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The gARNAUT REVIEW 2011
About the author
Ross Garnaut is Vice-Chancellor’s Fellow and Professorial Fellow in
Economics at the University of Melbourne as well as Distinguished Professor
at the Australian National University. He is a Fellow of the Australian Academy
of Sciences and an Honorary Professor at the Chinese Academy of Social
Sciences. In 2009, Professor Garnaut was awarded the degree of Doctor of
Letters, honoris causa, from the Australian National University and was made
a Distinguished Fellow of the Economic Society of Australia.
Professor Garnaut is currently Chairman of the Papua New Guinea
Sustainable Development Program Limited, and its nominee director on the
board of Ok Tedi Mining Limited. He is a member of the boards of several
international research institutions, including the Lowy Institute for International
Policy (Sydney) and AsiaLink (Melbourne). Professor Garnaut was a member
of the board of trustees of the International Food Policy Research Institute
(Washington DC) from 2003 to 2010 and its chairman from 2006. He was
foundation chairman of Lihir Gold Limited from 1995 to 2010.
Professor Garnaut is the author of numerous books, monographs and
articles in journals on international economics, public finance and economic
development, particularly in relation to East Asia and the Southwest Pacific.
Three of his recent books, The Great Crash of 2008, The Garnaut Climate
Change Review and China’s New Place in a World in Crisis, have been translated
into Chinese and published in China by the Social Sciences Academic Press.
Professor Garnaut was the economic adviser to Australian Prime Minister
R.J.L. Hawke from 1983 to 1985 and served as Australian Ambassador to
China from 1985 to 1988.
Professor Garnaut was appointed as an independent expert adviser
to the Australian Parliament’s Multi-Party Climate Change Committee in
September 2010.
 The
gARNAUT
REVIEW 2011
Australia in the Global Response
to Climate Change

Ross Garnaut
cambridge university press
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Tokyo, Mexico City
Cambridge University Press
477 Williamstown Road, Port Melbourne, VIC 3207, Australia

Published in the United States of America by Cambridge University Press, New York
www.cambridge.org

Information on this title: www.cambridge.org/9781107691681

The Garnaut Review 2011: Australia in the Global Response to Climate Change
© Commonwealth of Australia 2011

This work is copyright Commonwealth of Australia. All material contained in this work is copyright the
Commonwealth of Australia, except where a third party source is indicated.

Commonwealth copyright material is licensed under the Creative Commons Attribution 3.0 Australia
Licence. To view a copy of this license, visit http://creativecommons.org/licenses/by/3.0/au/.

The Commonwealth of Australia asserts the right to be recognised as copyright owner of the original
material in the following manner:

or

© Commonwealth of Australia (Department of Climate Change and Energy Efficiency) 2011.

Permission to use third party copyright content in this publication can be sought from the relevant
third party copyright owner/s.

First published 2011

A catalogue record for this publication is available from the British Library
Cataloguing in Publication data for this title is available from the National Library of Australia

ISBN 978-1-107-69168-1 Paperback

Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or
third-party internet websites referred to in this publication and does not guarantee that any content on
such websites is, or will remain, accurate or appropriate.

IMPORTANT NOTICE
This publication is produced for general information only and does not represent a statement of the
policy of the Commonwealth of Australia or indicate a commitment to a particular policy or course of
action. The views expressed in this paper are those of the author and do not necessarily reflect those
of the Commonwealth of Australia. The Commonwealth of Australia and all persons acting for the
Commonwealth of Australia preparing this publication accept no liability for the accuracy, completeness
or reliability of or inferences from the material contained in this publication, or for any action as a result
of any person’s or group’s interpretations, deductions, conclusions or actions in relying on this material.
Before any action or decision is taken on the basis of this material the reader should obtain appropriate
independent advice.

