1. - 0 - THE GARNAUT CLIMATE CHANGE REVIEW FINAL REPORT 30 September 2008 © Commonwealth of Australia 2008

2. - 1 - About the Garnaut Climate Change Review  Commissioned by Australia's Commonwealth, state and territory governments to examine the impacts, challenges and opportunities of climate change for Australia  Final Report released 30 September 2008 - Visit: www.garnautreview.org.auwww.garnautreview.org.au  Parallels with the UK’s Stern Review on the economics of climate change, but national in focus rather than global  Consultation papers released and public forums held on a range of topics  Over 4000 submissions received from community, industry, governments, academics; wide national and international interest.

3. - 2 - Chapters of the final report 1.A decision-making framework 2.Understanding climate science 3.Emissions in the Platinum Age 4.Projecting global climate change 5.Projecting Australian climate change 6.Climate change impacts on Australia 7.Australia’s emissions in a global context 8.Assessing the international response 9.Towards global agreement 10.Deepening global collaboration 11.Costing climate change and its avoidance 12. Targets and trajectories 13. An Australian policy framework 14. An Australian emissions trading scheme 15. Adaptation and mitigation measures for Australia 16. Sharing the burden in Australia 17. Information barriers to known technologies 18. The innovation challenge 19. Network infrastructure 20. Transforming energy 21. Transforming transport 22. Transforming rural land use 23. Towards a low-emissions economy 24. Fateful decisions

4. - 3 - Introduction  The weight of scientific evidence tells us that Australians are facing risks of damaging climate change.  The risk can be substantially reduced by strong, effective and early action by all major economies.  Australia will need to play its full proportionate part in global action. As one of the developed countries, its full part will be relatively large, and involve major early changes to established economic structure.  The work of the Review shows that the costs of Australia playing its proportionate part in an effective global effort, while considerable, are manageable.  There is a path to Australia being a low-emissions economy by the middle of the 21 st century, consistently with continuing strong growth in material living standards (chapters 11 and 23). By the end of the 21 st century, and beyond, more so with each passing decade, material living standards would be higher with than without mitigation of climate change.

5. - 4 - A decision-making framework  The central policy issue facing the Review can be simply stated: what extent of global mitigation, with Australia playing its proportionate part, provides the greatest excess of gains from reduced risks of climate change over costs of mitigation?  The mitigation costs are experienced through conventional economic processes and can be measured through formal economic modelling.  Only some of the benefits of mitigation are experienced through conventional market processes (Types 1 and 2) and only one is amenable to modelling (Type 1).  Others take the form of insurance against severe and potentially catastrophic outcomes (Type 3), and still others the avoidance of environmental and social costs, which are not amenable to conventional measurement (Type 4).  The challenge is to make sure that important, immeasurable effects are brought to account.  The long time frames involved create a special challenge, requiring us to measure how we value the welfare of future generations relative to our own.

6. - 5 - Understanding climate science  An understanding of the science of climate change is vital to the development of efficient policy responses.  The Review is not in a position to independently evaluate the considerable body of scientific knowledge; it takes as its starting point, on the balance of probabilities and not as a matter of belief, the majority opinion of the Australian and international scientific communities that human-induced climate change is happening.  The Intergovernmental Panel on Climate Change (IPCC) concluded in its Fourth Assessment Report in 2007 that the warming of the climate system is ‘unequivocal’ and that there is a greater than 90 per cent chance that ‘the global average net effect of human activities since 1750 has been one of warming’.  Human activity can affect the energy balance of the climate system in a number of ways – the most dominant being through the emission of greenhouse gases such as carbon dioxide from the combustion of fossil fuels.  Since the industrial revolution, emissions of greenhouse gases have been above the natural rate of removal in the atmosphere via chemical destruction and the carbon cycle. This has caused the accumulation of these gases in the atmosphere leading to higher atmospheric concentrations.

7. - 6 - Understanding climate science…continued  Higher concentrations of greenhouse gases in the atmosphere absorb more of the heat reflected from the Earth’s surface causing an increase in global temperatures. To limit increases in global temperature, we need to limit – or stabilise – the concentration of greenhouse gases in the atmosphere.  Stabilisation of greenhouse gas concentrations in the atmosphere requires the rate of greenhouse gas emissions to fall to the rate of natural removal from the atmosphere.  Even if greenhouse gas concentrations in the atmosphere are stabilised in the next century, lags in the climate system will mean that the climate will continue to change for hundreds, and even thousands, of years.  There are high levels of uncertainty as to the amount of temperature change for a given increase in greenhouse gas concentrations in the atmosphere, and the extent of change in other elements of the climate system.  There is increasing recognition in both science and policy communities that stabilising greenhouse gas concentrations at low levels will require ‘overshooting’ the desired concentration goal.

8. - 7 - Emissions in the Platinum Age  Greenhouse gas emissions have grown rapidly in the early 21st century. In the absence of effective mitigation, strong growth is expected to continue for the next two decades and at only somewhat moderated rates beyond.  So far, the biggest deviations from earlier expectations are in China. Economic growth, the energy intensity of that growth, and the emissions intensity of energy use are all above previous projections. China has overtaken the USA as the world’s largest emitter and, in an unmitigated future, would account for about 35% of global emissions in 2030.  China emerges as the most important country determining emissions, especially up to 2030. By 2030 its emissions easily exceed those of all developing and transition countries combined.  Other developing countries are also becoming major contributors to global emissions growth, and will take over from China as the main growing sources a few decades from now. Without mitigation, developing countries would account for about 90% of emissions growth over the next two decades, and beyond.

