A paper delivered to the Lavoisier Group Conference, May 2000
Economic Impacts on Australia
The Hon. Tony Staley
In 1992, the countries of the world came together in Rio de Janeiro for
what was known as the Rio Earth Summit or, simply, the Earth Summit. A burst
of warm inner glow infused the cheeks of politicians right and left, great
and small. The world was united in an historic resolve to Do Something about
the environment. It was the green movement's finest hour.
The mass of good intentions produced a further mass of conferences and
committees and working groups. From them emerged, among other things, the
United Nations Framework Convention on Climate Change, based on the proposition
that human activity was changing the global climate---warming it, in fact,
by overloading the atmosphere with gases that trapped heat, much like the
glass walls of a greenhouse create an environment for warm climate agriculture
in the cold and damp of northern Europe.
Rio gave greenhouse a solid political platform. Debate raged at the time
about its scientific validity, and still rages today. But politics quickly
overtook science and today greenhouse is a major policy issue for governments
everywhere, especially in the industrially developed world, and that includes
We should not be under any illusion. Governments, including ours, are
implementing greenhouse measures because their electorates want it. People
have become sufficiently concerned about the scenarios of deathly hot summers,
rising seas, violent weather extremes and epidemics of tropical diseases
for them to demand that their governments act to prevent such disasters.
Governments of democracies are duty-bound to respond positively to community
concerns, even in the face of evidence that action might be unnecessary
However, governments are not entitled---in the notorious phrase from
the Vietnam war---to destroy the village in order to save it. And that is
just what some observers fear will be the result of Australian greenhouse
policy since Rio---we will reduce our greenhouse gas emissions but in the
process cripple the Australian economy.
Certainly there will be an adverse impact on the economy. The Australian
Greenhouse Office and the Australian Government are in no doubt. Consider
the following quotes from the AGO discussion papers on emissions trading.
Compliance with our international greenhouse
gas emission commitments will require a degree of structural adjustment
within the economy and, as relatively emissions-intensive economy, the
eventual adjustment task in Australia may be larger than in other industrial
economies ... greenhouse gas emissions ... would involve real economic
costs for Australia. (1)
... the imposition of an emissions cap is
likely to reduce opportunities for growth and increased income. This reduction
in growth potential is the price that Australia and other industrialised
countries would be paying for greenhouse gas emissions reductions achieved
under the Kyoto Protocol.(2)
In short, the perceived need to cut greenhouse emissions will cost some
Australians their jobs now, and reduce opportunities for future Australians.
The Lavoisier Group has been convened in the belief that most Australians
are not aware of these crucial economic consequences of greenhouse policy,
so plainly put by the AGO. We believe they are entitled to know.
The Economics of Greenhouse
For a number of years after Rio, environmental politics held sway in
the international greenhouse debate. The focus was on reducing emissions
because, after all, the objective was to save the world. It dawned only
slowly in the political mind that the economic impact provisions in the
Framework Convention actually meant something, that the implication of reducing
emissions was global, fundamental economic restructuring.
Out of that realisation came the Australian
Government's almost lone rejection of the hard-line Geneva Declaration of
1996 (3) and the ultimately successful argument
for an international greenhouse agreement at Kyoto which recognised differences
of economic structure among nations. It was clear to the Government by then
that greenhouse was not so much an environmental issue as a fierce competition
for economic advantage. The United States was facing off against the European
Union. Japan was deeply concerned about both of them. China, India and other
emerging economies were not about to sacrifice their drive for industrial
Australia has a vulnerable position in this power game. Our economy is
energy-intensive and, in the simple equations of greenhouse, that means
it is also emissions-intensive, since our main energy sources are fossil
fuels---coal, petroleum and natural gas. Reduce fossil fuel consumption
and you reduce greenhouse gas emissions.
For Australia, this is not as simple as the starting equation. Australia
has one of the highest population growth rates in the world and therefore
a high rate of growth in domestic energy demand from that fact alone. Many
of our most valuable exports base their competitive advantage on the availability
of relatively low cost, coal-derived energy. Natural gas produces a lower
level of greenhouse gas emissions but is more expensive. Non-fossil fuel
alternative energy is even costlier and, in any case, cannot be produced
economically in the quantities required, at least not in any reasonable
And so it goes: wherever you look in the Australian economy competitively
priced fossil fuel energy is the key to industry, jobs and everyday life.