Editorial and artwork by Wilton Hanford Hanover

Index by Michael Harrington
Cover design by Sandra Nobes
Printed in Australia by Ligare
Contents

Preface vii

Introduction ix

Part I The global shift

Chapter 1 Beyond reasonable doubt 1

Chapter 2 Carbon after the Great Crash 19

Chapter 3 What’s a fair share? 33

Chapter 4 Pledging the future 48

Part II Australia’s path

Chapter 5 Correcting the great failure 67

Chapter 6 Better climate, better tax 77

Chapter 7 The best of times 89

Chapter 8 Adapting efficiently 100

Part III Australian transformations

Chapter 9 Innovation nation 113

Chapter 10 Transforming the land sector 131

Chapter 11 Electricity transformation 149

Chapter 12 Choosing the future 166

Notes 177

Acknowledgments 205

Index 209
Preface

T he Garnaut Climate Change Review was commissioned by the

Commonwealth, state and territory governments in 2007 to conduct
an independent study of the impacts of climate change on the Australian
economy. In September 2008, I presented the Review’s final report to the
Australian Prime Minister. The report examined how Australia, as a single
country, was likely to be affected by climate change and how it could best
contribute to climate change mitigation, and begin to adapt.
In November 2010, I was commissioned by the Australian Government
to provide an update to the 2008 Review. In particular, I was asked to examine
whether significant changes had occurred that would affect the key findings
and recommendations reached in 2008.
The commissioning of the update reflected the changed international
and domestic landscapes for climate change action following the international
climate change conferences in Copenhagen and Cancun in 2009 and 2010,
and the Great Crash of 2008. What implications did these events have for
climate change policy globally and in Australia?
This book, the final report of the update process, is the product of seven
months of careful research, analysis, expert studies and consultation, which
have examined key developments in the past two and a half years across a range
of areas—the climate science, global greenhouse gas emissions, international
progress on climate change mitigation, Australia’s land and electricity sectors,
innovation and technology, and carbon pricing. Eight detailed update papers
were released between February and March 2011. Two supplementary notes
came out at the same time as this book. These materials and other supporting
information can be found on the Garnaut Climate Change Review website at
www.garnautreview.org.au.

Ross Garnaut
Melbourne
31 May 2011
Introduction

I was explaining to the Multi-Party Climate Change Committee early in

2011 how I had worked out the costs and benefits of reducing emissions
for the 2008 Review. The costs of reducing emissions will come straightaway.
The benefits of reducing damage from climate change will come later—many
of them to later generations of Australians. In fact there will be more and
more benefits for later and later generations. So I needed a way of comparing
the value of income to Australians who are alive right now with incomes of
young Australians later in their lives and Australians who are not yet born.
‘So we had to choose the right discount rate’, I said. ‘We can’t use the
discount rates that determine values in the share market, because they take
into account risks of a kind that are not relevant here.’
I got the feeling that the mention of discount rates had set Prime
Minister Gillard’s mind towards what she would say to Hillary Clinton about
Afghanistan, Bob Brown’s to the grandeur of the Styx Valley, and Tony
Windsor’s to the good rain that was falling on the Northern Tablelands.
But then I said something that brought back the prime minister’s
attention.
‘If we used the share market’s discount rate to value the lives of future
Australians’, I said, ‘and if we knew that doing something would give lots of
benefits now but would cause the extinction of our species in half a century,
the calculations would tell us to do it.’
The beginnings of a smile on her face became a hearty laugh.
‘You’ve got us there, Ross’, she said, as the others were infected by the
lift in spirits and joined the laughter. ‘That’s a unanimous decision of the
committee. We’re all against the extinction of the human species.’
The 2008 Garnaut Climate Change Review compared the costs and
benefits of Australia taking action to reduce the damage of climate change
caused by humans. It concluded that it was in Australia’s national interest to
do its fair share in a strong global effort to mitigate climate change.
The 2008 Review accepted the central judgments from the mainstream
science about the effects of changes in greenhouse gas concentrations in the
atmosphere on temperature, and about the effects of temperature changes on
climate and the physical earth. I formed the view that the mainstream science
was right ‘on a balance of probabilities’, and that errors were as likely to be
in the direction of understatement of damage to human society as in the
direction of overstatement.
x | The Garnaut Review 2011

