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Tuesday, 11 October 2011
Page: 7088

Carbon Pricing

(Question No. 965)

Senator Cormann asked the Minister representing the Treasurer, upon notice, on 18 August 2011:

With reference to the Treasury Carbon Tax modelling, Strong growth, low pollution: Modelling a carbon price:

Given that the Treasury modelling asserts on p. 3 of the 'Overview' that 'delaying global action by 3 years adds around 20 per cent to the first year global mitigation cost':

(1) How can the notion that delay is very costly be reconciled with the fact that in the latter part of the modelling horizon, under what is supposedly the optimal approach to emissions reduction (global carbon pricing), the world does a huge fraction of its 'abatement' simply by borrowing abatement from the future.

(2) How can such a 'delay', year after year through this latter part of the modelling horizon, be economically desirable as part of a global market mechanism, when far smaller scale delay earlier on is reportedly very costly.

(3) If such global delay were not allowed later on, how much higher would the global carbon price need to be in 2050 than its projected level of $131 per tonne in real, 2010 Australian dollars.

Senator Wong: The Treasurer has provided the following answer to the honourable senator's question:

Delayed global action to reduce greenhouse gas emission will raise the cost of achieving any given stabilisation target for three reasons: (i) opportunities for low cost abatement in earlier years will be forgone; (ii) emission-intensive investment will be locked in; and (iii) the starting carbon price will be higher, resulting in a bigger adjustment to the economy. The Treasury modelling contained in the Strong growth, low pollution report found that delaying global action by 3 years adds around 20 per cent to the first year global mitigation cost. Delaying entry by a further 3 years adds a further 30 per cent to the first year mitigation cost.

The question implies that the methodology adopted in the Treasury modelling for determining the global carbon price path results in a delay in global emission reductions through the borrowing of abatement from the future. That is an incorrect inference. The carbon price path is determined such that the global emission path achieves the given environmental target. The actual emissions reported in the report are those that determine the calculation for the environmental target, not the allocated emission path. It is the combination of the carbon price and actual emission reductions that result in the output impacts from achieving global emission reductions. The banking and borrowing assumptions do not influence to any significant degree the Australian and world gross output modelling results.