9. - 8 - Emissions in the Platinum Age…continued  High petroleum prices will not necessarily slow emissions growth for many decades because of the ample availability of large resources of high-emissions fossil fuel alternatives, notably coal.  Mineral and fossil fuel shortages will not be a constraint on growth in the first half of this century. By that time, if the world were still on a business-as-usual path, the environmental damage would have already been done, as dangerous levels of temperature increase would already have been locked in. Shortages of minerals and fossil fuels will not solve the world’s emissions problems.  The recent and projected continued rapid growth in emissions has major implications for the global approach to climate change mitigation. Earlier and more ambitious action than previously thought will be required by all major emitters, if the world is to hold the risks of dangerous climate change to acceptable levels.

10. - 9 - Emissions in the Platinum Age…continued Figure 3.9 Global greenhouse gas emissions growth rates to 2030: a comparison of Garnaut Review no-mitigation projections, SRES and post-SRES scenarios, and historical data

11. - 10 - Projecting global climate change  Observations show that global average temperatures have risen around 0.76ºC since early industrial times. The total sea-level rise for the 20th century was 170 mm. Changes have also been observed in many other elements of the climate system.  Future changes in the climate will depend on a range of natural changes as well as human activity, and on the way in which the climate responds to these changes. Climate models provide a wide range of estimates of changes in the climate system.  The human-induced warming and the associated changes in climate that will occur over the next few decades will be largely the result of our past actions and be fairly insensitive to our current actions.  Extreme climate responses are not always considered in the assessment of climate change impacts due to the high level of uncertainty and a lack of understanding of how they work. However, the potentially catastrophic consequences of such events mean it is important that current knowledge about such outcomes is incorporated into the decision-making process.

12. - 11 - Projecting global climate change…continued  Under the emissions growth expected in the ‘Platinum Age’ projections, global average temperatures could increase by more than 5ºC by 2100 from 1990 levels, and considerably more if the climate proves to be more sensitive than the current ‘best- estimate’ predictions.  In the two scenarios examined by the Review where global emissions are reduced to meet concentration goals of 550 parts per million (ppm) and 450 ppm of carbon dioxide equivalent, the global temperature rise by 2100 is 2ºC and 1.6ºC above 1990 levels respectively, under ‘best-estimate’ projections.  Continued high emissions growth with no mitigation action carries high risks. Strong global mitigation would reduce the risks considerably, but some systems may still suffer critical damage.  There are advantages in aiming for an ambitious global mitigation target in order to avoid some of the high-consequence impacts of climate change.

13. - 12 - Projecting global climate change…continued Figure 4.5 Temperature increases above 1990 levels for the three emissions cases

14. - 13 - Projecting Australian climate change Historical climate change in Australia  Temperatures in Australia rose slightly more than the global average in the second half of the 20th century.  Over the last three decades, streamflows supplying the major urban water storages have fallen significantly in the southern regions of Australia. This has occurred earliest and most severely in south-west Western Australia.  Some of the observed changes in the Australian climate have been attributed by the mainstream science to human-induced global warming. This includes the observed decline in rainfall in south-west Western Australia, and the reduction in snow cover in alpine areas as a result of increased temperatures. Projections of climate change in Australia  In general, climate projections show little difference between emissions cases prior to the 2030s. From 2030 to the end of the century, there is increasing deviation in climate outcomes between a world of no mitigation, and one of effective global mitigation.

15. - 14 - Projecting Australian climate change…continued  Australian temperature is projected to increase in line with global increases. The north-west of Australia will experience the greatest increases.  Effects of future warming on rainfall patterns are difficult to predict because of interactions with complex regional climate systems. Best-estimate projections show considerable drying in southern Australia. The mainstream Australian science estimates that there may be a 10 per cent chance of a small increase in average rainfall, accompanied by much higher temperatures and greater variability in weather patterns. Table 5.1 Projected changes to state-wide annual average rainfall, best-estimate outcome in a no-mitigation case (per cent change relative to 1990) NSWVic.QldSAWATas.NTACT 2030-2.5-3.5-2.4-4.2-4.1-1.4-2.5-2.8 2070-9.3-12.9-8.6-15.5-14.9-5.1-9.0-10.3 2100-13.7-19.0-12.7-22.8-21.9-7.6-13.3-15.2 Source: CSIRO

16. - 15 - Climate change impacts on Australia  Growth in emissions is expected to have a severe and costly impact on agriculture, infrastructure, biodiversity and ecosystems in Australia.  These impacts would be significantly reduced with ambitious global mitigation.  There will also be flow-on effects from the adverse impact of climate change on Australia’s neighbours.  The hot and dry ends of the probability distributions, with 10 per cent chance of realisation, would be profoundly disruptive.  For the next two decades or so, the major impacts of climate change are likely to include stressed urban water supply and the effects of changes in temperature and water availability on agriculture.  Much coastal infrastructure along the early 21st century lines of settlement is likely to be at high risk of damage from storms and flooding associated with sea-level rise.  Key Australian export markets are projected to have significantly lower economic activity as a result of climate change. This is likely to feed back into significantly lower Australian export prices and terms of trade.