I used the results of the science to model the impacts of climate change
on the Australian economy, including impacts on agricultural productivity,
our terms of trade, and infrastructure. The model included links to the global
economy and was based on Australia doing its fair share in a global effort to
reduce the damage from climate change.
The modelling showed that the growth rate for Australian national
income in the second half of the 21st century would be higher with mitigation
than without. The present value of the market benefits this century fell just
short of the value of the costs of mitigation policy. However, when we took
account of the value of Australians’ lives beyond the 21st century, the value of
our natural and social heritage, health and other things that weren’t measured
in the economic modelling, and the value of insuring against calamitous
change, strong mitigation was clearly in the national interest.

New developments
And so we come to today. The purpose of this book is to examine how
developments in science, diplomacy, political culture and the economy have
affected the national interest case for Australian climate change action.
Since the 2008 Review, the science of climate change has been
subjected to intense scrutiny and has come through with its credibility
intact. The findings continue to be sobering. Unfortunately, new data and
analysis generally are confirming the likelihood that outcomes will be near
the midpoints or closer to the bad end of what had earlier been identified
as the range of possibilities for human-induced climate change.
Global average temperatures have continued to track a warming
trend. The year 2010 ranked with 2005 and 1998 as the warmest on
record, with global average temperatures 0.53°C above the 1961–90
mean. For Australia, 2009 was the second-warmest year on record and the
decade ending in 2010 has easily been Australia’s warmest since record
keeping began.
I noted in the 2008 Review the curious Australian tendency for dissenters
from the mainstream science to assert that there is no upward trend in
temperatures, or that if there had been a warming trend it has ceased or
moved into reverse. Such assertions were prominent in some newspapers
and blogs, but also appeared in serious policy discussions. The assertions
were curious because the question of whether the earth is warming or not is
amenable to statistical analysis.
 Introduction | xi

It so happens that answering questions of this kind comes with the

professional kitbag of economists who work on statistical analysis of series
of data that cover periods of time. For the 2008 Review, I asked two leading
Australian econometricians who are specialists in this area, Trevor Breusch
and Fashid Vahid, to analyse the data on temperature. Their conclusion was
clear. There is a statistically significant warming trend, and it did not end in
1998 or in any other year. I had the analysis repeated with three more years of
data for this book, with the same conclusions.
New observations of a changing climate include an increase in extreme
weather events. The Black Saturday fires in Victoria in 2009 and recent major
cyclones in Queensland are both consistent with expected outcomes in a warming
world, although we cannot draw conclusions about direct cause and effect.
Other studies since 2008 have confirmed that Australia is also seeing
historically unprecedented periods of wet and of dry in different areas of
the continent.
Globally, rising sea levels continue to track the upper levels of
modelling. Considerable debate is under way about the causes and potential
extent of sea-level rise. The latest research suggests that, beyond the effects
of thermal expansion, the melting of the great icesheets of Greenland and
West Antarctica may contribute much more than was previously thought
to sea-level rise. The debate is unresolved but oriented towards higher not
lower outcomes.
New research has also contributed to our understanding of ‘tipping
points’ in the climate system. These are points at which warming of the climate
triggers irreversible damage and a feedback loop for further warming. The
new research has focused on identifying and testing potential early warning
indicators of an approaching tipping point.
Progress has also been made on ruling out other possible causes of
warming, such as changes in the amount of solar radiation reaching the
earth. Scientists have identified ‘fingerprints’ of warming that confirm human
influence. A primary example is the pattern of warming in the layers of the
atmosphere. Under increased greenhouse gas scenarios, climate models
predict that the lowest layer of the atmosphere (the troposphere) should
warm, while the next layer up (the stratosphere) should cool. This has been
confirmed by recent observation. If increased output from the sun were the
cause, both layers could be expected to warm. These developments and more
are examined in Chapter 1.
Since 2008, advances in climate change science have therefore broadly
confirmed that the earth is warming, that human activity is the cause of it
xii | The Garnaut Review 2011

