Dog Days: Australia After the Boom (Redback) (16 page)

So what is Australia’s fair share? The Climate Change Authority has been established to provide independent and transparent advice on this matter. It takes account of what others are doing. It insulates the development of advice on emissions targets from the raw political process. Over time it could take its place as an important independent element of our system of economic governance, alongside the Reserve Bank and the Productivity Commission. The new Coalition government would find the work of such an authority helpful.

My own recommendation in the 2008 Climate Change Review had unconditional and conditional elements. I said that Australia should reduce emissions unconditionally by 5 per cent on 2000 levels by 2020. This is what we would do in the absence of other countries taking action to reduce emissions. We should be prepared to go further, up to a 25 per cent reduction, in the event of effective international action. The Labor government, with the support of the Opposition, adopted these targets. The unconditional and conditional targets were reaffirmed during the 2013 election campaign by the Coalition. In 2010, the conditional Australian commitments to the United Nations were given precise form. Our emissions would be reduced by 15 per cent if other developed countries took on comparable commitments and major developing countries committed to substantially restraining emissions. They would be reduced by 25 per cent in the context of a comprehensive global agreement capable of meeting the 2 degrees objective.

Other countries’ efforts already would seem to trigger Australia’s commitment to a 15 per cent reduction. This is similar to the commitment that the United States has made and towards which it is making solid progress. The comparison is relevant, since the US also has high energy use per person, high fossil fuel use and strong population growth through immigration. To meet Australia’s bipartisan policy communicated to the United Nations, we will need to go further still if a new and deeper set of commitments is made by others at Paris in 2015.

Chapter 6 notes that Australia’s economy has already been affected by climate change. Climate change-induced falls in productivity were experienced in utilities and agriculture. It can be expected to be increasingly important in the future, even with effective global mitigation and good fortune in holding temperature increases to 2 degrees. It will be overwhelmingly important if the international effort has incomplete success and future Australians have to live with temperature increases of more than 2 degrees. Adaptation is a useful if expensive accompaniment to prevention but not an alternative to it: it is fanciful to think of nation-states in their current form surviving temperature increases of 4 degrees or more. The costs of climate change and adaptation are part of our current economic reality and will grow at an uncomfortable pace in the decades ahead.

WHICH APPROACH IS CHEAPER?

While the former Labor and the current Coalition governments concur on targets, their approaches to meeting them are radically different. How we get there is not important to the climate outcome, but it does have implications for productivity and the budget.

Modelling in the 2008 Climate Change Review and subsequently by the Treasury suggests that Australia doing its fair share in a global effort to hold the temperature increase to 2 degrees would shave about one-tenth of a percentage point from growth each year until 2050. However, within about half a century the gains from avoided climate change – the gains from Australia doing its fair share of the global effort – would exceed the costs of mitigation. These gains over losses would grow larger and larger over time.

Part of the cost of global mitigation to Australian incomes comes from export prices falling as other countries do their fair share. The collapse of growth in China’s burning of coal for power in 2011 has already contributed to much lower thermal coal prices. The costs to Australia of the Chinese (and American) movement away from coal-based electricity is much greater than it needed to be because we kept investing in new capacity when the writing was on the wall. Billions of dollars of investment has been written down and written off since the market changed after 2011.

Experience in many countries shows that cutting emissions is getting cheaper and proceeding more rapidly than once anticipated. The cost of solar photovoltaic panels made in China in at least one major plant that I have inspected twice has fallen by 90 per cent over the past five years.

Like Europe, the United States and China, Australia has large numbers of minor policies that have contributed something to cutting emissions, but these are largely overshadowed by the Renewable Energy Target established in 2010, and the Clean Energy package with a national ETS as its centrepiece in 2011.

