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Garnaut got it wrong, says expert -

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Garnaut got it wrong, says expert

The World Today - Monday, 7 July , 2008 12:18:00

Reporter: Emma Alberici

EMMA ALBERICI: While most of the attention has focused on the Garnaut review, another climate
change expert, Warwick McKibbin, has presented the government with an alternative approach in a
separate report.

Warwick McKibbin is professor of economics at the Australian National University College of
Business and Economics and a co-director of the Brookings Institution project on climate and energy
economics in Washington.

He is also a member of the Reserve Bank Board. He argues that Ross Garnaut's model is not properly
costed and ignores the international context.

Warwick McKibbin is in our Canberra studio.

Warwick McKibbin, you've been in meetings at Parliament House this morning. What message have you
been delivering on the failings of the emissions trading scheme proposed by Ross Garnaut?

WARWICK MCKIBBIN: Well I think we have to be very careful to get this right and there are two
dimensions in getting it right. One is to get emissions to fall as quickly as we can in
coordination with the world and the second is to put up front the relative costs across countries
of taking climate action.

EMMA ALBERICI: And you don't think Ross Garnaut has adequately addressed those issues?

WARWICK MCKIBBIN: No I don't think so, I mean the problem we have is how to manage climate risk and
the best way to manage risk is to create long-term markets and very clear goals for Government that
the market can price and that the population can understand.

And I think Ross's focus is far too short-term on picking a cap for emissions without actually
knowing in the end what it will cost.

EMMA ALBERICI: Can anyone know what it will cost?

WARWICK MCKIBBIN: No, but we can do what do with monetary policy for example we set the short-term
interest rate and we let the market determine the long-term interest rate.

That way we don't let any major shocks to the economy come through interest rate fluctuations and
the same thing should occur with short-term carbon prices.

Rather than having the market set the short-term price we need something like a reserve bank of
carbon setting the short term costs of carbon in the framework of a long-term market that prices
the long-term carbon price.

EMMA ALBERICI: So back to the drawing board in your opinion?

WARWICK MCKIBBIN: Not at all, I think the report is very useful. It sets out a lot of good
material, I think the policy conclusions now need to be widely debated within the Australian
context there's at least three different approaches to this - there's my approach, there's the
Prime Ministers task group on emissions trading from last year and there's the Garnaut approach. At
the global level there's several more.

I think we need a wide ranging review of the policy options, I think Ross has laid out very clearly
that we do need to take action and Michael Costa has made it clear that if we don't take the right
action, that there's a lot of investment that will be potentially damaged. So we have to get this
right.

EMMA ALBERICI: Well, the New South Wales Treasurer Michael Costa has labelled Ross Garnaut's
observations about for instance the viability of the Great Barrier Reef as a nonsense and chicken
little warnings that don't add to a rigorous debate.

It is true isn't it that anything Australia does in isolation given this country only emits two per
cent of the world's greenhouse gases will have little to no impact on the future of things such as
Great Barrier Reef?

WARWICK MCKIBBIN: Well lets be clear on this, there are two issues. One is that Australia is small
in the world of emissions, but also any action the world takes today will not affect concentrations
dramatically for the next 20 or 30 years.

So any impacts on the Great Barrier Reef of any policies we implement in the next five years won't
be seen for 20 or 30 years into the future.

The time lags on this are very long and highly variable and that's why we need in place action now.
But we don't need to incur excessive costs in moving towards a low carbon future.

EMMA ALBERICI: Part of the problem isn't it Warwick McKibbin that there are three issues at play
here, the economics, the politics and the environment?

WARWICK MCKIBBIN: That's right.

EMMA ALBERICI: That's very hard to have them all meet.

WARWICK MCKIBBIN: Well that's right and the science is very helpful to tell us what the world
should do. There's no doubt that there's a majority of scientists who have strong opinions. But
when it comes down to the national level, there's no science that tells us how much a particular
country should cut emissions.

That's really both the moral and an economic question and if it was left to an economist the
approach would not be the approach that Professor Garnaut was advocating of arbitrary caps and
targets by country.

