Unsurprisingly, Garnaut concludes that the economic case for mitigation has only gotten stronger; the basic modelling was sound, the development of climate science is pushing up the expected costs of climate change, and the development of new technology is pushing the cost of mitigation down. This shouldn’t come as any shock to anybody.

Given the politics has come down to “electricity bills! Scary!” I can’t see this part of the update having a huge political impact, useful though it is. But there’s one fascinating little sidebar to the discussion surrounding the inter-generational equity of mitigation.

Essentially, some of the economic literature that suggests we should not take any action now rests on two premises: 1) that our descendents will be much richer than we are, and 2) that, on equity grounds, rich people taking a big hit to their welfare (for instance, by spending far more on late mitigation) is fairer than (relatively) poor people taking a small hit. The extent to which point 2) is true is quantified in a parameter of the social discount rate, which we’ll refer to as r for the purposes of this blog post. As the commissioned companion paper puts it:

Thought experiments are useful for making the choices of different values of r transparent. Stern (2008:15) discusses Okun’s (1975) ‘leaky bucket’ experiments to make the implications of different choices for r more concrete. If person A is five times richer than person B, r equal to one implies a unit of consumption is worth five times as much to B than to A, so a transfer from A to B improves social welfare even if 80 per cent of the transfer was lost along the way. With r equal to two, consumption is worth 25 times more to B and the transfer is worthwhile when up to 96 per cent is lost. Judgements about whether society accepts this trade-off or not can provide information about a value for in social policy contexts.

Some of the work critical of Stern and Garnaut has used values for r of two, or even higher.

Where it gets really interesting is when you compare it to what presently happens in the real world. As the technical report says:

When inferring preferences for climate policy evaluation, the last two of these conditions in particular pose challenges for inferring values from behaviour. Given that the aim is to infer ethical judgements for use in climate policy evaluation, preferences should be derived in a context that has at least some appropriate mapping to a global, long-term, risky and uncertain environmental problem with potentially catastrophic impacts. Economists adopting a normative approach to discounting have taken guidance from values of inferred from tax and transfer systems, as they provide information about social preferences for the distribution of consumption within generations. Such empirical work has given a range of values for r including numbers less than one (Stern 2008:16). Cowell and Gardiner (1999:24-5) infer from the United Kingdom personal income tax system, obtaining estimates of around 1.3 and 1.4 depending on the scope of taxes and transfers included. Evans (2005) investigates tax systems in 20 OECD countries, estimating r as 1.4, with a 95 per cent confidence interval of [1.2, 1.5].

In other words, to make an argument against mitigation work in terms of inter-generational equity, you have to plug numbers into the model that imply a preference for radically more egalitarian redistribution of income than our present taxation and social welfare systems.

I wonder what the likes of Gina Rinehart and Clive Palmer think of that.

Elsewhere: John Quiggin comments on a proposal by Sinclair Davidson over at Catallaxy to finance greenhouse action with long-term bonds. I’ll leave the technical discussion to actual economists, but note that Davidson is factoring in climate skepticism into his arguments. The analyses discussed here accept mainstream climate science (or, at least, most of it) but argue against mitigation anyway.

There’s a lot of possibilities in there; I’ll just pick one. As our vegetarian friends regularly remind us – Andrew Bartlett has pointed the issue out again – one of Australia’s biggest contributors to our greenhouse emissions is the methane-laden burping of our cattle and sheep. One solution would be to join Bartlett and make a mass switch to vegetarianism, or at the very least eat less meat. Or figure out how to stop ruminants producing methane, which is a nice idea but has proved to be rather difficult in practice (and may well involve genetic engineering). Alternatively, we could switch to pork or chicken, the production of which releases far less CO2. But for the truly committed carnivore, nothing replaces the taste of a nice red steak. So, if we can’t stop cows burping, farting, and poohing methane, what do we do?

Garnaut points to an interesting study by Edwards and Wilson (which, unfortunately, not only is not freely available, my university doesn’t have a full-text subscription) which looks at the idea of turning large parts of Australia back to kangaroo country. Kangaroo, when well prepared, is a rather tasty red meat, and, unlike ruminants, kangaroos don’t burp large amounts of methane every couple of days. So, in a nutshell, the study suggests that if carbon prices rise to the predicted levels, that we could profitably replace much of our beef and lamb production with roo.

But would people eat roo?

Well, Garnaut goes to the standard economist’s toolbox and looks to the power of price signals to change people’s diets. Here’s a chart of the real retail price of a number of different meat types , from 1960 until 2008:

Note that poultry prices have plummeted, pork has dropped a little, beef has stayed roughly steady, and lamb has risen (particularly recently).

