Date created: 15/5/07
Last modified:15/5/07
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John Quiggin

Hot heads won't save us

John Quiggin Australian Financial Review

15 February 2007

Now that the reality of global warming has finally been accepted, debate has turned to the question of what to do about. Unfortunately, much of the discussion has been about ‘picking winners’, from nuclear power to biofuels, rather than about the national and global markets in emissions that will be needed if a cost-effective solution is to be reached.

Suggestions made by Tim Flannery and Bob Brown that Australia should phase out coal exports are yet another example of picking winners, or, in this case, picking losers. Flannery and Brown assume that clean coal technologies such as carbon capture and sequestration can never be a cost-effective solution to the problem of reducing emissions.

Although Brown was reported in some quarters as calling for exports to be stopped within three years, his actual proposal was for a plan to be developed within three years to phase our coal exports over several decades. Unlike an immediate shutdown, this proposal can’t be dismissed out of hand - after all, industries do rise and decline over decades. However, it directly contradicts Brown’s principal argument against sequestration, namely that ‘clean coal is decades away.’

In any case, Brown is overstating the position here. Carbon capture is technically feasible now, and sequestration is already taking place on a significant scale at the Sleipner West natural gas field off Norway. The construction of an 860 MW gas-fired power plant from which CO2 will be pumped into offshore oil fields has been announced.

With current technology, carbon capture and sequestration is expensive, and attractive locations like oil fields are not available everywhere. Even so, it is already economically feasible in some cases and the options will expand as the technology matures.

More importantly, if we are to solve the problem of global warming we need to set the right price signals, then allow markets to determine the most cost-effective solution. Trying to impose particular solutions by fiat is a mistake.

The other problem with statements like those of Brown and Flannery is that they reinforce the view that we can reduce CO2 emissions only at the cost of a drastic reduction in living standards. This view is held by some environmentalists, who welcome the idea of a radically simplified lifestyle. It is also held by their most extreme opponents, who draw the opposite inference, that we should let global warming rip rather than change anything we are doing. Not surprisingly, this group (well represented in The Australian newspaper) has leapt on Brown’s statements.

The idea that only drastic measures will have any effect on global warming is contradicted by economic analysis, which consistently shows that the cost of a global agreement to stabilising atmospheric CO2 levels will be between 1 and 3 per cent of world income by 2050, or between 4 months and one year’s economic growth.

Debate about policy choices on coal exports is misleading in another way. The effect of climate policy on our coal exports will depend primarily on decisions made overseas, most importantly by coal importers such as China. Much discussion is premised on the assumption that China will do nothing to restrict its CO2 emissions for many years to come.

It is highly likely, however, that the US will ratify Kyoto, or introduce equivalent measures of its own, once the Bush Administration leaves office. Once that happens, the current cosy relationship, in which Washington and Beijing each point to the inaction of the other (with encouragement from Canberra) will come to an end. Instead, there will be immense pressure on China to follow through on the deal implicit in Kyoto, that a first round of cuts in emissions by developed countries will followed by deeper and broader cuts including developing countries like China and India. With its biggest customer on the other side of the table, China will have little choice but to cut a deal, though no doubt the bargaining will be hard and protracted.

Rather than ignoring this likely development we should be preparing for it. For example we should encourage China to construct power stations that can be adapted for carbon capture and storage.

Even with improvements in carbon capture and sequestration, the imposition of a global price on CO2 emissions is bound to constrain future demand for coal, regardless of what we do in Australia. There is no reason to expect, let alone to promote, an end to coal exports, but planning for the future should be based on realistic assessments rather than the wishful thinking that has prevailed so far.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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