Super-Power

It would be hard to find someone who was more of a climate policy insider than Ross Garnaut.  After a varied career in government and academia including a stint as economic advisor to Prime Minister Bob Hawke, Garnaut was asked by the Rudd Government to review climate policy soon after the 2007 election.  The result, completed in 2008, was the report which laid the groundwork for Rudd's emissions trading scheme which came within a whisker of being legislated before it was scuppered by Tony Abbott.  He was asked to revise and update this work in 2011 and this update provided the groundwork for the Clean Energy Futures Package which was legislated in 2012 and included a price on carbon.

Last year Garnaut released a book, Super-Power: Australia's low carbon opportunity, which further updates his analysis and simplifies it a little for readers like me. You might think that after seeing his careful policy work trashed by fossil fuel industry stooges, Garnaut would be angry or disillusioned but in fact he is amazingly upbeat.  Not in a blind or foolish way, I should stress - he is well aware of the potential for disaster - but he is optimistic about our chances of achieving the task and benefiting in the process.

His reasons for this optimism are not really based on scientific analysis.  He is not a scientist and he relies on the scientific consensus as expressed by the IPCC.  He also writes from within the framework of the Paris Agreement, with its stress on cutting emissions to keep warming to between 1.5 and 2 degrees Celsius, and what this means for global carbon budgets and each nation's fair share of emissions cuts.  Like anyone who is serious about this subject, he is quite clear that Australia's current efforts are well short of our fair share, even if we achieve our stated goals without fudging.  

His source of optimism is based on a very hopeful analysis of the economics.  Not that he thinks economics is everything - he is quite clear that there are ethical reasons for mitigating climate change that go beyond measurable economic outcomes.  However, in his view the economics alone justifies us in making rapid and  decisive efforts.  

He is, of course, a formidable economist and his analysis is quite complex, but at its heart is a simple analysis, shown in what he affectionately calls the 'fish curve', a version of which I have reproduced below.  He first developed this graph in 2008 and updated it in 2011 and again last year.

This graph tracks the economic costs and benefits of mitigating climate change as against those of 'business as usual'.  Mitigating climate change costs money and means that in the short term you are worse off - you have to pay for new carbon-free power generation, transport, industrial processes and so forth and this is money you can't spend on more immediate things.  The benefits come in the future and are two fold - you spare yourself the economic damage brought about by climate change, and you reap the benefit of your investment in renewable energy and low-impact technologies.  You can save the short term cost by not mitigating and continuing with 'business as usual', but in the longer term you have higher costs and miss out on the benefits.  You have to pay the price of environmental damage and you miss out on the benefit of the investment you failed to make in new technology.  The resulting calculations produce two curves - the curve of net economic 'utility' or wellbeing over time with mitigation is shown in blue in the graph below, the curve without mitigation in orange.  In essence, if we don't mitigate climate change we are better off right now, but there comes a point in the future where we become worse off than if we had taken mitigation action.

This analysis is not controversial.  It's what every climate economist does.  What is subject to some debate is the question of where the crossover occurs.  This depends on a number of factors, including how you compare present to future prosperity (the 'discount rate', a subject he relegates to an appendix to spare non-economists a lot of pain and confusion), your assumptions about costs of inputs and prices of outputs, and the relative success or failure of international cooperation.  Not surprisingly, in our world of partisanship and oligopolistic capitalism, there is a lot of obfuscation about this question too.  It suits the interests of many people right now to present the present costs as enormous, and the future benefits as minimal.  Some people are doing very nicely out of business as usual.  But of course there are others who see their interests best served by early and ambitious mitigation, and their numbers are growing as the reality of climate change starts to sink in.

In 2008, and again in 2011, Garnaut concluded that it made economic sense to mitigate climate change.  He concluded that the present costs would be outweighed by the future benefits within a reasonable and measurable time-frame.  In 2019, he is even more certain that this is the case.  There are three reasons for this - rapidly falling costs of renewable technology, persistently low interest rates and significant technological progress in a number of renewable processes.  

On the costs of renewable technologies, his 2008 and 2011 estimates of the rate of decline in costs turned out to be far more pessimistic than the reality.  The costs have declined to the point where wind and solar power combined with battery and hydro-electric storage are cheaper than coal or gas power.  It no longer makes economic sense to invest in coal or gas generation, even if there were no other costs to climate change.

On interest rates, his 2008 and 2011 reviews assumed a long-term real interest rate of around 5%.  However, subsequent developments have seen this rate drop virtually to zero, and all the economic indicators suggest it will stay there for a long time, especially now that the COVID-19 pandemic has knocked the global economy for a six.  This lowers the cost of capital to invest in new infrastructure and technology.  It also especially benefits renewable sources of power because they are more capital intensive - that is, most of their cost is up-front in the construction, they are relatively inexpensive to run.  If you are running a gas or coal generator (or a nuclear one) you have to pay the capital cost of building it, and the ongoing cost of buying the fuel that powers it.  If you build a solar or wind-farm or a hydro-electric generator you pay the construction costs, but the fuel is provided free by God.  

In addition to both these factors, technological knowledge of how to reduce emissions in industrial and agricultural processes, as well as power generation, has gone ahead in leaps and bounds.  He talks about technologies as diverse as using biomass in place of petrochemicals for plastics, using renewable hydrogen to replace coking coal in iron and steel production, and the use of renewable processes to make aluminium.

All these things make him optimistic about the world in general - it makes economic sense to mitigate climate change everywhere.  But he is positively bullish about how this affects Australia.  he says that if we grasp the opportunity, we are positioned to become a renewable energy superpower.  

