PM - Budgeting for climate change: economy and environment

MARK COLVIN: Ever since the Stern report on climate change came out in Britain at the end of October, debate has been growing here about the way the environment and the economy interact.The Lowy Institute in Sydney was packed to overflowing today for a lunchtime talk by the Australian National University Economist, Professor Warwick McKibbin, on "Why Australia should take early action on climate policy".Professor McKibbin presented a plan for making market forces, rather than, for instance, a carbon tax, do the job of reducing carbon emissions.He wants to do this by creating property rights in carbon. I asked Professor McKibbin what that meant, and how it would work?WARWICK MCKIBBIN: The best way for people to conserve something is to have somebody own it, and having someone own it and somebody who wants to buy it. And the idea is that we want to reduce carbon in the atmosphere, and so we give ownership rights to that carbon to everybody in the economy.MARK COLVIN: How do you give ownership rights of something as evanescent as smoke?WARWICK MCKIBBIN: Well, what you do is you make it a requirement by people who produce energy, the generators, to have a particular permit to emit... to build carbon into the products that they're selling, i.e. electricity, oil, gas.If they have to buy a permit to produce, someone who owns the permit gets to sell it to them, and then that becomes a market.MARK COLVIN: Who owns the permit though? Is it the Government?WARWICK MCKIBBIN: The Government has this requirement that any company that emits... that produces carbon in their energy has to have a permit to do that, and the Government allocates permits across whatever the target might be, which is, maybe, a 50 per cent reduction in emissions over a long period of time.Once you set that target and you set the requirement on industry, and you give those rights to individuals and companies, then you have the people who own the permits, and then you have the people who need the permits and that generates a market.MARK COLVIN: Okay, so if I'm the owner of coal mine, or a big coal-fired power station, I get a permit, I get ownership rights. Why is that fair?WARWICK MCKIBBIN: Well, you get some ownership rights, and it's fair because you've built... you've got a lot of a capital and there's a lot of workers who invested a lot of their efforts into a particular technology, which is now about to be changed.So, we want to compensate people whose decisions have been affected by the policy. So, we're starting from a new level. From this point on, you then have the right, if you're a fossil fuel producer, to keep doing what you're doing.But if you want to change what you're doing, you can then sell those rights, and it gives you an incentive to change more quickly.MARK COLVIN: But what if I own bunch of wind turbines or a solar power company, do I get property rights?WARWICK MCKIBBIN: Well, you don't need them. The point is that you now are selling a product whose price has not changed, whereas the electricity generated from fossil fuels will now be more expensive. This gives you a competitive advantage in the short-term, but more importantly if you can see that the future price of carbon will rise quite sharply, people will want to invest in your industry, because it doesn't face the same constraint.MARK COLVIN: What about at the demand end? Let's say that I'm somebody whose very tempted to buy a four-wheel drive or a couple of air conditioners for my house?WARWICK MCKIBBIN: The way this works is that you driving a four-wheel drive, don't need a permit. What you do is, when you buy the petrol to go in the four-wheel drive, the oil refinery needed a permit, which will increase the price that you have to pay.So, you'll be paying a higher price per unit of energy. Now, that hurts you, but by giving these long-term permits to you at the beginning, we're compensating you for all the increase in energy prices for the next 100 years of your life, and putting it all upfront.So, you're going to be financially better off. Then you have to make a decision, do I want to cut the amount of petrol that I use in my car by buying a smaller car, or do I want to keep doing that and use the money for that purpose?You will reduce your consumption of oil, and probably spend it on something else.MARK COLVIN: So, there's no need to subsidise, say, electric cars when they come on-stream, or hybrid cars that are there now?WARWICK MCKIBBIN: Well, it's a valid case to argue for subsidies for technology development, and I think that is very valuable. What we want to do is not just have the technology being developed, but we want to have it deployed.So, if you have a hybrid car, and all of a sudden the cost of petrol is significantly higher, then you have an advantage in the market because you're selling something that's using a fuel which is less carbon-intensive and therefore more profitable for you.And that's the goal, is to get everybody in the economy to change their behaviour, and to compensate those that will be worse off because of the change in the price in energy.MARK COLVIN: The Federal Government's very concerned that anything that is done about climate change may really fundamentally damage the Australian economy. Are you saying that it shouldn't be so concerned?WARWICK MCKIBBIN: No, it should be very concerned, but under our approach, we address that issue directly. There are two components in the economic outcomes in the short-term.One is we want to increase the price of carbon a little bit, and we can control that price, because the Government is controlling that short-term price, and that increases the cost to industry and that hurts.But by giving these long-term property rights, we're creating a market where companies can manage their risk. They can invest in different technologies, and have an asset to hedge against that investment.What that means is that they're financially better off. So on the one hand, the cost of capital goes down, but the cost of carbon goes up.We argue that you can balance those two by increasing certainty in the economy, you can actually make the economy better off, even though the price of carbon might go up in the short-term.MARK COLVIN: So there are no losers? I thought that was virtually impossible in economics.WARWICK MCKIBBIN: No, there are no... there are losers in the raw, but because we're creating value, like we create when we create real estate contracts, we can distribute that value around to the losers, and make everybody better off if we're clever enough.MARK COLVIN: Now, I understand that you've felt rather on the outer over the last decade or so in terms of governments, national and international. Has that changed?WARWICK MCKIBBIN: It's changed dramatically. When the Kyoto Protocol became the only game in town, debate was stifled, and I kept presenting, and I kept on getting people listening, but they kept shaking their head saying, "Well, we know Kyoto is the only game in town".Now people are realising that Kyoto is not working. It's not working for political reasons, it's that governments are not hitting their targets.People aren't willing to pay any price whatsoever to reduce emissions, especially when most of the world aren't reducing emissions.Now we are quite... we're listened to by quite a range of, not only governments, but also NGOs and other people who have a serious interest about the environmental outcomes of climate change.MARK COLVIN: Professor Warwick McKibbin of the Australian National University, who was talking at the Lowy Institute today.