and that the changes in the physical world are likely, if anything, to be more
harmful than the earlier science had suggested. This has led me to shift my
judgment about the reputable science from being right ‘on a balance of
probabilities’ to ‘beyond reasonable doubt’.
Chapter 2 focuses on likely amounts of greenhouse gas emissions in the
absence of mitigation. It examines the effect on emissions of the big global
economic developments following the global financial crisis—the Great Crash
of 2008.
Emissions under business as usual are on a somewhat lower trajectory in
the developed countries, mainly as a result of the loss of growth momentum
after the Great Crash. This is roughly balanced in the period to 2030 by
continued strong growth in the developing countries.
The result is a global emissions trajectory in the event of business as
usual that is little changed from 2008, but is constitutionally very different.
The share of emissions growth attributed to large developing nations like
China and India has grown as developed countries’ growth has shrunk.
Australia is an exception among the developed countries. Following
the Great Crash, Australia’s rich endowment of natural resources has helped
fuel the outstanding growth in the large developing countries. The resulting
high terms of trade project a strong growth performance based around high
levels of investment in mines, including for coal and gas. The projection
of Australia’s emissions trajectory without mitigation to 2020 has grown to
24 per cent above 2000 levels—4 per cent above the levels expected in
2007—despite new policy measures in the intervening years.
The shift of the centre of gravity of growth towards developing
countries is wonderful for human wellbeing so long as we can manage the
consequence: that mitigation becomes more difficult. By 2030, the average
income in developing economies will be slightly more than a quarter of that
of the United States. The potential for further catch-up growth in incomes
and emissions is stark.
However, there has been a major positive development. The world has
already moved considerably beyond the business-as-usual case described
above. Chapter 3 examines important developments in the global framework
for action that give hope of holding global emissions to levels that avoid
dangerous climate change.
The 2009 Copenhagen and 2010 Cancun conferences of the United
Nations Framework Convention on Climate Change led to an important
new direction in global mitigation policy. The diplomatic fiasco of the
 Introduction | xiii

Copenhagen conference disguised a breakthrough new agreement that

addressed the great failing of the Kyoto Protocol. It incorporated mitigation
targets for the United States and the large developing economies, notably
China. All countries also agreed to contain global warming within 2°C.
The Copenhagen agreement had its weaknesses. The new targets were
voluntary, not ruled by legal obligation and delayed the prospect of the
trading of carbon permits between countries. But they did establish a new
‘pledge and review’ system that included new mechanisms for measuring
and tracking emissions.
The meeting at Cancun consolidated and extended the new agreement,
as well as the mitigations targets pledged by developed and developing
countries.
The pledged targets of all countries that play substantial roles in
global emissions are evaluated in Chapter 4. The ranges for the United
States, the European Union and Japan together correspond to entitlements
for the early stages of a moderately ambitious—if not strong—global
agreement. On average, developed countries’ pledged 2020 targets are
somewhat less ambitious than are needed to hold the concentration of
greenhouse gases in the atmosphere to 550 parts per million (ppm) of
carbon dioxide equivalent.
For developing countries, targets are measured not in absolute
reductions but in reductions in emissions intensity. The modified contraction
and convergence framework described in the 2008 Review implied a targeted
reduction in China’s emissions intensity of 35 per cent between 2005 and
2020 if global concentrations of carbon dioxide were to be limited to 450
ppm. At Copenhagen and Cancun, China pledged to reduce its carbon
intensity by 40 to 45 per cent between 2005 and 2020.
China has already achieved considerable success in the implementation
of its pledged targets with sweeping regulatory actions in energy and
innovation. Chinese leaders have been pleasantly surprised at the pace and
cost of change and are growing in confidence that they will later be in a
position to offer more aggressive pledges still.
In this new world of concerted unilateral action, countries closely
examine each other’s efforts to confirm that each is contributing its fair
share. Freeloading may contribute in only a small way to overshooting
global targets, but it threatens the entire global effort as all countries look to
one another for reassurance that the pledged progress is being made.
xiv | The Garnaut Review 2011