17. - 16 - Climate change impacts on Australia…continued  A no-mitigation case is likely to see by mid century the effective destruction of the Great Barrier Reef and smaller reef systems such as at Ningaloo. This will have serious ramifications for marine biodiversity and the tourism and associated service industries.  By mid century, without effective global mitigation, there would be major declines in agricultural production across much of the country. Irrigated agriculture in the Murray- Darling Basin would be likely to lose half of its annual output. This would lead to changes in our capacity to export food and a growing reliance on food imports, with associated shifts from export parity to import parity pricing. By the close of the century a near complete absence of runoff in the Basin is likely to have ended irrigated agriculture for this region, and depopulation will be under way.  Australians will be substantially wealthier in 2100 in terms of goods and services, despite any setbacks from climate change. However, they are likely to be substantially poorer in terms of environmental amenity of various kinds.  If the world were to have agreed and implemented global mitigation so that greenhouse gas concentrations were stabilised at 450 ppm or even 550 ppm carbon dioxide equivalent (CO2-e), impacts risks for Australia could be radically different.

18. - 17 - Climate change impacts on Australia…continued Extract (pt I) of table 6.3Differences between probable unmitigated and mitigated futures at 2100 – median of probability distributions

19. - 18 - Climate change impacts on Australia…continued Extract (pt II) of table 6.3Differences between probable unmitigated and mitigated futures at 2100 – median of probability distributions

20. - 19 - Australia’s emissions in a global context  Australia’s per capita emissions are the highest in the OECD and sixth highest in the world, behind Bahrain, Bolivia, Brunei, Kuwait and Qatar. Our per capita emissions are high due to the relatively high contributions to emissions from electricity generation and agricultural production.  Australia’s per capita emissions from electricity generation are more than three times the OECD average and about eight times the world average. This is primarily due to the very high emissions intensity of Australia’s electricity.  The emissions intensity of our electricity supply is the highest in the OECD and nearly twice the OECD average. It is ninth highest in the world, behind Bahrain, Botswana, Cambodia, Cuba, India, Kazakhstan, Libya and Malta. Figure 7.9 Per capita emissions due to electricity, 2005 Source: IEA; Department of Climate Change

21. - 20 - Australia’s emissions in a global context…continued  The very high emissions intensity of Australian electricity is due to our reliance upon coal as fuel. More than 40 per cent of Australia’s primary energy is derived from coal, which is about twice the OECD average. The dominant role of coal is a relatively recent phenomenon. The Australian and OECD average emissions intensity of primary energy supply were similar in 1971.  Australia’s per capita emissions from agricultural production are more than six times the world average, more than four times the OECD average and are the third highest in the OECD, behind New Zealand and Ireland. This is due primarily to our relatively large numbers of cattle and sheep.  Australia has the largest per capita area of forests and wooded lands in the OECD and the second largest in the world, behind Suriname. The biosequestration potential of Australia’s forests and wooded lands is enormous. Its realisation would require a more comprehensive approach to carbon accounting in agriculture, forestry and other land use.

22. - 21 - Assessing the international response  Climate change is a global problem that requires a global solution.  Mitigation effort is increasing around the world, but too slowly to avoid high risks of dangerous climate change. The recent and projected growth in emissions means that effective mitigation by all major economies will need to be stronger and earlier than previously considered necessary.  The existing international framework is inadequate, but a better architecture will only come from building on, rather than overturning, established efforts.  Domestic, bilateral and regional efforts can all help to accelerate progress towards an effective international agreement.  All developed countries need to be subject to, and meet, emissions reduction goals. It is important that developed countries show credible domestic abatement effort to demonstrate to developing countries their seriousness, and that it is possible to reduce emissions without sacrificing prosperity.

23. - 22 - Assessing the international response …continued  Waiting until 2020 for any developing countries to commit to significant emissions containment policies (potentially the starting time for an agreement to follow the one currently being negotiated) would be to risk the prospect of achieving climate stabilisation at moderate levels. Reductions in developing countries’ emissions below business-as-usual levels are needed in addition to developed country reductions.  The United Nations meeting in Copenhagen in December 2009 is an important focal point in the attempt to find a basis for global agreement. Australia must be prepared to play its full proportionate part as a developed country.

24. - 23 - Towards global agreement  Only a comprehensive international agreement can provide the wide country coverage and motivate the coordinated deep action that effective abatement requires.  Global emissions reduction goals can best be defined in terms of emissions trajectories and multi-year budgets.  The only realistic chance of achieving the depth, speed and breadth of action now required from all major emitters is allocation of internationally tradable emissions rights across countries. For practical reasons, allocations across countries will need to move gradually towards a population basis.  An international global agreement to limit the risks of climate change will need to cover two main areas.  First, the quantum of mitigation effort needs to be agreed. By how much will emissions be reduced, worldwide, and in each country?  Second, while each country will be responsible for achieving its climate change mitigation goals, mechanisms for international collaboration will need to be in place to support national action. The most important of these will be international trading of emissions entitlements and public funding for technological development and adaptation.