The Renewable Energy Target requires an increasing proportion of electricity to come from large-scale renewable projects, rising to an amount, fixed by legislation, that was estimated to be 20 per cent by 2020. Unexpected falls in electricity demand make it likely that renewables will fulfil more than a quarter of total requirements by 2020. The combination of the Renewable Energy Target and greater efficiency in electricity use is leading to substantially more rapid decarbonisation of electricity generation than I contemplated in the 2008 Review. It is also leading to lower wholesale power prices as renewable energy competes with established coal-based electricity for a declining market. This is an unanticipated but large benefit for consumers of electricity.

The ETS that came into effect in July 2012 requires all large-scale emitters of greenhouse gases to surrender a permit for each tonne of carbon dioxide-equivalent released into the atmosphere. Permits are made available at a fixed price through the first three years. From July 2015 they will be sold by auction or can be purchased from participants in the European emissions trading system.

The Australian scheme raises substantial revenue. About half is returned to households as tax cuts and social security increases, and the remainder paid as compensation to business (falling over time) and support for development of renewable energy.

After being on a strongly increasing trajectory for many years, Australian emissions have stabilised under the new policies. Emissions from the electricity sector fell by more than 7 per cent over the year to June 2013. The scheme has made enterprises much more aware of emissions and opportunities for reducing them. This has been especially important in containing what is in any case rapid growth in ‘fugitive emissions’ associated with coal mining and gas production and processing. Care is taken now to use technologies that involve lower emissions because high emissions could become costly at a later time.

Current policies can meet the more and more demanding reductions that Australia is likely to be called to make, at a relatively low cost and with minimal political discretion and business uncertainty. For a considerable time, the current arrangements are likely to be an economically efficient, large and increasing source of revenue as compensation payments to coal-based generators cease in 2014–15, as compensation to trade-exposed industries is reviewed by the Productivity Commission from 2015, and as international carbon prices rise with economic recovery in the European Union and the tightening of targets in Europe, Australia and beyond.

The Coalition government came to power in 2013 committed to removing the carbon price. It would seek to meet the established targets by Direct Action, to which it has allocated a sum of money and says there will be no more.

I have no reason to doubt the sincerity of the prime minister and his environment minister in telling the Australian people before the election that the nation’s emissions targets would be met under a Coalition government. The environment minister explicitly embraced the conditional as well as the unconditional targets. Since taking office, he has noted that strong progress on emissions is being made in the United States and especially China.

Direct Action, in principle, allows Australia to meet the commitments to the United Nations that were made by the government with the then Opposition’s support. However, on the evidence currently available, it is hard to see how the amount of money allocated to Direct Action would be anywhere near enough for us to meet the unconditional target. Using Direct Action to meet a 15 or 25 per cent reduction from 2000 levels by 2020 would be much more difficult still. As the United States and China have shown, it is possible to make radical changes in emissions trajectories without carbon pricing. As the United States and China have also shown, large emissions reductions through Direct Action require expensive muscular interventions of a kind not yet discussed by the Coalition. Of course, the government can change the content of Direct Action to meet the 2020 commitments, but it would be more expensive to concentrate cuts into a short period than to achieve them gradually.

Australia’s trade-exposed and emissions-intensive industries are thoroughly protected under the current arrangements. To comprehensively replace these arrangements with other measures generating similar emissions reductions would not increase incentives for economic activity and may reduce them.

Coal mining is less protected than other trade-exposed industries under current policies, with the average cost of purchasing permits at about 50 cents per tonne in 2013 after deducting assistance from the carbon-pricing scheme. This has been the source of considerable opposition to carbon pricing from the coal industry, supported by mining and industry more broadly. To keep the issue in perspective, the net cost of Australian carbon pricing to coal mining represents much less than 1 per cent of the revenue loss from the fall in international prices from 2011 to 2013, and less than 5 per cent of the gain from the fall in the dollar between March and September 2013. The costs of permits to coal mining, as for other business, would fall by two-thirds with the link to Europe in 2014 or 2015, if European prices remained at their current levels.

