Friday, June 10, 2011

'A Price on Pollution: The Next Step Forward in Economic Reform'

In an address to the National Press Club on June 7, 2011 The Honorable Wayne Swan, MP, Deputy Prime Minister and Treasurer said:

The theme of [my post-Budget speech] a month ago ... is making the most of the tremendous opportunities presented by the enormous change underway in the world. Recognising that rather than being on the periphery of the global economy, in coming decades we will be closer and closer to its centre. The impact is most vividly apparent today in the mining boom, but in years to come it will be apparent in many other areas of our economy.

As I said when I was last here, to accept that challenge, to make the most of our opportunity, we need to modernise our economic infrastructure, increase our capacity, and invest more in the education and training of our workforce. But crucially, we also need to price pollution, so that we can drive new investment in clean energy. That's what I'm here to talk about today.

I start from a conviction that no first-rate, first-world economy will be anything other than a clean-energy economy into the future. Just like the global economy was propelled forward in the decade to now by rapid development in communications technology, success in the coming decades will be powered by cleaner energy innovation.

The only way to drive investment in this technology is to put a price on pollution. Only a market mechanism does the job. You can have a first-rate modern economy and a carbon price, or you can have neither.

As Treasurer I refuse to let this country become an old-world, high-polluting technological backwater.
As Ross Garnaut reported in 2008, world GDP would be 8 per cent lower by 2100 in a world with climate change compared with a world without climate change. Our own real GDP could be around 6 per cent lower over the same period, and real wages would suffer.

Without global action, we will experience severe water shortages and higher temperatures, and the Murray Darling Basin could lose half of its annual irrigated output by the middle of the century – with consequences for food prices and the cost of living more broadly. Extreme events, permanent changes to local climate and loss of parts of our coastline could severely damage our water supplies, electricity networks, ports, homes and commercial buildings.

As global growth slows, the engines of our prosperity would switch down to second gear as demand for our mining resources falls as well. Overall output from Australian mining could be 13 per cent lower by 2100, and – with a poorer world demanding less – coal and other mineral prices would fall. Tourism would also be hit harder by fewer overseas visitors due to widespread environmental damage and a weaker international economy.
...On Thursday this week the Productivity Commission's important piece of work on international action will be released. It will show that all of the countries studied, including seven of our top ten trading partners, have adopted major policies to reduce pollution and support clean energy. The approaches vary from country to country, but the report will make it clear that market mechanisms are a far more cost-effective way than other approaches like regulation and subsidies. So it will deal comprehensively with those who claim we would be striking out on our own, and those who argue for so-called direct action.

The PC will highlight something lost on too many people – that the world is moving, and it follows that if we don't act now we'll be left behind. Countries accounting for around 80 per cent of emissions have already pledged to act to address climate change. Thirty-two countries and ten American States already have operating emissions trading schemes in place. The world's key economies are all taking action of one kind or another.

China's 12th Five Year Plan, which covers the years to 2015, has a goal of 'gradually establishing a carbon trading market', while emissions trading is planned to be trialled in six key provinces before 2013. This is on top of existing incentives for low-emissions power generation.

India has begun implementing a national energy efficiency certificate trading scheme accounting for more than 50 per cent of the fossil fuel used there, and a coal tax is expected to raise about half a billion dollars for investments in clean-energy technologies in the first 12 months.

In South Korea, legislation was introduced in April to commence mandatory economy-wide emissions trading from 2015. The South Koreans have also had a trial emissions trading scheme in place since January involving 14 cities and provinces, including Seoul.

And Japan has also operated voluntary emissions trading schemes involving some of its largest companies since 2005.

In Europe, an Emissions Trading Scheme commenced in 2005 and applies in 30 countries, some of which also have a carbon tax, and many of which have additional measures such as renewable energy subsidies.

In Britain – which produces roughly the same total carbon pollution as Australia but has a population three times our own – a Conservative coalition government has just tightened its emission targets to 50 per cent below 1990 levels by around 2025.

In the US, despite a hostile Congress, the President is committed to a new Clean Energy Standard that will double the share of clean-energy sources in the US electricity supply mix to 80 per cent by 2035.

So the world is moving now to reduce pollution, and we need to be part of that if we want to maintain and improve our competitive advantage. Our 2008 modelling indicated the costs of taking action now could be around 15 per cent less than if countries play catch up later on – and we will provide an update of that estimate in the coming weeks.

But it's already clear that with the highest level of carbon pollution per capita in the developed world, Australian exports will become a prime target for trade measures if we fall too far behind....

Take coal, as just one example. The world will continue to burn our coal for a long time, especially with concerns over nuclear power. Prices are high, having doubled since the CPRS was proposed. But our job is not just to export cleaner coal at good prices, but to export the technology that makes coal more viable into the future.
Of course, when it comes to the big ticket reforms, there are always those who say the sky is going to fall in. As Bob Hawke reminded us last week, so many of our most important reforms were once described as a potential disaster for our economy. But in time they reaped big dividends for the country, helping secure two decades of uninterrupted economic growth.