The Kyoto Protocol
The Kyoto Protocol assigns Australia an emissions limit of 108 per cent
of 1990 emissions, to be achieved on an annual average basis over the five
years 2008 to 2012.(4) The Federal Government
estimates that current policy measures are only enough to restrain emissions
to 118 per cent by 2008-2012. And this is only at current rates of economic
growth. No account has been taken of unpredictable events, such as proposals
for further large-scale industrial development based on North West Shelf
The National Greenhouse Strategy(5) encompasses a broad range of measures but basically
it rests on two interconnected policy positions:
- Focus on the coal-fuelled electricity industry, which produces about
35 per cent of Australian emissions, through generation efficiency standards,
a stand-alone domestic emissions trading system and favouritism towards
natural gas as a substitute fuel.
- Ensure that international emissions or carbon credits trading, carbon
sink offsets and other so-called flexibility mechanisms are fully implemented
under the Kyoto Protocol, scheduled to be finalised this November at The
Hague Conference of the Parties.
The Government knows that Australia cannot achieve its Kyoto target by
emissions abatement measures alone. Offsets from carbon sinks, recognition
of land use changes and emissions/carbon credit trading are essential. These
so-called flexibility mechanisms at least give us a chance to manage the
economic impacts, if we are to pursue a reduction in greenhouse gas emissions.
The Government is right to insist that Australia will not ratify the Protocol
until all the provisions relating to flexibility mechanisms are settled
to the satisfaction of the Australian people.
Economic Impact on Australia
The proposal to create a trade in greenhouse gas emissions and carbon
credits probably covers all the economic issues associated with greenhouse
policy, as illustrated by the vast international literature on the subject.
Development of a trading system requires identification of emitters, quantification
of their emissions, certification of carbon credits, construction of market
instruments, a carbon pricing structure and a verification/audit mechanism.
The development of an emissions trading system
therefore allows the impact of overall greenhouse policy to be judged. The
four AGO discussion papers published last year provide a general view, as
quoted above, and in March this year the Victorian Government released a
bi-partisan report by Allen Consulting Group which modelled impacts on specific
The Allen Report listed winners and losers under four scenarios---three
modelling different domestic emissions trading set-ups and a fourth modelling
the impact of a broad range of measures. It should be said that no account
was taken of any international trading system, nor of emissions abatement
measures being implemented under the National Greenhouse Strategy.
All three trading
scenarios predict a high price for emissions permits to be issued by the
Federal Government under a cap and trade system. The base case scenario
prices permits at $44 a tonne of carbon dioxide-equivalent and states plainly
that this is equivalent to a carbon tax.(7)
The report goes on to say that a permit price or carbon tax of $30 a tonne
would translate to a 75 per cent rise in electricity pool prices.(8)
It then stated:
... measures that raise the price of electricity can be expected to
have a substantial impact on the competitiveness of a wide range of Australian
There should be no surprise then that the Allen models predict a significant
fall in gross domestic product and retrenchment in the loser industries---coal-fired
power generation, aluminium, cement, petroleum, motor vehicles and agriculture.
People interested in the numbers can refer to the report. More crucial are
the implications of that list of losers.
Almost without exception the major losers are based in regional Australia.
We are talking here about the likes of the Latrobe Valley, Geelong and Portland
in Victoria; the Hunter Valley and the Illawarra in New South Wales; Gladstone
in Queensland; Elizabeth in South Australia and Kwinana-Bunbury in Western
Let us isolate just one example. The aluminium smelter at Portland in
Victoria exists because of the supply of brown coal electricity from the
Latrobe Valley at world competitive prices. The smelter employs about 800
people, including contractors, out of a regional population of 15,000. An
enterprise of that size generally creates three more jobs in the community
per employee---that is, a further 2400 people probably have jobs in the
Portland district because of relatively low cost electricity.
The higher electricity prices flowing from greenhouse measures will erode
Portland's competitiveness against smelters in Asia, Africa and South America
which will not be affected by the Kyoto Protocol or its outworkings. In
fact, they might be advantaged by it.
The result is inevitable, once the Kyoto Protocol is implemented. The
smelter's contribution to Portland will start to reduce as costs are cut.
Jobs and contracts will be pared back. There will come a time when the owners
have to decide whether to carry on. As far as anyone can see at present,
the answer will be negative.
The irony of this situation is that the imposition of cap and trade domestic
emissions trading, or more honestly a carbon tax, will not reduce greenhouse
gas emissions from the Latrobe Valley power generators to any significant
degree by the Kyoto deadline of 2008-2012. That is, unless the cost burden
forces a shutdown of generation capacity---and that, given the brownouts
of last summer, has other unpalatable implications for Victoria.
The Australian Government made another admirable decision in 1996, as
well as the refusal to be forced into an untenable position at Geneva, referred
to earlier. And that was the reform of our treaty-making process.(9)
This statement set down a clear path for involving the Australian people
in how Australia accedes to international treaties. Key elements of the
process now include the tabling in Parliament of the proposed treaty and
a National Interest Analysis of its provisions. The treaty is also considered
by the Treaties Council, a body representing the States under the Council
of Australian Governments.