The Coalition envisages retaining elements of existing policy under the rubric of Direct Action. There is bipartisan support for the Renewable Energy Target, which will be the main source of emissions cuts in the electricity sector until the European–Australian carbon price rises considerably. The government is committed to retaining the Australian Renewable Energy Agency, which provides support for innovation in low-emissions technologies. Modification of the former government’s Carbon Farming Initiative can be seen as an element of Direct Action. Carbon pricing interacts productively with each of these ways of reducing emissions.

The new government has placed considerable emphasis on the potential for sequestration of carbon in soils, woodlands and forests. Prime Minister Abbott has often named my work as an authority for his statements about meeting Australia’s targets in this way. It is worth putting much effort into technology for measurement and sequestration, and into leading the international community into wider recognition of its contribution. It has to be recognised, however, that these are early days, and that for soil and woodlands we are talking about technical possibilities rather than certain, internationally recognised methods to reduce emissions.

Other Direct Action measures to which the minister for environment has alluded also have potential for curbing emissions, although we do not know how much and at what cost. The most productive of these could be brought within the framework of the established system, where they would be funded by part of the revenue generated by carbon pricing.

The new government is bound by its election commitments to introduce legislation to remove carbon pricing. That legislation will pass the House of Representatives. If the legislation were to succeed in the Senate, it would deepen the budgetary problems with which the government will eventually have to deal. It would lead to larger sacrifices of productivity than would be necessary with broadly based carbon pricing. It would lead either to much higher costs later in the decade or to Australia breaching its commitments to the international community and damaging its own interest in the global mitigation effort. And it would set the Australian polity on another long journey to find a way to make our contribution to combating global climate change, distracting the government and the polity from the great economic challenges facing Australia.

It would be a victory that the government may come to wish it had not won.

Since the bursting of the debt-funded bubble in 2008, democratic capitalism has been having its hardest time since the Great Depression and World War II. Ours is one of a small number of developed countries so far to have escaped great economic difficulties and profound doubts about the social an
d political order. Australia’s continued success is important for the welfare of Australians, and also for the standing of democratic capitalism in a changing world.

Australia will only avoid the problems of other developed countries if we manage our own challenges well. We will be tested by the end of the China resources boom.

Before discussing recent changes in the political culture here, let us recollect some of the lessons of modern economic development. The immense achievements of economic growth arose from a melding of capacity for collective action with the energy and genius of individuals and small groups. As social scientists have sought explanations for why some societies succeed economically and others fail, they have kept coming back to getting the balance right between collective institutions and the constraints on and incentives for people to pursue private interests.

In early 1989, an American political scientist wrote an influential article that was later developed into a book called
The End of History
. History, or the later and important part of it, had been a struggle among ideas about how economic and political life should be ordered. History had ended with the triumph of democratic capitalism.

The author, Francis Fukuyama, has recently published an article called ‘The Future of History’. He now says that the future of democratic capitalism depends on whether powerful internal tendencies to wider inequality and the influence of wealth in the democratic process can be contained and corrected.

Moral philosophers and sociologists have long drawn attention to the social underpinnings of modern economic and political institutions. Capitalism stands on the shoulders of a pre-capitalist ideology – a system of beliefs and moral precepts that constrains the greed and ambitions of individuals in areas where they will be damaging to order and prosperity, but allows them loose rein where this is productive for society as a whole. But the widening scope of the market economy corrodes old constraints. The democratic capitalist order is in trouble unless we renew old or build alternative sources of constraint on individual ambition and greed, and do so in a way that retains the dynamism of individual initiative expressed through the market.

These moral and social constraints make it possible for people to accept personally unsatisfactory outcomes from political processes – in contrast with recent developments in democratic Egypt.

They make possible a system of general taxation that can support a functioning state – a system that would not lead to widespread tax evasion and the bankruptcy of the state, as it did in Greece.

They mean that leaders forgo opportunities to enrich themselves through their offices. The failure of development in many of the world’s poor countries – indeed, concerns about stability even in the more successful developing economies – demonstrate the consequences of weaknesses in restraint.