25. - 24 - Towards global agreement…continued  An initial agreement on a global emissions path towards stabilisation of the concentration of greenhouse gases at 550 CO2-e is feasible. 450 CO2-e is a desirable next step. Agreement on, and the beginnings of implementation of, such an agreement, would build confidence for the achievement of more ambitious stabilisation objectives.  All developed and high-income countries, and China, need to be subject to binding emissions limits from the beginning of the new commitment period in 2013. Other developing countries—but not the least developed—should be required to accept one-sided targets below business as usual. Total emissions (Gt CO 2 -e) 550ppm stabilisation450ppm stabilisation 2000-01 baseKyoto/2012 base2000-01 baseKyoto/2012 base 20202050202020502020205020202050 World14%-41%-3%-50%4%-66%-11%-71% Developed Countries -22%-79%-19%-78%-37%-88%-34%-87% Australia-30%-90%-27%-88%-40%-95%-40%-93% Table 9.3 Emissions entitlement allocation for 2020 and 2050 relative to 2000-01, expressed in per capita terms

26. - 25 - Deepening global collaboration  International trade in permits lowers the global cost of abatement, allows greater flexibility for developed countries in meeting their commitments, and provides a financial incentive for developing countries to take on commitments.  Trade in emissions rights is greatly to be preferred to trade in offset credits, which should be restricted.  A global agreement on minimum commitments to investment in low-emissions new technologies is required to ensure an adequate level of funding of research, development and commercialisation. Australia’s commitment to support of research, development and commercialisation of low-emissions technology would be up to about $AUD 2.8 billion in 2007—or more than $AUD 3 billion per annum by the time the proposed International Low Emissions Technology Commitment took effect in 2013.

27. - 26 - Deepening global collaboration…continued  An International Adaptation Assistance Commitment would provide new adaptation assistance to developing countries that join the global mitigation effort.  The Australian Centre for International Agricultural Research (ACIAR) should expand its mandate to include climate change, in its biological, biophysical and social science dimensions.  Early sectoral agreements would seek to ensure that the main trade-exposed, emissions-intensive industries face comparable carbon prices across the world. These would include international civil aviation and shipping.  A WTO agreement is required to support international mitigation agreements and to establish rules for trade measures against countries thought to be doing too little on mitigation.

28. - 27 - Costing climate change and its avoidance  The Review’s approach to modelling the costs of climate change and the net costs of climate change mitigation was a highly complex and technically path breaking exercise.  The range of costs of climate change and the benefits from its avoidance must be considered in a full cost benefit evaluation of climate change mitigation but only some are amendable to economic modelling or standard economic estimation.  Type 1 (modelled median outcomes) plus Type 2 (estimates of other median outcomes) costs of climate change in the 21st century are much higher than earlier studies suggested. Figure 11.2 The modelled expected market costs (median case) for Australia of unmitigated climate change, 2013 to 2100 (Type 1 costs only)

29. - 28 - Costing climate change and its avoidance…continued  The modelling of the 550 mitigation case shows mitigation cutting the growth rate of over the next half century, and lifting it somewhat in the last decades of the century, as at the margin, more new climate change damages are voided than new mitigation costs added.  GNP is higher with 550 mitigation than without by the end of the century. The loss of present value of median climate change GNP through the century will be outweighed by Type 3 (insurance value) and Type 4 (non-market values) benefits this century, and much larger benefits of all kinds in later years. Figure 11.4 Change in annual Australian GNP growth (percentage points lost or gained) due to net mitigation costs under the 550 scenario compared to no mitigation, 2013-2100

30. - 29 - Costing climate change and its avoidance…continued  Mitigation for 450ppm costs almost a percentage point more of the present value of GNP through the 21st century than the 550 mitigation scenario. The stronger mitigation is justified by Type 3 (insurance value) and Type 4 (non-market values) benefits in the 21st century and much larger benefits beyond.  Neither the 450ppm or the 550ppm strategy will lead to the complete avoidance of the non market impacts of climate change but the difference between the two will be important for a range of environmental impacts – the 550 strategy would likely lead to an almost complete destruction of the Great Barrier Reef, the 450 strategy is expected to damage but not destroy it.  The most decisive advantage of the 450ppm scenario over the 550ppm is its insurance value. While neither scenario would eliminate climate change risks, the 550 scenario would leave the world, and Australia, open to larger risks of exceeding threshold temperature values, even if these tipping points cannot be known in advance with certainty.  In this context, the costs of action are less than the costs of inaction.

31. - 30 - Targets and trajectories  Australia should indicate at an early date its preparedness to play its full, proportionate part in an effective global agreement that ‘adds up’ to either a 450ppm or a 550ppm emissions concentrations scenario, or to a corresponding point between.  Australia’s full part for 2020 in a 450 scenario would be a reduction of 25 per cent in emissions entitlements from 2000 levels, or one-third from Kyoto compliance levels over 2008–12, or 40 per cent per capita from 2000 levels. For 2050, reductions would be 90 per cent from 2000 levels (95 per cent per capita).  Australia’s full part for 2020 in a 550 scenario would be a reduction in entitlements of 10 per cent from 2000 levels, or 17 per cent from Kyoto compliance levels over 2008– 12, or 30 per cent per capita from 2000. For 2050, reductions would be 80 per cent per capita from 2000 levels or 90 per cent per capita.  If there is no comprehensive global agreement at Copenhagen in 2009, Australia, in the context of an agreement amongst developed countries only, should commit to reduce its emissions by 5 per cent (25 per cent per capita) from 2000 levels by 2020, or 13 per cent from the Kyoto compliance 2008–12 period.

32. - 31 - Targets and trajectories…continued

33. - 32 - An Australian policy framework The role of an emissions trading scheme  Australia’s mitigation effort is our contribution to keeping alive the possibility of an effective global agreement on mitigation. Any effort prior to an effective, comprehensive global agreement should be short, transitional and directed at achievement of a global agreement.  In determining the preferred approach for Australia’s mitigation effort, the primary policy objective must be to meet a specified trajectory of emissions reductions at the lowest possible cost.  A well-designed emissions trading scheme has important advantages over other forms of policy intervention. However, a carbon tax would be better than a heavily compromised emissions trading scheme.  The market-based discipline for tackling climate change preferred by the Review will be efficient, but may have undesirable distributional consequences.