Solutions
So, developments in science, global emissions profiles and shifts in the
structure of global climate change agreements have all strengthened the
national interest case for a stronger Australian mitigation effort.
What domestic policy response should we take? Once we know what
our fair share is in the global effort to reduce greenhouse gas emissions, we
can work out how to do it at lowest cost. This exercise was undertaken in
detail and with great care for the 2008 Review. There are two basic approaches
to achieving the required emissions reduction: a market-based approach, built
around putting a price on carbon emissions; and a regulatory approach, or
direct action.
In the market-based approach, carbon can be priced in two ways. Fixed-
price schemes, or carbon taxes, set the price and the market decides how
much it will reduce the quantity of emissions. Floating price schemes set the
quantity of emissions and permits to emit are issued up to that amount. The
permits are tradeable between businesses and so the market sets the price.
There are various hybrid approaches that combine fixed prices for a period
with floating later on, and floating prices at some price levels with a price
floor or a price ceiling or both.
In the alternative route, regulation or direct action, there are many ways
that government can intervene to direct firms and households to go about
their business and their lives. The Chinese Government’s direct action includes
issuing instructions for factories with high emissions to close, subsidising
consumers who buy low-emissions products like solar electricity panels and
electric cars, and restricting new investment in industries judged to have
undesirably high emissions.
Chapter 5 explores these options and argues for a three-year fixed
carbon price followed by a carbon trading scheme with a floating price.
This confirms the approach proposed in the 2008 Review for circumstances
similar to those in which we now find ourselves. This is Australia’s
best path forward towards full and effective participation in humanity’s
efforts to reduce the dangers of climate change without damaging Australian
prosperity.
One distinct advantage of addressing climate change mitigation through
a market-based carbon price is that it raises considerable revenues. These
can be used to buffer the transition to a low-carbon economy for Australian
households on low and middle incomes, as well as to offer security to the
most vulnerable low-income households.
 Introduction | xv

A carbon price of $26 will raise approximately $11.5 billion in the first
year and rise over time. Efficiency and equity objectives would be best served
by allocating the majority of this revenue to households, perhaps modelled
on the kind of tax and social security reforms envisioned in the Henry review.
At the same time, slices of this revenue should also be used to support
innovation in low-emissions industries, provide incentives for biosequestration
in rural Australia and prevent export industries from being placed at a
disadvantage against international competitors that are not yet subject to
comparable carbon constraints. Chapter 6 is a national interest analysis of
how compensation should be deployed to each of these groups.
Of course, under a direct action or regulatory approach, costs are
imposed on households and businesses but none of these benefits are
available to balance them.

National versus vested interests

Yet, as clear as the case for carbon pricing may seem, the political basis
for such policies has weakened since 2008. Alongside the central discussion
of climate policy, this book is a guide to another struggle that is deeply
colouring the climate change debate—the struggle between special interests
and the national interest.
This conflict is not new. Indeed, it is always with us, and always will
be. But there are periods when the special interests have had the strongest
hold on policy, and others in which policy making is strongly grounded in
the national interest.
It is salutary to recall that Australia, with New Zealand, had the poorest
productivity performance of all the countries that are now developed through
the 20th century to the mid-1980s. The long period of underperformance
had its origins in the domination of policy by business and union vested
interests. Political leaders responded to democratic pressures with protection
and regulation. There was little competition to prompt firms to seek new,
more productive ways of doing business.
We managed to break out of that from 1983 onwards, and entered a
remarkable period of productivity-raising reform. After a while, suggestions for
policy reform were not taken seriously by anyone unless they were placed in a
sound national interest context. The leadership of the Australian Council of Trade
Unions responded quickly to the circumstances offered by a new approach to
government. To remain relevant to the policy process, the old, protectionist
business lobbies were reformed as the Business Council of Australia.
xvi | The Garnaut Review 2011

