A number of economic studies have been conducted analysing the impact for Australia of major greenhouse emissions reductions in the energy sector, all of which indicate that the costs of reducing emissions are surprisingly affordable.

While there will be some reduction in economic growth compared to doing nothing (if one ignores the substantial economic consequences of unmitigated climate change), the impact is mild. Under the best estimates, it shaves about 0.1 per cent off economic growth - which averages around 2.3 per cent a year. Even under some of the worst case scenarios, Australians will be twice as wealthy in 2050 then they are today, even after increases to energy costs required to clean up our energy supply.

The results of economic modelling by the Federal Government’s Australian Bureau of Agricultural and Resource Economics (ABARE) below illustrate that Australia’s and the globe’s economic wealth is virtually indistinguishable under a ‘do nothing’ scenario (reference case) versus a number of scenarios where 35-40 per cent emissions cuts are achieved. No scenario involves anything less than a doubling in Australia’s economic wealth.

The scenario where Australia’s GDP most differs from the ‘do-nothing’ scenario is an extremely unrealistic one where Australia reduced its own emissions by 50 per cent below 1990 levels while the rest of the world’s emissions are allowed to grow by around 50 per cent above 2001 levels. In reality the European Union have stabilised their emissions at around 1990 levels and intend to cut them by 20 per cent below 1990 levels by 2020 and considerably further after this date. In the US the Congress is considering several legislative proposals for schemes that would reduce emissions by 60 per cent by 2050. Japan has proposed a 50 per cent cut by 2050 for the globe, and the Canadian Government has announced a target of 70 per cent reductions. Australia will not be alone in addressing greenhouse emissions, so this unrealistic scenario can be effectively ignored. But even under such unfavourable assumptions Australia’s per capita GDP doubles over current levels.

This is quite a different result to what many commonly believe, probably because most people mistakenly focus on the importance of energy rather than its cost. While energy is essential to our way of life it is not a huge component of our expenditure – either in households or most businesses. While we can’t do without it, we can afford to pay more for it in the interests of avoiding or minimising the risk of dangerous climate change. According to the Australian Bureau of Statistics, Australian households on average spend more on alcohol and cigarettes than they do on domestic fuel and power.

In terms of businesses, for the vast majority of industry sectors, energy is a small component of their overall material costs – typically below 5 per cent. Once you take into account labour costs, energy makes up a significantly smaller proportion of costs.

Dr Hugh Saddler (Energy Strategies), Adjunct Professor Frank Muller (University of NSW) and Clara Cuevas-Cubria (ABARE) investigated the trade competitiveness implications associated with the unilateral imposition of a carbon price of $35 per tonne CO2e in Australia. They found that: “For most sectors the effect of a $35/t CO2e cost is comfortably less than one per cent of the value of production.” There were six sectors for which the effect was greater, but several of these were not thought to be significantly exposed to trade competition from Kyoto Protocol Annex A countries (those that do not have binding emission caps). They found:

“In summary, the analysis of this paper shows that the international competitiveness problem is much smaller than has often been claimed. However, some industries would be significantly adversely affected by the imposition of a price on GHG emissions in Australia; they include aluminium, alumina, steel, other non-ferrous metals, LNG and gold. These industries currently account for about 1.5 per cent of GDP and 19 per cent of merchandise exports. It seems unlikely that any other industries would be appreciably affected.”

The authors of this paper are in an excellent position to evaluate these impacts. Dr Saddler assists the Australian Greenhouse Office in the preparation of the energy section of Australian emissions inventory. Adjunct Professor Muller headed greenhouse and sustainable development policy within the NSW Government before joining the University of NSW. Clara Cuevas-Cubria is co-author of ABARE’s Australian energy projections modelling work.

Australia also has large opportunities for cost-effective improvements in energy efficiency. These missed opportunities are often not taken into account in studies of the economic costs of reducing greenhouse emissions. Analysis undertaken for the joint State and Federal Governments’ National Framework of Energy Efficiency found that by implementing energy efficiency improvements that would pay back their extra costs within four years:

Australian businesses in mining, agriculture, manufacturing, and construction could achieve reductions in their energy consumption of around 20 per cent on average; and The residential and commercial sector could reduce their energy consumption by 30 per cent. Implementing just half these measures would deliver a GDP benefit of $1.8 billion.

International studies also indicate that taking action to reduce emissions is economically affordable. The table below, taken from the IPCC Fourth Assessment Report, summarises the studies done to date on the costs of stabilising greenhouse gases at various concentrations (note that the Stern Review recommended that CO2e should be stabilised below 550 ppm).

So what’s the cost of avoiding dangerous climate change? A reduction in the rate of economic growth of about 0.1 per cent per annum. This is much like inflicting a scrape on your car’s paint work in swerving to avoid a head-on collision with a freight train.