34. - 33 - An Australian policy framework…continued Complementary measures  The role of complementary measures to the emissions trading scheme is to lower the cost of meeting emissions reduction trajectories, as well as adapting to the impacts of climate change by correcting market failures.  Once a fully operational emissions trading scheme is in place, the Mandatory Renewable Energy Target will not address any additional market failures. Its potentially distorting effects can be phased out naturally over time.  Governments at all levels will play an important role in informing and coordinating the community’s adaptation response to climate change. More direct forms of intervention may be warranted when events unfold suddenly or when communities lack sufficient options or capacity for dealing with the impacts of climate change.

35. - 34 - An Australian emissions trading scheme  A highly principled approach to the design of the Australian emissions trading scheme (ETS) is essential if the scheme is to avoid imposing unnecessary costs on Australians.  The integrity, efficiency and effectiveness of the scheme requires adherence to a number of key design features: Scheme coverage that is as broad as possible, within practical constraints Establishment of an independent carbon bank as an independent regulator of the scheme, with all the necessary powers to oversee the long term stability of the scheme All emissions permits auctioned by the independent carbon bank No ceilings or floors for the price of permits (beyond 2012) Hoarding of permits allowed, and lending of permits (by the independent carbon bank) allowed within five year periods Measures to address the distortion created by the failure of Australia’s trading competitors to adopt a commensurate carbon constraint A judicious and calibrated approach to international linking A penalty for non-compliance, accompanied by a ‘make good’ provision.

36. - 35 - An Australian emissions trading scheme…continued  A transition period to the end of the Kyoto Period (2010 to end-2012) is supported in which: Australia’s emissions reduction target would be Kyoto commitment Emissions permits would be sold on demand, at a fixed price - $20 (rising at 4% + CPI, per annum) International trading of permits allowed, but unlikely Fixed price permits issued during the transition period could not be hoarded for use after the transition period.  As a priority, governments and industry should pursue effective international sectoral agreements for trade-exposed, emissions-intensive industries, en route to a global agreement.  Until sectoral or global agreements are reached, the Government should assist trade- exposed, emissions-intensive industries (TEEIIs), to account for material distortions arising from major trading competitors not adopting commensurate emissions constraints.

37. - 36 - An Australian emissions trading scheme…continued  The provision of transitional assistance to TEEII firms should take the following form: Only products that are expected to increase in price in excess of a threshold (in percentage terms) would receive assistance or credits For every unit of production, eligible producers would receive credit equivalent to the expected uplift in world product prices that would eventuate if trading competitors implemented a commensurate mitigation policy. Eligible producers would receive credits for that part of the expected price up-lift that is in excess of the threshold. An eligible firm could not receive credit or assistance in excess of its permit obligation in any compliance period Special arrangements may be required as a safeguard where the estimated price uplift factor exceeds a relatively high proportion of gross value added per unit of production  30% of permit auction revenue should be returned to business (including payments to TEEIIs)

38. - 37 - Adaptation and mitigation measures for Australia  It is likely that Australians and Australian institutions will be adapting to climate change within a few decades. Before that time, Australians will be dealing with the price effects of an emissions trading scheme.  The experience of climate change will vary between households, and across communities, businesses, sectors and regions. Geographic location, degree of exposure and the capacity of those affected to reduce their vulnerability will all influence the Australian experience.  Households and businesses will take the primary responsibility for the maintenance of their livelihoods and the things that they value.  The Review favours strong reliance on local initiative in determining how Australia as a whole adapts to climate change and emissions trading.  Information on the possible impacts of climate change is essential for determining the most appropriate means of adapting to climate change and the timing and scale of the response. Hastening progress towards more ambitious global mitigation will also require a better understanding of climate change, its impacts and our progress in dealing with it.

39. - 38 - Adaptation and mitigation measures for Australia…continued Information and understanding  The Review has highlighted two areas of need. 1. Climate science and modelling  While pluralism is always valuable in basic research, it is likely that, because of the sheer size and complexity of the task, Australia can only afford one strong coordinated effort in its contribution towards the international climate modelling work.  The most recent attempt to improve and consolidate Australia’s climate modelling capability has been the establishment of the joint CSIRO – BoM Centre for Australian Weather and Climate Research. This appears to be a step in the right direction.  The Australian Climate Change Science Program should be provided with the financial resources to succeed as a world-class contributor to the global climate science effort from the southern hemisphere.  Some support should be targeted at increasing Australia’s participation in international research and modelling efforts and review and assessment processes.

40. - 39 - Adaptation and mitigation measures for Australia…continued 2. Climate change policy research  An Australian climate change policy research institute should be established to inform public discussion and to strengthen the intellectual context for policy development.  The proposed research institute would need to have disciplinary strengths in the physical (climate) and biological sciences, in applied biological and engineering sciences, and in economics and the relevant social sciences. To maintain independence, the institute should have its own governance structure. The role of markets and market-based policies  Flexible markets using the best available information are the second essential component for successful adaptation and mitigation policies. It will be important to strengthen markets for insurance, water and food.  Markets are well placed to transfer risk to those best placed to deal with it and disperse concentrated risks across a wide base of industries, communities, regions and countries. The smooth flow of goods and services, and factors of production, increases the ability of the Australian economy to respond at least cost to abrupt shocks and anticipated changes over the longer term.  Government can facilitate adaptation by continuing to promote broad and flexible markets, and seeking to correct remaining barriers to efficient exchange.