Protective and regulatory constraints on higher productivity were

progressively reduced.
The period of policy reform oriented to the national interest lasted
until the turn of the century. Productivity responded to the new political
culture and the policies that it supported. Australian productivity growth in
the 1990s after the recession at the start of the decade was the highest in the
developed world.
The end of the era of reform can be dated fairly precisely. No major
market-based productivity-raising reform has survived the political process
since the tax reform package of 2001. That package was itself deeply
compromised by the increased distortions in federal–state financial relations
that had been introduced as the political price for reform. And it was bought
with ‘overcompensation’ amounting to about a percentage point of Australian
national income.
From the beginning of the 21st century, Australian policy making has
reverted to type. Business and union organisations refocused on securing
sectional gains. Governments responded. There could be no policy change
if there were any losers, so there could be no productivity-raising change at
all. There has been little increase in the productivity with which resources
(capital and labour together) are used in Australia so far in the 21st century,
and none at all since 2003.
The absence of total productivity growth over the last decade was
covered up for a few years at the beginning of the century by an extraordinary
boom in housing and consumption, mainly funded by unsustainable foreign
borrowing by our banks. That boom would have ended quickly in tears had
we not been rescued by a resources boom—much higher export prices and,
after a while, investment in resources—of historic dimensions. Now it will end
in tears after a longer period.
This is the problematic political context of the climate change policy
discussion.
Some business leaders have recently drawn attention to the need for
long views and hard decisions in policy making. They say that the minority
Labor government elected by the Australian people in 2010 is weak and lacks
long time horizons.
A more accurate accounting would recognise that the current government
has taken on the most difficult and long-dated policy reform that has ever been
attempted. It has taken on a reform in the national interest that must overcome
stronger pressures from sectional interests than any since the contests over
protection in the 1980s and early 1990s. That part of big business that is
 Introduction | xvii

active in the debate has taken on the role of spoiler. Chapter 7 examines this
phenomenon and notes that in a political economy already dominated by
vested interests, a transparent, market-based carbon price is far less likely to
be unduly influenced by private interests than a regulatory approach which
provides recurring opportunities for lobbying. A market-based approach will,
for this among other reasons, cost Australians substantially less.
The same calculation applies to adapting to the degree of climate
change that is already locked in regardless of mitigation efforts from this time
forth. Chapter 8 looks at the likely adaptation measures that will be required.
The key to success and greatest efficiency will be maintaining a productive,
flexible, market-oriented economy.

The independent centre

I noted in the 2008 Review that the diabolical policy issue of climate change
had a ‘saving grace’ that may make all the difference—that climate change
is an issue in which a high proportion of Australians are deeply interested.
This provided an opportunity for the exercise of authority by an independent
centre, against the claims of interests that see themselves as being negatively
affected by mitigation. My consultations and community engagement through
the update of the Review have confirmed the continued presence of the
saving grace, although it has been tested by the bizarre quality of the public
discussion of recent times.
In confronting the spoiling voices, we must remember that rejection of
current proposals for carbon pricing would not end the debate over climate
change policy. It might, however, end the possibility of action at relatively
low cost.
The increasing impact of climate change as well as policy developments
abroad would prompt continued pressure for new policy in Australia. Inaction
by Australia, with the highest emissions per person in the developed world,
would invite retaliation in trade and other areas of international cooperation.
If current efforts on carbon pricing failed, debate would continue over how
much Australia should do and how we should do it. This would continue to
raise the supply price of investment in businesses that might be affected by
restrictions on emissions. The political system would respond to continued
community interest in and pressure for action on climate change by myriad
costly interventions. The failure of current efforts to place a price on carbon
through much of the economy would open the way to a long period of policy
incoherence and instability.
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