Imagine if he and Paul Keating hadn't brought down tariffs, imagine if we were still an isolated, island economy, hiding from the world. China's industrialisation would be booming away to our north – and Australia would still be paying industries to be uncompetitive. Rather than plugging into global supply chains, we would be on the sidelines of the Asian Century, failing to capitalise on the shift in global economic weight that we are now living through.

Imagine if in 1992 the Keating Government had been spooked by the business group that called the superannuation guarantee 'irresponsible and ludicrous'. We wouldn't have achieved an increase in national savings and retirement incomes, setting the platform for dealing with a global recession and the long-term pressures of an ageing population.

Imagine if we'd given up on reforming resources taxation, just because the miners said it would ruin the industry, close down mines, send companies offshore, and smash profits. Instead we have a deal that will allow us to cut company tax especially for small business, boost super and invest in infrastructure, while mining profits and investment continue to skyrocket.
We are doing our best to counter the scare campaign in a methodical, considered way, and by commissioning new analysis by leading experts:

Professor Ross Garnaut has updated his 2008 climate change review, including the latest economic data and developments.
* We are working on an emissions trading scheme with a fixed price for three to five years beginning as early as July 2012.
* It would then convert to a 'cap-and-trade' emissions trading scheme with a flexible price.
* And as the multi-party committee said in February, the scheme will have broad coverage across the economy.

We have also made clear that every cent raised by the scheme will be directed to three important purposes:
* Generous assistance to households and families, to help them make the transition to clean energy;
* Support for businesses, to protect jobs, investment and energy security, without affecting the incentive to reduce pollution;
* And we are also examining new ways to support investment in clean-energy projects and provide additional support for innovation in a way that is supported by unions, environmental groups and superannuation funds who want to invest in the technology.

The household assistance will be targeted to pensioners, and low- and middle-income households. More than half the revenue raised by the scheme will be allocated to household assistance. The assistance will be permanent. And millions of households will be better off.
The second really key point I want to make today is that we can have strong economic growth without growth in pollution.

Don't believe the vested interests who argue Australia must choose between a stronger economy and decent environmental outcomes. Jobs will still be created, industries will prosper, and our economy will continue to grow strongly with a carbon price.

When we finalise the modelling I look forward to releasing hundreds of pages of detailed information that bears this out, including an updated assessment of the benefits of acting now versus acting later. But today I'm able to give you a bit of a sense of where it is headed and a handful of key conclusions.

For the purposes of this speech please don't read anything into the fact I've used the numbers for a $20 carbon price, as this is just the example price we've used before. There will be a range of modelled scenarios and nobody should take this example as meaning we have settled on a price, because we haven't.

The first conclusion is this: our economy will continue to grow solidly while making deep cuts in carbon pollution.

The modelling will show real national income growing strongly under a carbon price, at an average annual rate per person of around 1.1 per cent until 2050 instead of 1.2 per cent. This means a carbon price would only reduce annual growth in GNI per person by about one-tenth of 1 percentage point.

Real national income per person would be 16 per cent higher than current levels by 2020, which is an increase of more than $8,000 in today's dollars. By 2050 the increase is about 56 per cent, or more than $30,000.

That's before you take into account the long-term benefits of carbon pricing – like protecting tourism icons such as the Great Barrier Reef or Kakadu, or the agricultural wealth of the Murray Darling Basin.

The second conclusion is just as important: employment continues to grow just as strongly after we put a price on pollution.

Today I can say that the modelling shows aggregate employment is approximately the same with or without a carbon price. By 2020, national employment is projected to increase by 1.6 million jobs, while at the same time growth in domestically-produced pollution slows. For a Government obsessed with jobs, this conclusion is crucial.

The third key outcome of the modelling is that demand for low-emission goods and services increases dramatically with a price on pollution, so that there will be stronger growth in sectors, such as less-emission-intensive or renewable electricity.

As I mentioned in my economic note on Sunday, gas-fired electricity is projected to increase by between 150 and 300 per cent over the period to 2050, with the renewable electricity sector projected to be 600 per cent bigger than it is today.
But the only way to get these kinds of outcomes in a cost-effective way is with a market mechanism. This is my third key point today.

It is a view shared by the Productivity Commission, by Professor Garnaut, and by every serious economist including the 13 who were moved to pen an open letter last week.

True to form and despite all the evidence and analysis, our political opponents will have you believe the sky will fall in if we price carbon. The bipartisanship of earlier years has been unwound by the most negative Opposition we have seen....

They say they can deliver abatement through what they describe publicly as direct action and privately as trying to look like they care.
As Greg Combet has said, their inability to hit the 5 per cent target means international permits would need to be purchased at a cost of over $20 billion. So the Coalition's Direct Action policy would cost over $30 billion rather than the claimed $10.5 billion, leaving households $720 per annum worse off on average.
The Honorable Wayne Swan, MP, Deputy Prime Minister and Treasurer
Address to the National Press Club; 7 June 2011
Australian Treasury Department

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