41. - 40 - Sharing the burden  Mitigation policy (an emissions trading scheme) will significantly affect income distribution, as a carbon price flows through the economy.  Households will pay more for goods and services, including necessities. Low-income households spend a higher proportion of their disposable income on basic necessities and will therefore be disproportionately affected.  There will be geospatial variability in the effects of an emissions trading scheme. Those who live in outer suburbs or remote/regional locations will be affected more by higher transport costs.  The main guarantor of equity during rapid structural change is maintenance of economic growth and full employment within a flexible economy. This helps to ensure that there are ongoing economic opportunities for those displaced by the differential impacts of an emissions trading scheme and climate change.  Assistance for households can be funded by permit auction revenue (around half of total revenue to be used for this purpose). Assistance should take two forms: 1.General mechanisms – social security and tax systems 2.Targeted measures – Green Credit schemes focusing on energy efficiency, supported by audits.

42. - 41 - Sharing the burden…continued  Assistance for particular industries or regions is only likely to be appropriate where they can satisfy the dual rationale of equity and efficiency. Assistance should be non- distorting, transitional, and must ultimately benefit household and communities.  The electricity generating region of the Latrobe Valley may be a candidate for early assistance as: severe or concentrated effects could have inequitable employment outcomes there may be limited employment opportunities if the industry declines.  Assistance is also justified because market imperfections and distortions might make transitional unemployment and production losses larger and more sustained that they otherwise might be.  $1 billion should be allocated to facilitate structural adjustment in regions reliant on coal-based electricity generation. It would be provided as matched funding for the adoption of proven low-emissions technology, for new and existing plant. If technology is not viable, funding can be used for re-skilling and infrastructure for new industry.

43. - 42 - Information barriers to known technologies  Even with an emissions trading scheme, there will be barriers that prevent people taking up proven mitigation and adaptation technologies and practices. These will increase the cost of mitigation and adaptation if not addressed.  There are significant opportunities for increased energy efficiency in Australia. It is difficult to accurately determine the size of this opportunity, as it is hard to quantify the effort it would take to take up energy efficiency opportunities.  Policies should only be implemented if there are real market failures. There are some good reasons that seemingly effective technologies are not adopted. For example, there are real costs in staff time in making a factory as energy efficient as possible which can outweigh the benefits.  The Review identified the following key market failures: Public good information - The market will not provide some information Education and training - May be underprovided by the market Information asymmetry - If buyers and sellers do not have the same information on a product buyers won’t invest in better quality products. In some cases this means that sellers will largely provide poor quality products

44. - 43 - Information barriers to known technologies…. continued  The Review proposes the following policies: Targeted information programs for households on energy efficiency. Governments should avoid expensive and ineffective basic media campaigns Targeted education programs and advisory services for experts like engineers and tradespeople, intermediaries like retailers and business managers Governments should consider the adoption of measures similar to the Commonwealth Government’s ‘Green Leases’ for buildings Mandatory energy labelling for appliances, vehicles and buildings at point of sale and lease Minimum energy performance standards for appliances and buildings

45. - 44 - The innovation challenge  Early research and development of low-emissions technologies is an international public good, requiring high levels of expenditure by developed countries.  Australia should make a proportionate contribution alongside other developed countries. This would require a large increase in Australian commitments to research, development and commercialisation of low-emissions technologies, to more than $AUD3 billion per annum by 2013.  A new research council should be charged with elevating, coordinating and targeting Australia’s effort in low-emissions research.  As the emissions trading scheme delivers quick and profound shifts in the economic context, there will be a special requirement for high rates of technological improvement in low-emissions technologies. The emissions trading scheme will raise the opportunity cost of an inadequate market response in producing new technologies.  The required adaptation response is less likely to face the same time pressures. The impacts of climate change are likely to be felt more gradually, suggesting that the adaptation effort can be managed within established research and development funding practices.

46. - 45 - The innovation challenge…continued  The ‘innovation chain’ concept can help identify policies appropriate for different stages of research and development. The correction of market failures along the chain justifies government policy intervention.  Government must ensure that innovation schemes address material market failures that yield net benefits to society and that processes of resource allocation are insulated from political pressures.  The proposed measures need to target the problem and the cost of a market failure needs to be more than the cost of government intervention, with all of its political economy and other risks and costs.

47. - 46 - The innovation challenge…continued Demonstration and commercialisation  There are externalities associated with private investment in commercialising new, low-emissions technologies.  To achieve an effective commercialisation effort on a sufficiently early time scale, an Australian system of matching funding should be available automatically where there are externalities associated with private investment in low emissions innovation.  Early research should be guided by a transparent and independent process of evaluation and review that identifies research areas that are (1) aligned with Australia’s national interest and (2) is in an area of comparative advantage.  Government and broader industry (such as the black coal sector) should consider higher industry levees, at similar to levels applied in the agriculture sector, to fund the demonstration and commercialisation new low emissions technologies. Market uptake  The emissions trading scheme and better research and dissemination of knowledge about impacts will create enough demand–pull for new technologies so that generally there will be no need for any additional support at the market uptake stage.