The Kyoto Protocol
is subject to this process.(10) Australia has
signed this treaty, an action which signals commitment to its principles,
and has stated that it will ratify---that is, accept the treaty as law---provided
certain conditions are met. These include international agreement on the
acceptance of carbon sinks as offsets to emissions and on the establishment
of a trading system in emissions and carbon credits.(11)
As discussed earlier, these are crucial to Australia's ability to meet the
108 per cent target, to which we are already committed, while maintaining
some degree of economic growth.
The question now is: what constitutes the national interest? Is it in
the national interest to cast doubt over jobs in towns like Portland or
Gladstone in order to reduce Australia's greenhouse emissions by some fraction
of the 1.5 per cent of global emissions that Australia produces?
We have to admit the possibility that it might be. Australia is part
of the global community, it does have a role to play internationally and
its economic interests are inextricably entwined with the world trading
system. Australia cannot afford to be excluded from the international community.
But apart from the small number of people consumed with greenhouse issues,
who is aware that Australia is facing a serious decision that will impact
directly on individual Australians? Apart from official papers, where, in
plain language, has it been spelt out that an effective greenhouse response
means restructuring the Australian economy? There is no real public debate.
Vox populi television coverage, for example, is concerned almost
entirely with environmental issues. The personal economic impacts of greenhouse
need to be discussed with the same level of community participation.
A National Interest Analysis presented to Parliament and the Treaties
Council would canvass all the issues, environmental and economic. At the
end it would tell Australians where their governments believe the national
interest lies. National media coverage would ensure that the message is
presented for popular debate and conveyed to the farthest corners of our
land. Only then can we be sure that the Australian people have been given
a chance to decide that what is being proposed in their name is actually
in their interest.
Wide community acceptance of the global warming proposition is driving
governments in Australia and throughout the industrialised world to implement
policies separately and together to reduce emissions of greenhouse gases.
However, the clear implication of greenhouse measures---if applied as
envisaged by the Framework Convention on Climate Change and its offshoot,
the Kyoto Protocol---is global, fundamental economic restructuring. Reducing
greenhouse gas emissions means, at its simplest, reducing industrial activity,
or finding alternative means of maintaining standards of living. The cost
will be high.
Measures to meet the perceived need to cut greenhouse gas emissions will
eliminate the jobs of some Australians now, and reduce opportunities for
future Australians. There can be no doubt of that. The Australian Greenhouse
Office has said so and the recent Allen Report to the Victorian Government
Hardest hit will be those regional communities which host major industries---such
as the Latrobe Valley, Geelong and Portland in Victoria; the Hunter Valley
and the Illawarra in New South Wales; Gladstone in Queensland; Elizabeth
in South Australia and Kwinana-Bunbury in Western Australia. The vast North
West Shelf development will be cut off long before it reaches its potential
to provide huge export income, jobs and technology advancement deep into
the 21st Century.
The Lavoisier Group believes the economic consequences of greenhouse
are being given insufficient public exposure. The personal impacts of greenhouse
should be discussed with the same level of community participation that
environmental issues are.
Individual Australians are entitled to know the cost to them of reducing
greenhouse gas emissions. At the very least, this should be the subject
of the National Interest Analysis that is required to be tabled in Parliament
before Australia ratifies the Kyoto Protocol.
The analysis would define where the national interest lies. It would
give Australians the chance to decide that what is being proposed in their
name is actually in their interest.
Greenhouse Office, June 1999, National Emissions Trading, Issuing the
Permits, Discussion Paper No.2, chap.5, p45.
for the Environment, June 1996, address to the Second Conference of the
Parties to the United Nations Framework Convention on Climate Change, Geneva.
4. Allen Consulting
Group, January 2000, Report to the Department of Premier and Cabinet, Victoria,
Greenhouse Emissions Trading.
Greenhouse Office, November 1998, National Greenhouse Strategy; Prime
Minister, November 1997, ministerial statement, Safeguarding the Future:
Australia's Response to Climate Change.
6. Allen Consulting
Group, January 2000, report to the Department of Premier and Cabinet, Victoria,
Greenhouse Emissions Trading
section 10.2, p191.
section 11.3, p221.
for Foreign Affairs and the Attorney-General, May 1996, joint statement,
Reform of the Treaty-Making Process.
May 1999, Commonwealth Budget 1999-2000, Ministerial Statements, Investing
in Our Natural and Cultural Heritage, chap.8, box 8.1.
for the Environment and Heritage, May 2000, address to the World Business
Council on Sustainable Development and the Australian Business Council Forum,
Warming to the Challenge: the Role of Australian Business in Combating
Global Warming, Melbourne.