convert to a low-carbon economy. But declaration of an excessive carbon tax unilaterally would run the risk of damaging an economy. The initial fixed price of AU$23 a tonne of CO₂e to 2015, rising 2.5% in real terms is lower than expected, but a price that should incentivise industry to introduce abatement efforts without sending them to the wall. Coupling the carbon tax with subsidy packages for emissions-intensive industries such as energy, mining and agriculture should help shoulder the burden of introducing low-carbon infrastructure and business practices.

So am I optimistic or pessimistic? I am not always optimistic when it comes to politicians, although somehow we usually seem to muddle through. Perhaps that is the art of politics. I am though quite optimistic when it comes to human ingenuity. The success of human ingenuity will dictate whether we can transition to a low-carbon economy while maintaining a reasonable style or standard of living. I believe we can.

*John Hobson is a leading, UK-based carbon strategist. He was recognised for his contribution to the Intergovernmental Panel on Climate Change, leading to its award of the Nobel Peace Prize for its work combating climate change. Hobson led the development of the UK approach to estimating methane emissions from wastewater and led the process input into a number of carbon accounting tools for UK Water Industry Research (UKWIR).