48. - 47 - Network infrastructure  Opportunities to reduce costs as the emissions price rises will require good network infrastructure. So will effective adaptation to climate change.  There is a risk that network infrastructure market failures relating to electricity grids, carbon dioxide transport systems, passenger and freight transport systems, water delivery systems and urban planning could increase the costs of adjustment to climate change and climate change mitigation.  There may be circumstances in which, with well directed and minimal government intervention, private activity can overcome market failures. But often, these market failures can mean that investments in network infrastructure in response will be less than the economically ideal amount. Electricity interconnection  Adequate interconnection will allow the National Electricity Market to accommodate any structural change in the electricity sector that may be valuable as costs and demand change rapidly and differentially across the power sector under an ETS.  Adaptation to climate change and more frequent disruptions of electricity supply will also require deeper interconnection capacity.

49. - 48 - Network infrastructure…Electricity infrastructure The transmission of electricity  Without major changes in the transmission infrastructure, new technologies will find it difficult to compete, even in circumstances in which they are expected to be highly competitive once compatible infrastructure has been established.  The role of the proposed national electricity transmission planner should be expanded to include a long-term economic approach to transmission planning and funding. The Renewable Energy Transmission Initiative in California provides some important lessons for such an approach.  The Building Australia Fund should be extended to cover energy infrastructure. Embedded generation and the distribution of electricity  Market failure arises in the distribution of electricity because the investor in the embedded energy infrastructure cannot appropriate the benefits created for others from deferred network augmentation or transmission losses. These could lead to inefficient investment decisions.  Feed-in tariffs can be used to internalise the positive externality for investors in embedded generation, though they can only do so at the margin.

50. - 49 - Network infrastructure…Carbon dioxide infrastructure The transportation of carbon dioxide  As the number of sources of carbon dioxide and identified sequestration sites increases, there will be a corresponding increase in the need for pipeline networks to transport carbon dioxide between locations, some of which may be relatively isolated.  The provision of a system of pipelines transporting carbon dioxide from points of capture to points of storage has the potential market failure in three phases. 1.While carbon dioxide geosequestration technology matures and approaches commercial feasibility, an appropriate independent body established by government could start highlighting some of the possible long-term priorities for key pipeline infrastructure. 2.Once the industry has matured to the point of being potentially commercially competitive, government will need to be prepared with efficient mechanisms for initial development and funding of a pipeline grid. 3.In the long term, management and access arrangements for multiple users may be required as the pipeline system could be a natural monopoly.

51. - 50 - Network infrastructure…Transport  Consumers can only express their preferences for low-emission forms of transport (eg. public transport) if appropriate network infrastructure and services are available. In the absence of clear market forces, governments require good policies, institutions and funding arrangements to deliver the right transport infrastructure, services and land-use.  There are good reasons to improve these policies, institutions and funding arrangements in the absence of a mitigation imperative, with the mitigation imperative increasing the need for reform.  The Review focused on analysing whether there were biases towards the provision of infrastructure and services for roads. This analysis lead to the following recommendations: The Commonwealth broaden its transport funding to all modes of transport, and that each State and Territory review its funding arrangements for transport modes. Governments work together to investigate whether: users pay the full costs for each mode of transport, including externalities charges increase with costs eg. insurance prices should increase with use State governments investigate whether sufficient alternative modes of travel are in place to permit trials of congestion charging in major cities.

52. - 51 - Transforming energy  The energy industry has already been facing changes driven by increasing capital costs and global fuel dynamics. Climate change mitigation will add to these factors to effect a transformation in the sector.  Electricity is projected to represent a rising share of total energy as electricity supply decarbonises and other stationary energy and transport progressively turn to low- emissions electricity as the preferred energy supply.  Australia is exceptionally well endowed with energy options across the range of fossil fuels and low emissions technologies to remain a competitive supplier of primary fuels and minerals processing capability.  The future for coal based electricity generation, for coal exports and for mitigation in developing countries depends on the commercial viability of carbon capture and storage.  Initially the energy sector decarbonises through reduced demand and gas, progressively turning to coal with CCS and non-hydro renewables over the next few decades.  In the 550/450 scenarios, non-hydro renewables are projected to make up 5%/13% of generation capacity by 2020 and 30%/50% respectively by 2050.

53. - 52 - Transforming energy…continued  Most existing generators are projected to remain in operation and profitable beyond 2020, with more than 90 per cent of existing coal-based capacity still in place by then under the 550 scenario. Under the 450 scenario the initial impact on coal-based generation is greater with 2020 installed coal-based capacity around 28% below today’s level.  Australia is not the logical first home for new nuclear capacity on economic grounds, let alone public concerns. Future developments could cause a review of that position.  Coal-based aluminium in Australia is likely to decline in favour of locations with low- emissions electricity such as stranded hydro. This tendency will be constrained by the availability of such sites.  Gas is projected to gain in the early decades. Its longer term future will be dictated by the balance of fuel price relativities, resource availability and CCS.  In other areas of stationary energy, actions to reduce direct emissions and then to substitute towards lower-emissions technologies will lead to decarbonisation. Some fugitive emissions will depend on technology breakthroughs.  An effective energy market is critical in delivering this transformation. Retail price regulation, asset ownership and transmission constraints must be addressed.

