Sharper tools for a low carbon economy

Like 2011 before it, 2012 is shaping up to be another year of economic volatility, political instability and environmental challenges for Australia. It is easy to be distracted by short-term issues but against this backdrop, climate change mega-trends are continuing.

Evidence of climate change driven by our economic dependence on polluting technologies continues to grow. Scientists are attempting to more clearly identify the natural boundaries that humanity needs to respect in order to avoid the risk of tragic and expensive environmental change at both continental and global levels. Initial indications are that many of these boundaries appear to have already been crossed and others are increasingly under threat.

Leading policymakers, businesses and economists accept that economic development to date has come at the expense of natural capital and the critical economic and life support services our ecosystems and climate provide. They are now actively pursuing smarter, cleaner and healthier models of economic development.

It is no coincidence that immediately following the global financial crisis, around 16 per cent of total economic stimulus packages around the world were allocated to climate change measures, representing upwards of $US520 billion – towards clean energy development and low-carbon growth.

Despite the uncertain economic conditions, 2011 saw another record year for clean energy investment, with investment topping $US260 billion. Investment in clean energy generation is now competing with global investment in fossil fuels, rising to 42 per cent of total energy investment in 2010.

Over 100 nations now have policies supporting the development of renewable energy. Carbon taxes and direct prices are already legislated in countries covering around 567 million people and a further 900 million will be covered when schemes commence in China and South Korea in 2015. While the European Union (EU) carbon market deals with oversupply issues and broader economic woes, Australia's starting carbon price of $A23 is by no means the world's highest price.

For all the relative strength of the Australian economy, we are not immune to global trends. We are reminded of this every day by news reports about the impact of the mining boom and global economic conditions on our exchange rates and our economy.

Australia is faced with a dual challenge: how, on the one hand, we can ensure our economy is flexible enough to deal with those global trends that may negatively impact us, but on the other hand, how we ensure we are positioned to capitalise on the opportunities the 21st century global economy presents.

Unfortunately, theGlobal Climate Leadership Review 2012 highlights just how ill-prepared Australia is to meet many of these economic challenges. What we have seen as the economic blessings of the past, such as cheap, heavy polluting energy, will shortly become the economic curses of the future.

In 2009, The Climate Institute commissioned London-based economics firm Vivid Economics to measure the low-carbon competitiveness of the G20 countries. This year, The Climate Institute in partnership with GE commissioned an update of the Low-Carbon Competitiveness Index, using the most recent data available and also back-casting to incorporate data from 1995 to examine how those rankings have changed over time.

It provides a snapshot of each country's current level of readiness for a low-carbon world, assessing the structure of each economy, the extent of early preparation, and broader indicators of future prosperity such as natural and human capital. It is important to note that the index does not incorporate the recent Clean Energy Future initiatives into its analysis as these measures have largely not yet come into force.

The key findings from the index include:

-- France, Japan, the United Kingdom, South Korea and Germany are currently best prepared to be competitive in the low-carbon economy.

-- Australia is amongst those countries facing the biggest challenge in remaining competitive in a low-carbon future, ranked 16th, lower than Argentina, South Africa, Saudi Arabia, Russia and the US.

-- Australia is the only country in the G20 which has become less prepared for the low-carbon economy since 1995.

-- 2011 saw significant progress in international negotiations with the first ever agreement to finalise a new legal framework that covers commitments from all major emitters by 2015. In 2012, whether Australia helps or hinders global efforts will hinge on whether it accepts a new and credible Kyoto Protocol target at the end of the year.

-- The countries which are best prepared for the low-carbon economy are those that have recognised the inextricable link between economic, resource security and climate change policies and are taking action accordingly. Australia's Clean Energy Future package is a step towards joining these nations.

Economic transformation is always difficult; it will require strong national leadership to guide Australia through what can be an unsettling period of change. However the change is inevitable. Australia can't turn its back on the global shift from dirty to clean energy, from non-renewable to renewable, and from inefficient to efficient. It can't do this anymore than it could resist the information technology age or the rise of China – and it is not in our national interest to do so.

The Clean Energy Future package will begin to change our direction. For the first time Australia will have an absolute and ongoing limit placed on the carbon pollution we release into the air. The pollution price, the Renewable Energy Target, the Carbon Farming Initiative and new policies announced last year – like the Clean Energy Finance Corporation and the proposed national Energy Savings Initiative – can drive investment, innovation and can minimise the threats and maximise the benefits to our citizens in a world limiting pollution.

Political and investment decisions still to be made will determine the success of this package. It will take leadership from government, business and the community to reverse Australia's declining carbon competitiveness.

Australia must also act diplomatically to secure its national interest in keeping global warming below 2 degrees Celsius above pre-industrial times. One high-value approach is for Australia to build regional carbon trading coalitions to provide economic incentives for advanced and developing countries to commit to more ambitious action.

At a multilateral level Australia faces a choice between maintaining a relatively unambitious approach to climate negotiations or pursuing more ambitious global action.

2011 saw significant progress in international negotiations with the first ever agreement to finalise a new legal framework that covers commitments from all major emitters by 2015. Australia will be an important player in these negotiations and will need to choose between retreating to the recalcitrant position it held up until 2007 before it ratified the Kyoto Protocol, or work with other leading nations, such as those in the European Union and the small island states, that are advancing ambitious cooperative agreements.

In 2012, this will hinge on whether Australia accepts a new Kyoto Protocol target at the end of the year. By marrying our climate diplomacy and carbon policies we can engage strategically with the international community in building a resilient and prosperous zero-carbon global economy.

Australia is at no risk of leading the world, but in 2012, when the Clean Energy Future legislation comes into effect, we will for the first time start moving in the same direction as those that are, and can reap the benefits accordingly.

John Connor is CEO of The Climate Institute.