Garnaut's theorem: E=M-C

Ross Garnaut, in his much awaited draft report, seeks to turn that argument on its head: Australia has much to lose from even the mildest impacts of climate change. If we want to save our economy, then we need to save our environment first.

Let's put aside, for the moment, the hand-wringing from vested interests about the potential impact of a carbon price and an emissions trading scheme. What happens if we do nothing? Here, Garnaut is unequivocal. His review group has conducted preliminary economic modelling on just the "measurable", unmitigated climate change for "middle of the road outcomes" on temperature and rainfall. The result: a 4.8 per cent cut in Australia's projected GDP, a 5.4 per cent cut in projected household consumption, and a 7.8 per cent cut in real wages by 2100.

And this is only part of the story. "There are also conventional economic effects that are not currently measurable, the possibility of much larger costs from extreme outcomes, and costs that aren't manifested through markets,” says Garnaut.

Agricultural production would be deeply impacted, in the Murray Darling Basin it could decline by 92 per cent by the end of the century. The Barrier Reef, Kakadu and other tourist assets could disappear much earlier. And, he notes, there would be dramatic and inestimable impacts on Australians' quality of life and lifestyle.

Garnaut says a full assessment of the economic impacts will be made in his "supplementary" draft report, due in late August, which will include modelling from Treasury and suggested emissions reduction targets and trajectories.

In this report, however, he makes several key recommendations. First, that the coverage of an ETS should be broad, that all permits should be auctioned, and that the money raised should go to: households, preferably in the form of efficiency measures (50 per cent); structural adjustment, including payments to trade exposed industries (30 per cent); and investment in new technology (20 per cent).

Because Australia has more to lose than any other developed country – Russia, quips Garnaut, is quite excited about the prospect of a three degree rise in temperature – it has an interest in encouraging the strongest feasible global effort.

Time is running out, says Garnaut. It would have been better to start the process years ago. "We will delude ourselves should we choose to take small actions that create an appearance of action, but which do not solve the problem," he says. "Such an approach would risk the integrity of our market economy and political processes to no good effect."

It will be interesting to see what the most vocal industry groups have to say in response. So far, we have seen little more than the expression of vested interests.

For instance, Brad Page, the CEO of the Energy Supply Association of Australia, was on the radio this morning claiming that energy generators needed to be protected from a scheme because they were the only ones in a position to invest in new energy technology. Pure hogwash. The flow into new and renewable technologies in places like California, where they have been smart enough to encourage such investment, is just extraordinary. In Australia, the renewable energy target attracted nearly $12 billion of investment before grinding to a halt when the Howard Government acceded to lobbying from the likes of the ESAA and decided to can the target.

And an extra thought. A recent report commissioned by Merrill Lynch into the global private banking industry found that more than a quarter of the world's 10 million people who count as high net worth individuals and have some $US40 trillion to invest between them, wanted to invest in green technology. The figure for the second generation of these wealthy individuals was a staggering 80 per cent. No one is as keen to protect their wealth as the ultra rich.

But back to another point made by Page. He admitted that some generators are particularly vulnerable to a carbon price because they have huge debts. That's because the financial engineers have geared them up to the eyeballs and structured them so they can take dividends now from future cash flows. That's why they are in no position to invest in anything much at all. What the world needs is engineers who can make investments now to create a future dividend, the ones that will be appreciated by the next generation. Not the other way around.

Of course, not all generators find themselves in such a predicament. Origin Energy CEO Grant King says he wants an emission trading scheme. That's because his company has been smart and has seen what's coming. It has invested heavily in gas resources, which have much lower emissions than coal, and in renewables, particularly wind and geothermal. Not only does King want a carbon price, created by the issuing of permits and other constraints, he wants to ensure it is high enough to achieve the desired reduction in emissions. If heavy emitters such as coal are excluded, then there is no reductions scheme.

So at least some companies are prepared for the future. Garnaut agrees there will be winners and losers. But, he notes, there will be big winners. Everyone just needs to get used to the new economic formula. The economy and the environment will only thrive if carbon is taken out of the market. E=M-C.