54. - 53 - Transforming transport  Transport systems in Australia will change dramatically in the next century, independently of climate change mitigation, due to: higher global oil prices research leading to new vehicle technologies (eg. electric cars) population growth requiring new housing and transport infrastructure  These will interact with an emissions price through the market to drive: improved emissions-efficiency of vehicles demand for lower-emission modes of transport, like public transport reductions in travel activity  Oil will be the primary driver away from current transport patterns and technologies, but an emissions price will select the adoption of low-emission fuels.  Governments investment in transport infrastructure and services, and land-use planning will be required to facilitate mode switch and reductions transport activity.

55. - 54 - Transforming transport…continued  Transport emissions will grow more slowly over the next few decades with mitigation, and then fall rapidly after the introduction of a very low-emissions road transport technology. Emissions from aviation may take longer to fall.  Changes in road vehicle technology will likely account for a large proportion of emission reductions. Technology changes will likely occur first in urban areas.  Mode shift will vary between transport sectors. Mode shift will be minor in urban freight and international travel, and substantial in urban passenger transport. Irrespective of the mitigation imperative, there are clear reasons to plan for compact cities and invest in public transport, walking and cycling  The Review proposes that, in addition to changes to infrastructure policies, governments:  invest in mode shift and compact urban areas  reduce and equalise import tariffs on vehicles  shift flat charges on vehicles to use-based charges  amend Fringe Benefit Tax provisions on vehicles.

56. - 55 - Transforming rural land use  Without the impacts of climate change and mitigation policies, Australia’s agriculture sector would be likely to grow because of higher demand and higher commodity prices. Impacts of climate change will reduce opportunities and emissions mitigation policies will cerate new opportunities.  Carbon accounting in the land use sector should be as comprehensive as possible to avoid perverse or suboptimal outcomes. Australia should attempt to influence international emissions accounting rules in this direction.  Biosequestration offers enormous potential – it has the ability to transform the costs of mitigation for the agriculture sector and to the country. Comprehensive accounting will be required for Australian land managers to take advantage of all opportunities.  Australia should measure and report all emissions and removals by the land use sector with the ultimate objective of including all anthropogenic emissions and removals in an emissions trading scheme (ETS).  Under an ETS, land managers undertaking deforestation should be liable for resulting emissions and those undertaking reforestation should be allowed to opt in for coverage from scheme commencement.

57. - 56 - Transforming rural land use …continued  Clear rules will be needed regarding the treatment of non-anthropogenic emissions from the land-use sector, such as those caused by drought and fire.  Activities in the land use sector that are not included in an emissions trading scheme should be targeted by other mitigation policies.  When carbon removal by soil can be accurately estimated or measured, it should be included in an ETS.  Introduction of a carbon market could drive changes in land use that would have additional environmental consequences that may be negative or positive. These externalities should be addressed through the creation of market-based instruments for other ecosystem services (for example, water, biodiversity).  Subsidies and mandated targets for energy derived from biomass distort the market. The correct way to support mitigation through use of biomass for energy involves placing a price on all greenhouse gases arising from the production process and fuel combustion.  Understanding of emissions sources and sinks is vital for landowners and for government. Public good research in addressing data gaps regarding emissions from agriculture, forestry and other land use is warranted.

58. - 57 - Towards a low-emissions economy  Australia’s living standards are likely to grow strongly through the 21 st century, with or without mitigation, and whether 450 or 550 ppm is the mitigation goal. Botched domestic and international mitigation policies are a risk.  By mid-century, Australian household disposable incomes will be around two and a half times higher than they are today with Australia playing a proportionate part in global mitigation to achieve 450 or 550 ppm global concentrations. By the end of the century, incomes will be around 7 times higher than they are today under both mitigation scenarios. Yet we will have achieved this while reducing emissions by 35-50% below what they would otherwise have been by 2020 and more than 90% by 2050.  Substantial decarbonisation by 2050 to meet either the 450 or 550 obligation is feasible. It will go fastest in the electricity sector, then transport, with agriculture being difficult unless, as is possible, there are transformative developments in biosequestration.

59. - 58 - Towards a low-emissions economy…continued  There is considerable technological upside. This could leave Australian energy costs relatively low, so that it remains a competitive location for metals processing.  Australia’s human resource strengths in engineering, finance and management related to the resources sector are important assets in the transition to a low-emissions economy. They will need to be nurtured by high levels of well-focussed investment in education and training.  The introductory impact of the Australian emissions trading scheme will not be inflationary if permit revenue is used judiciously to compensate households.  Flexible and open markets are critical success factors; they give the best chance if things turn out well – they give the best chance if they turn out less well.

60. - 59 - Fateful decisions  There are times in the history of humanity when fateful decisions are made. The decision this year and next on whether to enter a comprehensive global agreement for strong action is one of them. The case for strong mitigation is a conservative one.  Success at Copenhagen requires agreement to large emissions reductions from developed countries, plus agreement on a framework for early contributions to mitigation from China and as soon as possible from other successful developing countries.  An international agreement must be a credible agreement. The sum of national commitments must ‘add up’ to the environmental objective.  The fateful decisions at Copenhagen will be for all sovereign nations. But the fates will be set long before December 2009. They will be set in the earlier national policy decisions taken by many countries, including Australia.  Australia will matter to the international community’s fateful decision. We can make a difference by announcing at an early stage that we are prepared to play our full proportionate part in an ambitious global mitigation effort.  The chances of success at Copenhagen would be greater if heads of government favouring a strong outcome set up an experts group to come up with a practical approach to global mitigation that adds up to various environmental objectives.  On a balance of probabilities, the failure of our generation on climate change mitigation would lead to consequences that would haunt humanity until the end of time.