Australia's crushing climate trap

Australia will have to increase its greenhouse gas reduction target from the current 5 per cent by 2020, to at least 15 per cent within two years under the policies of both the ALP and the Coalition.

That's because the conditions for doing that look like being met. Remember… the government's reduction target is 5 per cent below 2000 levels unilateral, and 15 per cent if “major developing economies commit to substantially restrain emissions and advanced economies take on commitments comparable to Australia's”.

The Opposition has signed up to both the 5 per cent and 15 per cent targets, although it hasn't mentioned the second one for a while.

It's clear that science is beginning to reassert itself on this subject after a few years on the sidelines following the debacle in Copenhagen in 2009.

Current advanced country pledges already suggest a 10-20 per cent reduction from 1990 levels by 2020. China has imposed quotas on carbon emissions and is likely to have an emissions trading scheme in place by 2015; it already has them in nine provinces. The action being taken by other developing countries is already sufficient for a 15 per cent reduction in Australia.

The idea that Australia is leading the world on climate change is quickly becoming untrue. Moreover the delays caused by the 2009/10 political convulsions, which saw both the opposition leader and the prime minister sacked over climate change, will mean Australia ends up paying a much higher price than it would have.

The recommendation on Australia's target will come from the Climate Change Authority, to be chaired by former Reserve Bank governor and industry super champion, Bernie Fraser.

Even the 5 per cent reduction from 2000 levels is starting to look nearly impossible given the increase in emissions since the target was set; 15 per cent would represent a crushing burden for Australia's businesses.

Australia's carbon emissions are already 5 per cent above 2000 levels. At the current rate of increase, they will be 23 per cent above the 2000 level by 2020, or 690 million tones of CO2 equivalent.

That means the 5 per cent reduction target to which both parties have committed is already a 23 per cent, or 160 million tonne reduction from business as usual. Reducing by 15 per cent from 2000 – which looks like being the target – means we would have to cut emission by one-third from BAU.

If that were achieved by cuts in Australian emissions, it would need a carbon price in the hundreds of dollars, or direct action that would bankrupt the Government.

As things stand the tax of $23 per tonne will stand for three years to be replaced by emissions trading in 2015. Despite the obvious concerns about it from business and the community generally, the carbon tax won't actually do much to reduce carbon emissions because of the compensation and offsets that have been promised.

The impact of the target will only start in 2015, when it will determine the number of permits emitting businesses will have to buy.

It's possible that a new Coalition government will dismantle the whole thing next year, but that would be a Humphreyan courageous decision: first the rest of the world clearly is taking action to reduce emissions, so that if Australia just dropped out of the project and dropped its targets the cost would be very high; and second, if the Coalition tried to use its “direct action” plan to meet the targets, the cost to the budget would be horrendous.

That is especially true on both counts if the target is 15 per cent by then. If the world is doing enough to justify a 15 per cent target according to Bernie Fraser's CCA, which it almost certainly will be, then the Coalition could hardly dump Australia's targets altogether. “Direct action” to meet even a 5 per cent target is unaffordable; 15 per cent is laughable.

Emissions trading is the cheapest way to reduce carbon emissions because businesses can buy permits from overseas. At the moment European permits cost less than $15 per tonne and certificates from the Clean Development Mechanism, which will qualify as Australian permits, cost around $5 each.

On that basis the cost to Australian businesses will immediately fall to the floor price of $15 a tonne when emissions trading starts in 2015.

At that price, the cost of meeting the 5 per cent reduction target would be $2.4 billion in total. A 15 per cent target would cost $3.2 billion.

But the question is whether Australia can or should meet its emissions target simply by buying permits from overseas. It's true that climate change is global not national, so it doesn't really matter where a tonne of carbon is removed, but would it be acceptable politically, here and overseas, for Australia not to actually reduce its emissions and simply pay other countries to do it?

This is a question that is exercising the minds of the policymakers in Canberra now – how to pitch Australia's scheme so that the targets are met without crushing our industries but without, in effect, simply buying and preserving forests in Borneo while continuing to produce most electricity from coal.

By the way, most of the increase in carbon emissions between now and 2020 will come from export energy projects, principally coal, coal seam gas and LNG, as well as some from transport and industry direct combustion – almost none of it from electricity generation.

In effect it's a double whammy from the resources boom: a high dollar plus a larger climate change burden.