But it would be to set a world price on carbon where we end up with the lowest possible emissions
at a common and uniform price across the world. And then the politics obviously feeds on both the
economics and the morality, and I think that's where the debate is being held and should be held.

EMMA ALBERICI: If we just look what we're trying to do in isolation, we are net energy exporters
and yet we're essentially set on developing a trading scheme that excludes the effects of the coal
that we sell to the world because the biggest emissions come when it's turned into electricity
which generally happens in China, in India, in other parts of South East Asia.

Do you really expect what we do here in Australia to have any discernible influence on those big
emitting countries?

WARWICK MCKIBBIN: Well in fact it can because right now we see a stalemate in Hokkaido at the G8
Summit, we see a stalemate in the international negotiations under the framework convention on
climate change. The world is looking for a way forward to move away the barriers to sensible policy
at the global level.

Australia has the opportunity to create a system which other countries particularly China and India
will follow and the United States will follow and actually lead to a good global outcome.

Just closing your eyes and wishing for a target no matter what it costs is actually the barrier
which is preventing negotiations at the international level.

My view is that we can put in place a much better approach in Australia that could be adopted by
our major trading partners and could break through the negotiation stalemate which is focused
particularly on targets and timetables. That is the problem at the global level and that's now the
approach that's been advocated for Australia.

EMMA ALBERICI: To mitigate the effects on individuals and specific industries, the Garnaut review
proposes to redistribute the money generated from carbon permit revenues and he's looking at 50 per
cent to households, 30 per cent to trade exposed industries and 20 per cent to renewable energy
research and development.

Is that the kind of compensation that you're looking at in your report?

WARWICK MCKIBBIN: Well the ratio surprisingly is similar to my report, but what I would argue is
that the revenue shouldn't go to the Government in the first place. The rights to emit carbon
should be distributed throughout society.

We argue half of the long-term permits should go to households who will be paying higher energy
prices and half to industry to compensate them for restructuring their way of producing and using
energy.

And so you put the rights in the society and let the society trade them. The role of government is
not to collect the revenue and then to adjust the tax system or pick industry winners, it's to
provide very clear property rights, very clear rules and regulations on how markets might function
but let the markets themselves at the long end determine the direction of the economy and let the
central bank of carbon determine the costs to society if we go from the short-term to the
long-term.

It's very clear what we should do in my view and I think there's just too much revenue to the
Government in the Garnaut proposal and we know from experience historically that that's not the
most efficient way of getting good economic outcomes.

EMMA ALBERICI: But we also know historically that that's likely to be a winner when it's the
Government that's choosing the system we go with.

WARWICK MCKIBBIN: Well not if we can actually make it clear that the property rights over carbon,
my view is should be distrusted to the people in the society. For example when we privatised
Telstra, we sold Telstra back to the original owners and then we have about 80 per cent of
Australians owning Telstra shares.

In my view we should give away the rights to carbon to the Australian people, plus to the industry
and let them buy and sell to establish a price on carbon that in the short-term is regulated by
someone like a central bank of carbon.

That to me is a good balance between equity, efficiency. It gets over many of the political hurdles
that I think the Government and the Opposition are over the years have put in front themselves.

Lets think afresh here, we don't want to look backward to the reforms of the 80s, we want to look
forward to exactly how we should do this in the national and global interest.

EMMA ALBERICI: Given where you sit, are you actually concerned that if it is the Government that
takes the proceeds of this carbon pricing that essentially they might misspend it and push up
inflation which is something you're a close observer of?

WARWICK MCKIBBIN: Well they may or may not misspend it. My problem is you don't have confidence on
where it would be spent, whereas if it was in the hands of the innovators so that if your reduce
the emissions, you free up a permit that you can sell back to the market and make money, then we're
likely to get a lot more innovation.

Secondly it's the long-term carbon price signal that's going to drive technology and I want to
drive the incentives for renewable energy by looking at a market where a renewable energy
investment pays off in spades because you can see the return in a very transparent market.

There are some macroeconomic implications of volatility in carbon prices which also concerns
central banks all over the world and this is becoming an emerging issue.

EMMA ALBERICI: Warwick McKibbin thank you very much for your time today.

WARWICK MCKIBBIN: My pleasure, thank you Emma.