Why we can ignore Rio, Copenhagen and Kyoto

The Rio 20 Earth Summit will as usual generate a whole lot of media ‘hoo-ha' about the inability of the world to come to a meaningful agreement on controlling global environmental problems such as climate change. But, at least in relation to climate change, these types of mass international conferences have become an incredible distraction. They actually undermine rather than support efforts to reduce greenhouse gas emissions even if they might be worthwhile for other environmental issues.

This is because they reinforce a false belief that reducing carbon emissions must be closely internationally co-ordinated to avoid major trade and therefore economic disadvantages for any individual nation that acts to reduce emissions.

When you actually look at the underlying data you realise that, except for a few very select industries – namely aluminium smelting, cement clinker, and steel production – the economic and trade implications from policies to reduce emissions are relatively minor. These are entirely manageable with some targeted concessions for industry that is emissions-intensive and trade-exposed. This is the case not just for Australia but every major economy around the world.

In the case of Australia, the chart below illustrates that there are really two industries, aluminium and cement, which have such high emissions as a proportion of their revenue that a carbon price would represent a very serious impact on their viability. In addition to these two, the production of the raw steel is also highly emissions intensive (but has been obscured by ABS data that groups it in with a range of other steel value-adding activities which aren't emissions intensive).

Source: Grattan Institute (2010)

To illustrate the point with cement as an example, it produces almost 5,000 tonnes of CO2 per million dollars of revenue, so at a $23 carbon price this would equate to $115,000 per million dollars of revenue which would make it unviable. So there are significant trade implications for these three industries.

Yet it's not as if we need a global climate change agreement involving everyone from the USA all the way down to Zimbabwe, to manage a problem for three industries which don't even make up 1 per cent of GDP for Australia. At worst there might be a further handful of industries on top of these three for which some kind of half-convincing case could be made that the carbon price could make the difference between a long-term sustainable industry in Australia versus serious decline. By the way coal mining or oil & gas couldn't make such a case (further explained in this Grattan Institute publication).

The really interesting thing is that this kind of pattern is repeated around the globe.

The chart below is for the United States and illustrates the likely impact on industry value-add (a proxy for gross profit) from a carbon price of $US20 per tonne of CO2. Nitrogenous fertilisers can be safely ignored, because they could reduce their emissions overnight by installation of an off-the-shelf pollution control technology to remove their nitrous oxide emissions.

With this excluded we again see cement (lime is sub-part of cement industry), aluminium as well as steel as the industries with big exposure. Yet for industries representing 99.5 per cent of US GDP, the impact would be less than 5 per cent of gross value add and unlikely to be significant enough to noticeably alter trade flows.   

Impact of US$20t CO2 carbon price on different US industries' value-add and their share of GDP  

Source: Climate Policy and Industrial Competitiveness: Ten Insights from Europe on the EU Emissions Trading Scheme

The pattern is again repeated in the UK as illustrated below. This is largely representative of the European Union as a whole based on other analysis prepared by the European Commission and the think tank Climate Strategies. It should be noted that refined petroleum is unlikely to be severely impacted because European fuel quality standards provide a degree of protection from overseas refineries. So industries representing more than 99 per cent of GDP would not suffer any trade impacts from carbon pricing.

Impact of a €20t/CO2 carbon price on different UK industries' value-add and their share of GDP  

Source: Climate Policy and Industrial Competitiveness: Ten Insights from Europe on the EU Emissions Trading Scheme

The world does not have to reduce their emission in lock-step to avoid major trade problems.

Achieving international progress in reducing emissions will come down to each country demonstrating through its own efforts that it is willing to make a contribution. This will create the good faith necessary for others to then make their own additional emission reduction efforts.

This is the path to progress, not international talk-fests.