If you’re a believer in the power of price signals, you’d expect chicken consumption to rise, and sheep meat consumption to drop, right? Well, here’s the data:

Of course, correlation is not causation, and there are a number of other possibilities you could imagine for the changes in consumption. But the pattern is striking. And, frankly, switching from beef to kangaroo meat isn’t a great gastronomic sacrifice much of the time; roo tacos taste pretty much the same as beef ones, for instance.

There are a lot of barriers to overcome to bring back kangaroos; not least of which is that kangaroos aren’t amenable to traditional Western agricultural practices of small private farms with animals fenced in, selectively bred, trucked from place to place while still alive, and so on. But stranger things have happened. Bring on the roo commons and save the planet.

UPDATE: Here’s the paper. Thanks to the reader who mailed me the link.

Australia’s total greenhouse emissions, assuming a 450ppm target and “backstop technology”. Source: Garnaut Review Final Report, Figure 23.6

The above chart shows the modelling for the Garnaut Review of one emissions scenario – that an international agreement for a 450ppm target is adopted using the model he proposes. It also assumes the existence of “backstop technology” that can take unlimited amounts of greenhouse gas from the atmosphere at $250/tonne (a reasonable assumption for the long term).

It’s stunning how much of “our” reduction is actually achieved overseas. We’re going to be buying a lot of permits on the open market…

By way of preview, a number of climate scientists have released an open letter to Kevin Rudd (text here):

The Garnaut Review concluded that an emission reduction target for Australia of 25% below 1990 levels by 2020 would be an equitable contribution to the international effort required to achieving this outcome. As a group of Australia’s leading climate change scientists, we urge you to adopt this target as the minimum requirement for Australia’s contribution to an effective global climate agreement.

In Crikey yesterday, Bernard Keane contrasted the apocalyptic prophesies of doom emanating from business with the rather lame reality of the government’s proposals to date.

Nightmare stuff. Imagine how bad it would be the Government had actually proposed a serious effort to reduce our carbon emissions?

As Keane notes in another article, the release of the Treasury modelling today:

should provide a welcome corrective to much of the hysteria generated by modelling commissioned by rentseeking industry groups.

Keane also observes that Garnaut will be talking about adaptation strategies and costs in this report as well.

Note: Related post from dk.au on public opinion, polls and climate change.

Update: The report has now been released and can be downloaded from here.

Update: From Crikey, Bernard Keane on Garnaut at a glance and Clive Hamilton on politics trumping science.

Elsewhere [dk.au]: Barry Brooks is also running an open thread at his blog Climate Dilemma [ht: Peter Wood in comments]

Joshua Gans comments on Chapter 14 (TEEIIs) which he argues is “dramatically superior” to the Green Paper solution of free permits. He also renews his call for border adjustment taxes:

In my opinion, it would be better to bite the bullet and, at least for imports, assess the carbon cost of those imports and tax them. This will get the price signals right and also put pressure on trading partners to put in their own emissions trading schemes so as to avoid that tax.

Industrial relations and global warming were key issues for the Labor voters who took part in all three polls, with two of the polls revealing that global warming was the prime concern among voters who changed their vote between the 2004 and 2007 elections.

In it, he repeats that he thinks that more aggressive carbon cuts, of the kind required for a 450ppm stabilization target, are desirable. However, he expands on his reasons for doubting that it will be achieved:

With regret, I note that no developed country or group of countries has indicated a willingness to cut emissions by 2020 to the extent implied by the 450ppm target. The European Union comes closest but even its 30 per cent conditional offer (relative to 1990) falls short of the 36 per cent that would be required of it under the 450 agreement (Table 5.4 of the Draft Report). Garnaut Climate Change Review Canada’s target is instructive: its current 2020 commitment would translate, we estimate, to a reduction of 10 per cent over 2000 levels, less than would be required of it in a 550 let alone a 450 world.

In another example, the US Presidential candidate commitments for 2050, if translated into 2020 targets with a starting point of 2012 convert into reduction commitments of around 10-15 per cent over 2000, again consistent with a 550 rather than a 450 agreement. (Similar targets are given or implied by various US climate change bills.)

One issue he hasn’t expanded on, however, is his “convergence target”. Regular LP commenter Peter Wood explains the issue here:

How is it that Australia, as the highest per-capita emitting Annex I country, only needs to reduce emissions in 2020 by 10% for a 550 ppm target, and 25% for a 450 ppm target? Australia’s increasing population only tells part of the story. The main factor, that totally undermines the integrity of these targets, is the time taken in the ‘contraction and convergence’ model until convergence, which is when all countries are allocated the same amount of per-capita emissions, which can be traded.

Garnaut proposes that this time period should be 42 years (until 2050).

How many years’ grace do we really deserve for being big polluters?

A big hat tip to Peter for pointing out the letter in comments.