The main reason for this is that we have among the best renewable energy resources in the world.  We have relatively low population density, lots of areas of low rainfall and warm sunlight for solar generation, a long coastline and lots of suitable sites for wind power, and a number of different climate zones to allow us to balance out local peaks and troughs.  We also have good supplies of the various minerals needed to make renewable technologies - good quality sand for silicone, good supplies of lithium, plenty of copper and bauxite, and so on.  We have lots of land which has low or no agricultural value but which can be managed in a way which maximises carbon capture in plants and produces vegetation for biomass.  And along with all this, we have a high level of scientific and technological capability to take advantage of all this.  

These advantages mean that if we play our cards right the global shift to zero emissions in coming decades will pave the way for a revival of Australian industry.  Where we currently export most of our iron and bauxite for processing elsewhere, a shift to renewables will mean it makes more sense to process them here.  The loss of our gas and coal exports will be more than made up for by growth in local industry and the use of our renewable power to make things like liquid hydrogen, aluminium and iron or steel for export.  Our ability to grow thousands of square kilometres of mulga or mallee forest, which are drought- and fire-resistant and store large amounts of carbon in their roots, will mean we will both be able to sell carbon credits on any future carbon trading system, and harvest the upper parts of these trees to make biomass for various chemical industries.  

Hence in 2019, as opposed to 2008, not only is the short-term cost of transition much lower, but the long-term benefit - the tail of the fish - is much higher.  In 2019 the fish has a tiny body and a huge tail. Of course this is just economics, and Garnaut is the first to acknowledge that there are many valuable things that can't be measured economically, like the value of wild places and the preservation of biodiversity.  Nonetheless, even in purely economic terms it makes much more sense to act quickly to mitigate climate change than to plough ahead with 'business as usual'.  This will provide farmers and graziers with an alternative source of income which can at least partly make up for the loss of agricultural productivity caused by more frequent droughts.

Of course all this won't happen on its own.  We currently have policy settings designed as much to impede as to speed the transition, and a government that is entrenched in its support of the fossil fuel economy.  The change might happen anyway, but it certainly would be helped along and its costs reduced by a more supportive policy framework. Garnaut remains, in principle, a supporter of a carbon price as the best way to incentivise the transition.  However, he recognises that this will not happen any time soon, and that it would be counter-productive unless it had bipartisan support given the long-term nature of the investments it is trying to incentivise.  

Still, he sees many things that even our current government can do without breaching its election promises.  These include continuing to support the work of ARENA and the Clean Energy Finance Corporation, widening the granting of incentives for emissions reduction, freeing up the ability of private sector developers to build transmission infrastructure for industrial purposes, using the Safeguards Mechanism to progressively reduce industrial emissions, and funding research and development in key areas.  

Even our current government can quietly pivot towards stronger action without drawing the ire of its supporters, at least those outside the fossil fuel industry.  Indeed, we are seeing more an more parts of the core Liberal and National party base get on the bandwagon.  Rural mayors are urging stronger climate mitigation in the wake of last summer's drought and bushfires.  The Australian Industry Group has shifted ground and is advocating a focus on renewables in the post-COVID recovery, and has even been supported in this call by the Business Council of Australia.  Our government and its coal and gas industry backers risk becoming increasingly isolated.

It's worth quoting a few concluding words from Garnaut's final chapter.

I am often asked if I am optimistic or pessimistic about Australia and the world doing what must be done to avoid great disruption from climate change.  People who look on and despair at past and present failures of action ask how I manage to carry on trying to improve the outcomes or at least the chances of a less damaging outcome.

I reply that there is still a chance of avoiding disastrous outcomes, and the incidental advantages of that outcome for Australians are so large that once my fellow citizens see them as they are, they will want us all to cross that bridge.

Of course that does not deny the awful reality of where we have gone over the past decade, and where we are today.  But Australians with good leadership have made big changes in the past when severe challenges required them.

Neither does it deny the difficulties that we have brought on ourselves and will leave to future Australians by leaving the start so late and closing off the less tangled paths to the bridge across the chasm.  The awful reality is that we may fail to change far and fast enough, and that our grandchildren will inherit a parched and disordered country in which a past time of prosperity, democracy and good order is a myth of origin.  Yes, that is a possibility.  And yes, sometimes I do think that the time of hope has passed.  But there is still a path to a manageable outcome.  And I see no good purpose in acceding to despair while the path to a manageable outcome remains open to us.

It's worth thinking about this analysis next time you hear our politicians say phrases like this, as Scott Morrison's minders insert into his letters.

Australia is making a strong contribution to the global effort of tackling climate change while ensuring we have a robust and resilient economy.

We are all well aware that the first part of this sentence is only not an outright lie because it is unclear what the term 'a strong contribution' actually means.  However, it's tempting to buy the implied message of the second part of the sentence - that the reason the government is not 'stronger' on climate change is because it is prioritising the economy.  Garnaut's analysis suggests that this assertion is, if anything, more misleading than the first.  The result of their current direction is that in the short term the economy may appear robust (during the few years we are in the belly of the fish) but it certainly will not be resilient.  We will be left with a creaking energy system based on old technology and will have missed the opportunity to build the renewable energy resources and the industries that they can support.  We will be left to live on a less hospitable continent without an economic alternative to make up for what we have lost.  We will be living our life on the underside of the fish's tail.  I don't think that's where any of us want to end up, not even Angus Taylor.