There is an emerging consensus that avoiding dangerous levels of climate change will require high-income nations to reduce their greenhouse emissions footprint by 60-90% from current levels by 2050. While this is an enormous task, contrary to some views economic modelling of deep cuts in emissions suggests that sensible policy options can achieve reductions of this magnitude with only modest social and economic impacts. Steve Hatfiled Dodds explains why.
Economic modelling of a 60% reduction in emissions was undertaken for the Australian Business Roundtable on Climate Change (ACG 2006). This assumed that Australia begins serious reductions in emissions from 2013, as part of global action. Reductions in emissions are driven by tradable emissions permits, which are auctioned annually after a 10-year transition period.
This raises significant revenues, which are used to reduce personal income tax and company tax. The scenario assumes that the entire emission reduction is achieved within Australia (without 'buying in' credits from overseas), that carbon capture and sequestration is feasible and becomes cost effective between 2020 and 2025, and that nuclear electricity is not introduced.
Impacts on economic growth and real incomes
The headline economic result is that GDP grows at 2.1% per annum with early policy action, rather than 2.2% per annum without any further action--noting that the modelling does not take account of any possible direct impacts of climate change.
Living standards, meanwhile, continue to rise: private consumption per person rises 80% above inflation over the 45 years to 2050 with policy action, rather than increasing 91% without emissions reductions. Other economic modelling indicates broadly similar impacts, although details vary across models and scenarios (see EFF 2006, Grubb 2006).
Decoupling economic activity and environmental pressure
Introducing an emissions constraint gives economic value to emissions reductions and motivates action. Direct emitters, such as electricity generators, change their fuel mix (away from coal towards natural gas and renewables), and introduce new technologies such as carbon capture and storage as these become cost effective in light of a rising 'carbon price: Energy users --including consumers and other businesses--choose more energy efficient appliances and technologies, which can reduce energy use while maintaining or improving the underlying energy service provided (such as a hot shower or commuter travel). They also change consumption patterns over time towards products and services with lower embodied emissions and energy. The increased attention to emissions and energy efficiency also has an important role in supporting environmental awareness and helping to identify win-win opportunities to reduce costs and improve the efficiency of resource use.
Revegetation projects also benefit from the introduction of the carbon signal, which provides a new revenue source for biodiversity plantings and other 'carbon sinks' that offset emissions.
The modelling suggests these policies effectively decouple emissions and energy use from economic growth. As shown in Figure 1a, without further policy action these three key variables are all projected to rise substantially. Figure 1b shows that policy action effectively decouples economic activity from energy use and greenhouse emissions--resulting in static energy use (implying falling energy use per person) and very significant reductions in emissions, while maintaining strong economic growth. This decoupling is achieved through improved energy efficiency, adoption of low emissions energy technologies, and some reductions in demand for energy intensive goods and services.
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It is worth contrasting the magnitude of the economic and environmental impacts of this set of policies. Annual emissions are 60% lower than current levels, rather than 77% higher. …