Policy on climate change is mostly hot air


Climate change is one of the toughest issues facing Australia, and every other nation, yet two things last week showed how confused and incoherent our response to it is.
In Melbourne, the Bracks Government decided to make electricity retailers buy 10 per cent of their power from renewable sources by 2016, despite its own consultants finding that this is an expensive way to reduce greenhouse gas emissions.
Meanwhile in Sydney, Prime Minister John Howard trumpeted it as a virtue that his Government is doing nothing to set up a market-friendly framework to reduce greenhouse emissions, while forecasting that rising exports of coal, gas and uranium could make Australia a future "energy superpower".
The PM said Australia needed a "pragmatic, rational and flexible energy policy". So it does. But let's be honest: we don't have that now. Our policies are driven by interest groups, irrational and inflexible.
And so they will be until we get the fundamentals right, by adopting a mechanism for the market to find its own way to reduce greenhouse emissions.
To be pragmatic and rational in this debate, the starting point is that if the scientists are right, then global warming implies colossal risks for mankind, and policies should actively try to minimise them.
Then the task is to achieve the most effective response at the minimum cost. Governments can help foster technology development, as the Howard and Bracks governments are doing - but the real job is to put in place a structure that will see those technologies used.
Certainly, right now it's an exciting time for energy technology. Next year pilot projects will start operating in the Latrobe Valley to squeeze coal dry before burning it, and in the Otway basin to test carbon capture and storage technology. With both governments and the coal industry now committing significant funds to take clean coal technologies from the lab to the power stations, we are on track at last at that end of the process.
The problem is at the other end. Suppose we test the technology, we find it works, but (inevitably) at a higher cost than doing things the old way. What happens then?
With the policies we have now, nothing would happen. Companies will not make philanthropic gestures by choosing new expensive technologies over old cheap ones. Without a price mechanism to give firms an incentive to choose (and retrofit) new low-emission technologies, they won't be used.
The very articles and reports the PM quoted in his Sydney speech tell him the same thing. He quoted a new report by the Australian Bureau of Agricultural and Research Economics as showing that if Australia cut greenhouse emissions by 50 per cent and the rest of the world didn't, it would cost us dearly. Well, that's true, but hardly rocket science.

Two other points the ABARE report made are more relevant. First, its low-cost scenarios for cutting greenhouse gases all assume a "globally harmonised carbon tax": that is, a carbon tax set at the same level around the world.
The benefit of this would be its simplicity and transparency: countries in a post-Kyoto treaty would not have to haggle over reduction targets, or fear losing their energy-intensive industries offshore.
ABARE warns that "the political feasibility of such an 'all countries coalition' is highly questionable". True, but it should be our goal.
Second, the report emphasises that without a carbon tax (or emissions trading system), there will be no take-up of the carbon capture and storage technology the Government wants. "Adoption of CCS commences if the cost of capturing and storing a unit of carbon dioxide is less than or equal to the emissions penalty that would otherwise be paid," it notes.
The PM wants realism. So do I. If we want a future for Australia's coal industry, we need to support a tax structure that makes clean coal technology viable. The global market wants cleaner fuel, and if you oppose carbon taxes or emissions trading schemes, then coal will lose out to gas and uranium in pollution-conscious, energy-thirsty markets such as China and India.
The tragedy is that the Howard Government treats energy policy as politics. Take wind power, where Environment Minister Ian Campbell supports wind farms, while Agriculture Minister Peter McGauran denounces them as "a complete fraud" that "only exist on taxpayer subsidies". And on Bald Hills, for political reasons, the PM sided with McGauran, supposedly out of concern for the fate of the orange-bellied parrot.
Wind and biomass, the experts tell us, are the cheapest options in renewable energy (hydro aside). But a 2004 study by the Allen Consulting Group for the Bracks Government, The Greenhouse Challenge for Energy, found they are anything but a cheap way to reduce greenhouse gas emissions.
Allens ranked renewable energy as the most expensive option apart from carbon capture and storage(!). Far more cost-effective are improving the efficiency of energy use, making existing generators more energy-efficient, switching from coal to gas, and shutting down heavily polluting plants (such as Hazelwood) to install energy-efficient ones.
Instead, we have Hazelwood given an extended lease of life, with no retrofit to use clean coal technologies, while Victorians will subsidise the development of a wind industry here. Steve Bracks tells us it will cost us only $1 a month per household, but won't release the report that figure comes from, while opponents say it will cost three times that.
The Howard Government's lack of leadership has created a vacuum in which second-best policies rule. Australia deserves better.
Tim Colebatch is economics editor.