They mean that limits are placed on the use of corporate wealth to exercise power over policy in a democracy. The extreme deregulation of the North Atlantic financial systems, the Great Crash of 2008 and the loss of five years of potential growth in much of the developed world show the importance of such factors to the world’s most developed economies.

Remove these constraints, and we have broken the foundations of modern economic development and democratic capitalism.

None of the big inflexion points in human history came from the blueprint of a thinker or leader. Adam Smith’s
The Wealth of Nations
emerged from his observation of the creative power of markets. Smith helped us to understand the great changes in the currents of history that were occurring in his lifetime, and others were then able to ride those currents further.

We learn for sure that we have reached an inflexion point only when it has passed into history. Once we observe that things have gone wrong, it is usually too late to change course without large disruption and cost. Democratic capitalism may be at such an inflexion point now. Today’s big risks are mainly to do with developments in our political culture.

These are issues we should keep in mind as we think about whether and, if so, how Australia can maintain full employment and high (if for a while somewhat lower) living standards after the China resources boom.

THE POLITICAL CULTURE OF THE DOG DAYS

Prime Minister Julia Gillard and Treasurer Wayne Swan did a fair job of economic policy after the China boom reached its peak and started its long downward slide in 2011, but they were judged by the electorate to have failed. That’s what Dog Days do. People had come to expect rising employment, incomes and services, along with falling taxes, but the economy could no longer support these. Governments look bad in the Dog Days. The former government’s position looked worse because its revenue forecasts were consistently too high. The largest of the six-monthly upgrades to the budget deficit came out three days before the calling of the 2013 election. The government had accepted official advice, as a good government should, and paid a high price in credibility.

Dog Days end when people abandon expectations of rising living standards and accept that some of the private gains of the Salad Days must be surrendered for the common good. This only happens in a timely way if leaders explain that times have changed and outline a programme of shared restraint. Otherwise the alignment of expectations with reality is a long slog, usually involving recession, massive business failures and high unemployment.

We seemed to be making a start on lowering expectations in the May 2013 budget, when some measures created losers and the Opposition did not come out against them. That ground was lost in August, when a modest measure to remove an income tax loophole was attacked by the private interests affected by it and rejected by the Opposition, and then became prominent in the election campaign. The Opposition also gave prominence to an extraordinary piece of middle-class welfare, its paid parental-leave scheme. These developments cancelled the budget message that the good times might have stopped rolling.

During the election campaign, the former government made slight reference to the challenge of transition from the China resources boom but said nothing about what needed to be done in response. The Opposition said that it would stop the boom from ending and would solve the budget problem because improved confidence on its election would lead to stronger economic growth.

We are in the Dog Days for some time yet – for years, if we have no effective leadership. Excellent economic policy will look ordinary, and ordinary policy abominable. Good policy has to begin with a huge readjustment of community expectations. But a changed political culture presents political leaders with an awful choice: between easy short-term political gains from telling the electorate what it wants to hear, and the risk inherent in explaining and seeking to advance the public interest.

A NEW MEDIA CULTURE MAKES GOOD POLICY HARDER

A massive technological change in communications took effect from the late 1980s and accelerated through the early twenty-first century. It has reshaped the way people exchange information and changed the nature of politics.

One early consequence was the expansion of the influence of national media, both print and electronic. The
Financial Review
and the
Australian
had both been around since the first half of the 1960s, but they became more truly national. This was on the whole supportive of a government with a national reform agenda. It strengthened national against state governments, just as it fostered the development of national leagues in all of the main sporting codes.

In parallel with the expansion of the national media, the News Ltd purchase of the Herald and Weekly Times group in 1987 brought over 60 per cent of the ownership of Australian newspapers under single control. This introduced monopoly in media ownership to an unprecedented extent among the substantial democracies. Such single control of print media would generally be problematic in a democracy even without the major shareholder being a citizen of a foreign country and having a well-earned reputation for opinionated political activism. The approval of the takeover was a mistake of the Reform Era that casts a long shadow.

