Block’s Indicator of Sustainable Growth

By Ray Block

As a practical minded economist, who accepts the imperative for reducing greenhouse gas, the decision to name this blog “block’s indicator of sustainable growth” was premised on two themes.  .

 

One of these was the historical evidence that too fast growth over a long period in both the developed and major developing economies, as was evident in the late 1990s and again this decade, usually heralds the beginnings of recession.

 

The longer the boom is prolonged by too lax central bank action, the greater the approaching downturn. And as such a boom is accompanied by record levels of unrestrained financial speculation and greed, the longer is the recession and the larger the level of asset write downs. The outcome is always pain and misery to masses of people.

 

The other theme was the realisation that there was strong evidence of major changes in world weather patterns, more devastating and crippling rains and prolonged droughts, rising sea levels, greater losses in threatened species, substantial increases in polluted rivers and streams, and higher densities of  atmospheric pollution. And this was being accompanied by ever rising world population. So that by 2050, there would be a crowded planet with nine billion people.

 

As the Australian prime minister, Kevin Rudd, pointed out in the government’s white paper (December 15 2008), in introducing the carbon pollution reduction scheme to start July 1 2010, “Australia, as one of the hottest and driest continents on earth, will be one of the nations hardest and fastest hit by climate change if we don’t act now” He went on:

 

“Unmitigated climate change poses a significant threat to Australia’s economic security. It challenges our prosperity and risks undermining the viability of many of our coastal, rural and regional communities. It is in our national interest to take strong and decisive action on climate change.”

 

Against this background, there was no way that any political astute Australian government could legislate for a 25 per cent to 40 per cent reduction in C02 emissions by 2020, as demanded by the extreme environmentalists. But to opt only for a 5 per cent cut in carbon emissions below 2000 levels by 2020 seems at first glance somewhat meagre.

 

Even if this is accompanied by a larger commitment for a 15 per cent cut in emissions, if there is a comprehensive global agreement to stabilise atmospheric concentrations of CO2 to be limited to a maximum 450 ppm by 2020. The other Australian commitments are for a 20 per cent level of renewable energy to total energy consumed by 2020, and for overall emissions to fall by 60 per cent below 2000 levels by 2050.

 

By comparison with the Australian position, the European Union’s 27 country agreement is for a 20 per cent cut in emissions by 2020 below 1990 levels, along with a 20 per cent level of renewable energy to total energy consumed by 2020, and a 20 per cent increase in energy efficiency by 2020. The 20 per cent cut in emissions below 1990 levels would rise to 30 per cent, in the event of an international agreement by other developed countries.

 

The Australian government argues that on a per capita basis, the reduction in CO2 for the European Union would be a commitment by 2020 of 24 per cent (34 per cent if international agreement), while for Australia the comparable reduction is for a per capita reduction of 27 per cent (34 per cent if international agreement).

 

On a strict comparison basis of measuring emissions reduction below 1990 levels, the Australian government’s commitment is for a per capita cut of 34 per cent (41 per cent if international agreement). The other point in Australia’s favour is that Australia expects a population growth of 34-41 per cent over the 1990 to 2020 level, compared to the European Union’s relatively stable population over the same period, which makes the per capita comparisons even more valid.

 

There are a number of similarities between the European emissions trading scheme and the Australian scheme in that they are both of the cap and trade variety, and similarly there is the same type of industry concessions spread like confetti over the two schemes.

 

In Europe, industries such as steel, paper, cement, chemicals etc will only need to phase in carbon credits initially at 20 per cent in 2013, and rising only to 70 per cent by 2020. Indeed, these concessions end only in 2027.

 

In Australia, concessions are given to emissions-intensive trade-exposed industries, such as LNG extraction and processing, petroleum refineries, coal mines etc.  Protected industries will receive 25 per cent of all carbon pollution permits free or at discount, rising up to 45 per cent by 2020.

 

Unlike the European scheme, where the power companies in Western Europe will have to buy at auction all their carbon permits from 2013, Australia has large concessions for coal-fired electricity generation, which are emissions-intensive, but not trade-exposed.

 

A fixed administrative allocation of permits to these generators will take place delivering assistance of around A$3.9 billion, based on an initial carbon price of $25 per tonne. These permits will be distributed to each eligible generator over the first five years of the scheme. The amount of assistance for each generator will be determined upfront, before the emissions scheme commences in 2010. This suggests that the coal-fired generators will have little incentive to upgrade their facilities, unless there is a quick breakthrough in the carbon capture and storage technology.

 

Politically crafted to secure parliamentary approval, and at the same time placate a wary industry, at a time of low mineral and metal prices. Add in an economy just staying narrowly out of recession, there still remains large elements of potential roadblocks to the legislation expected to be introduced in Parliament during February 2009.

 

The Government has control of the lower house of Parliament, but relies on considerable bargaining to secure support in the Senate. The minority green party is vehemently opposed to what they consider as sell out politics, while the Liberal-Narional Party coalition in opposition will do what they can to embarrass the governing Labor Party.

 

And despite the industry concessions, the white paper is only warily accepted by them. The Australian Industry Group, representing the bulk of heavy industry calls the government’s white paper “a positive compromise but a stretch nonetheless” and estimates it will add about A$7 billion to business costs in 2010 after compensation, rising to $10.5 billion by 2020.

 

 

 

 

 

 

 

 

Posted under Carbon Abatement Scheme, Climate Change, European Emission Trading Scheme, Global Warming, Low Carbon Economy, Renewable Energies