Given that, I thought I’d look at one possible scenario; where the 550ppm global deal is signed, but Australia unilaterally goes for a target proportional with its responsibilities under a 450ppm deal. How much would that cost Australia?

Surprisingly, if you make some assumptions, it’s not that hard to calculate a rough figure. As noted previously, there is only a rather tangential connection between the targets set for Australia, and what the levels of our physical domestic emissions will be. The “targets” essentially tell Australia, and other countries around the world how many permits they are entitled to issue. As those permits will be traded internationally, they will rapidly converge to a single, global carbon price. If Australia’s carbon price rises above the world average, we buy some permits from overseas. If it falls below the world price, foreigners will buy them from us.

So, to go for the “450 target”, the Australian government would issue fewer permits each year. That would leave fewer permits available globally, and therefore global emissions will be lower. It will also push the price of permits higher than it would be, but not much – Australia would only account for around 1.5% of the permits issued, so cutting our permit allocation by 15% or so would only reduce the global allocation by 0.1% or so; Ill assume for the purposes of this exercise that such a small cut wouldn’t affect the global price much. The net result of issuing that smaller allocation will therefore do very little to affect what happens on the ground in Australia. Instead, one of two things would happen: that Australia sells fewer surplus permits to foreigners, or we have to buy more on the global market. The net loss would be the number of permits, multiplied by the global permit price.

Firing up the handy-dandy spreadsheet, such a change would mean that by 2020 we would be issuing around about 83,000,000 less permits than we otherwise would. Garnaut estimates that the price of a permit (in 2005 Australian dollars), will be $34.50. The net loss to Australia? Around $2.9 billion annually. Say $3 billion, to take into account the effect on the carbon price. That’s in the context of an Australian economy with an annual GDP that already exceeds $1000 billion, and will probably be around $1400 billion in 2020.

If that’s what it takes to convince the rest of the world we’re serious about wanting a better deal, it’s very, very cheap at the price.

But there’s another point that doesn’t seem to have permeated into Insiders‘ non-random sample of the commentariat (with the exception of Brian Toohey). If you look at the press release, it seems that a 10% cut in absolute emissions by 2020 (a 30% cut per head of population) as part of a global agreement, will cost us less than a 5% cut (25% per capita) without one. What’s going on?

To understand this, you have to understand the nature of the targets Garnaut is proposing. The Australian government would issue permits in quantities that declined gradually to the target level. But that doesn’t necessarily mean that emissions will physically emanate from Australia in those quantities. Why? Because of international trading in permits.

It’s not yet clear (to me at least) exactly how such international trading would work – whether private firms would trade directly on the global permit market, or it would be handled on a government-to-government basis. In the end, it doesn’t really matter; the net result of a global agreement would be that permits would be worth essentially the same around the world, and would be readily bought and sold as advantageous. If it turns out that emissions reductions in Australia are easy and cheap, we’d end up making greater physical reductions than 10% by 2020 here, and sell the surplus permits on the international market. If it turned out to be easier and cheaper to make cuts elsewhere – for instance, not logging Indonesian forests, or building hydro-powered aluminium smelters in Tajikistan, or improving appliance efficiency standards in the United States – we’d buy additional permits from those sources.

In a situation without a global agreement, opportunities for international trade will be much more limited. Of particular concern is an inability to trade with developing countries, because a lot of the opportunities for cheap mitigation are physically located there. That’s why the modelling indicates that the costs would be higher, and achieve less mitigation, for Australia in the absence of a global agreement.

Amongst the other consequences for such a global permit market is the possibility that Australia will do very little, and simply buy extra permits as required on the global permit market. But will you feel comfortable paying other people to clean up their mess, rather than cleaning up our own, even if that’s the economically rational thing to do?

The starting point for Garnaut – at least, with the scenarios he hopes will happen – is what level of greenhouse gases we are aiming for in an international agreement. His conclusion, expressed at length in the report, is, essentially, the lower the better. That’s something that shouldn’t come as any shock to anyone that’s been reading LP (particularly some of Brian’s excellent posts on the matter), but it’s good to hear it from Garnaut. A world in which greenhouse gas levels are stabilized at 550ppm is likely to be a heck of a lot better than a world without mitigation, but the consequences are at best nasty and still potentially catastrophic. “450 world”, as Garnaut calls it, reduces both the certain damage and the risks of catastrophe some more. But, as he puts it, “A similar case can be made for the superiority of 400 ppm overshooting over 450 ppm overshooting, as for 450 ppm over 550 ppm.” But a global agreement on 400ppm is a long, long, way off in Garnaut’s view. He’s crunched the numbers on two “global agreement” scenarios, one for a 550ppm target and one for a 450ppm target. Given that, what’s Australia’s share?