A second change in media culture came with the increased use of the internet for classified advertisements. The classifieds had been local natural monopolies of the daily broadsheets with high reputations, most importantly the
Sydney Morning Herald
and the
Age
. Revenue from them generated rents that were used, among other things, to subsidise high-quality journalism and the training of journalists. The rise of the internet eroded these monopolies, which in turn weakened the broadsheets’ ability to focus on long-term issues and undertake deeper analysis.

The third change came with the increasing role of the electronic media as information sources. The new technologies underwrote the emergence of continuous news channels and a proliferation of current affairs programmes. The entry costs to the new media were low, so internet news sources became much more important.

These developments saw the emergence of the ‘24-hour news cycle’. A simple and bold political statement would receive instantaneous and wide coverage, but would not sustain interest for long enough to require an elaborate defence. Superficiality was no disadvantage. The clear negative statement was much more likely to be heard. Political leaders were taken more seriously if they continuously generated new messages. To compete with the constantly changing news on the 24-hour cycle, newspapers, too, were encouraged into the sensational, the ephemeral and the negative.

The authority of the broadsheets declined, and with it their role as arbiters of what was worth a place in the national conversation. The polls tell us that only the public broadcaster, the Australian Broadcasting Corporation, enhanced its credibility.

The decline in commitment to accuracy and balanced reporting has gone furthest in the News Ltd (now News Corp Australia) majority of newspapers. I was able to observe this most clearly in relation to the reporting of climate change. Errors of fact brought to the attention of journalists were generally no longer corrected (although some individual journalists maintained higher professional standards).

There was a systematic selection of material for publication in the newspapers, so that readers who relied on these sources of information were exposed to an unrepresentative subset of reality. This was important, for example, in the reporting of international progress in reducing greenhouse gas emissions, notably in the United States and China.

Over time, newspapers that take this approach to accuracy and balance in reporting lose credibility with the public, so the system may be partially self-correcting as more reliable sources grow in influence. I say
may
not
will
, as it is not certain that the commercial incentives will drive competitors towards accuracy and balance.

The distortion in the reporting of policy and politics in a major part of the print media was an important advantage for Prime Minister Abbott in his thrust for the leadership during the four years to September 2013. It is at best a mixed blessing once in office. All mortals are easily encouraged into deeper error if they are reassured of the wisdom of every proposal that passes their mouths. In 2013, a prominent economic columnist for the
Australian
found reassuring things to say about the economic impact of the paid parental-leave scheme. All good leaders are at times without cover. It is of no advantage for the naked emperor to have courtiers praise the beauty of his clothes.

The proliferation of information sources has led to a fragmentation of the national conversation about policy. People can choose the sources that tell them what they want to hear. This seems to have the effect of entrenching established attitudes.

People can choose their facts. This may have been important in commercial as well as policy discussion. One wonders how influential the selection of sources of information was in the thermal coal investment decisions at the height of the boom – decisions that now have been shown to have wasted many billions of dollars of shareholders’ wealth. The absorption of information readily available from other sources (including my climate change reviews) at the time of the investment decisions would have led to caution about the effects of policy developments in China and the United States on prospects for thermal coal.

The proliferation of information sources has a positive side: pluralism, and the opportunity to reach a large audience with a view not supported by the monopolistic print media. Specialist centres of communications can develop more profound analysis and information for niche audiences. Political campaigns can be developed independently of the print media, especially if they are built around single and simple issues.

On the whole, these developments in media culture to date have made the prosecution of a wide-ranging positive reform programme more difficult. In general, they favour an Opposition with a simple negative message over a government seeking to deal with the complex issues that arise when governing in the public interest.

But these are early days. The use of the new opportunities could evolve in a number of ways. It is possible, for example, that the best of the internet media outlets could develop mass audiences that can support investment in high-quality journalism. The greater use of international sources is leading to better information being widely available on foreign policy.

While the new media environment in Australia seems to favour the negative and has done so up till now, we have not yet seen a major effort by a strong political leader to appeal to the electorate through the new media culture on a programme of reform in the public interest. It might be effective.