This comes back to material discussed at length in the earlier Draft Report. Essentially, Garnaut’s view is that the only feasible approach is (in principle) give each country an emissions allocation that reduces over time; countries than then trade allocations with each other if they so choose. The allocations are awarded under a “contraction and convergence model” – countries start out with a per-capita allocation based on their current emissions. Gradually, the per-capita allocation converges such that at some future time – Garnaut picks 2050 – all countries are given allocations in direct proportion to their populations. There are some wrinkles, but that’s the basic idea. Given those assumptions and a pile of demographic data, out drops the 2020 and 2050 targets for either “550 world” or “450 world”.

The 10% reduction by 2020 suggestion that’s been characterised as “Garnaut’s recommendation” is what Australia would need to do, given an international agreement on “550 world”, using the per-capita contraction and convergence out to 2050.

So why did Garnaut recommend “550 world” targets, when he clearly thinks that “450 world”, or even lower, is the way to go? Simple. He doesn’t think “450 world” is politically achievable. In his own words,

“Achieving the emissions limits set by the 550 scenario over the next decade would be a major win, reflecting unprecedented levels of global cooperation. It might just be feasible. It is not realistic to expect that the international community would, in the few years immediately ahead, agree on the even tighter emissions containments and reductions consistent with a 450 world.”

The report goes on to explain that – essentially whatever the developed world does, “450 world” -is not achievable without cuts in the developing world well beyond what’s on the agenda at the moment. In his view, the way way to getting to 450ppm is…

The most important first step towards stabilisation at 450 ppm CO2-e is to quickly put in place an effective international agreement directed at 550 ppm, to put in place the national and international carbon pricing and support for research, development and commercialisation of low-emissions technologies that can lower the costs of mitigation, and to begin the process of reduction of emissions.

Australia should, in his view, continue to push as hard as it can for 450ppm (and lower targets) in future international negotiations on climate change.

There are a couple of other scenarios investigated in the report, for a world in which there is no international agreement on climate change. While there’s not time to discuss these fully in this post, the really short version is that even a bad global agreement is likely to be better for Australia than no agreement; the unilateral action scenarios suggest that it’ll cost us similar amounts and achieve a lot less without a global agreement. Why? Because (and it shouldn’t come as any surprise that an economist like Garnaut would take this view, modelling to back it up or not) global trade in allocations will achieve emissions reductions at the cheapest location, and much of the time that won’t be in Australia.

In any case, there’s Garnaut’s targets in a nutshell. What are some of the potential criticisms? One has already come up in comments on the previous thread: the rate of convergence. Giving Australia 40 years to bring its per capita emissions in line with, say, India, might well be viewed as a pretty big free kick to a disproportionate polluter.

Another argument is that the whole idea of contraction and convergence – and per-capita emissions allowances, isn’t a good one. I must admit that the idea that somebody immigrating to Australia from a low-emissions country essentially gets a bonus of free emissions permits – which will be quite valuable as time goes on – is a worry.

Finally, you might also quibble with Garnaut’s view of the global politics of how best to achieve the long-term goals of 450ppm or lower. Australia’s case for the world to adopt 450ppm or lower might be stronger if we voluntarily undertook additional emissions reduction commensurate with such a target – which, I think, is what environmental groups are arguing.

Anyway, as best I can understand, that’s where Garnaut is coming from.

Ross Garnaut will be at the National Press Club in Canberra today at 12.30pm to release his next report – on Targets and Trajectories.

There’s been a fair degree of speculation around that he will recommend a low target. Bernard Keane wrote in Crikey the other day:

Ross Garnaut’s Supplementary Draft Report to be released on Friday will propose a carbon reduction trajectory based on a 0-15% reduction on 2000 emission levels by 2020, according to sources close to the review. The Report is based on extensive modelling by Treasury and Garnaut’s review team, which has been delayed on several occasions.

Senator Christine Milne at GreensBlog makes the argument that the policy shouldn’t just be seen through the “economic reform” frame, which is squarely where the government has attempted to position it (for a range of reasons – including a previous round of responses to arguments that it lacks a “narrative”). It needs to be recalled that big business is not the only interlocutor in the policy debate, and it was surely significant that a research report from Crosby/Textor of all people released this week suggested that the public wanted to see business make sacrifices to address an urgent issue.

Milne:

What this means for Professor Garnaut, and the Rudd Government, is that any policy framework that seeks to address climate change must actually seek to prevent runaway climate change. We must seek to limit warming by as much and as fast as we still can or else the warming we have already locked in may swiftly overtake us. A policy which seeks to make incremental change, which seeks to cut emissions at the edges, without a plan to completely decarbonise our economy, is not a climate change policy. It may be an economic policy. It may be an election policy. But it is not a policy that seeks to address climate change.