According to modelling conducted by the Australian Government's Department of Treasury early global action to address climate change is less expensive than later action.
The modelling also found that a market-based approach, or Carbon Pollution Reduction Scheme (CPRS), supports robust economic growth, even as emissions fall.
Treasurys modelling forms part of a much wider body of work on the economic impacts of climate change.
The final report states that even though global action will reduce costs, there are advantages to Australia if early action is taken.
Deferring action gives rise to higher long-term costs, such as increasing climate change risks and locking in more emissions-intensive industry and infrastructure.
But, the report also noted that if Australia prices emissions before its competitors, some emissions intensive, trade-exposed sectors could lose some of their competitiveness.
Putting a price on emissions will drive a structural shift from an economy that creates emissions-intensive goods, technologies and processes towards one that creates low-emission goods, technologies and processes.
Emissions and energy-intensive industries contribute substantially to the Australian economy, so Australia faces a relatively greater adjustment task than many other developed economies.
Nevertheless, some of Australias emissions-intensive industries are likely to grow as global mitigation efforts are introduced, particularly coal, non-metallic minerals, livestock, iron and steel as Australia is less emissions-intensive than their international competitors in these industries.
But, aluminium and petroleum refining are likely to decline because relative to international competitors, Australia is more emissions intensive in these industries.
The final report looks only at the costs of mitigation, not the benefits. A critical challenge for future economic analysis is to develop methods, models and capacity that will allow a more integrated analysis of these costs and benefits.
How will the CPRS impact economic growth?
Treasury's modelling found that the impact of the various targets to reduce emissions on the Australian economy (as measured in the growth of GNP per capita) would be negligible.
The costs to sectors and regions, though, will vary as growth in emissions-intensive industries are likely to slow and possibly decline, while growth in low-emissions industries will accelerate.
The slightly lower rates of growth in GNP per capita gets marginally worse closer to 2050 (compared with business as usual); however, the modelling does not take account of the potential costs of climate change itself.
How will the CPRS impact inflation?
The CPRS is expected to cause a one-off increase in inflation of between 1 to 1.5 per cent in the year it is introduced.
The Carbon Pollution Reduction Scheme green paper predicts a 0.9 per cent increase, but this was based on an emissions price of $20.00 per permit, with minimal impacts for on-going inflation.
The impact on on-going inflation will be affected by the possibility of the subsidy on fuel being removed in 2013 and agriculture being brought within the CPRS in 2015.
This modelling assumes that the emission price will be passed on to consumers in full. Electricity prices are expected to increase between 17 to 24 per cent, and gas prices by 11 to 15 per cent.
How will the CPRS impact the value of the Australian dollar?
As low-emissions, low-energy intensive goods become more attractive to consumers, there will be slower growth in demand for energy commodities such as coal. This will in turn lower Australia's terms of trade, which lead to a fall in the Australian dollar. This may increase the international competitiveness of other sectors of the Australian economy.
Will Australian industries move overseas?
Even though the introduction of the CPRS is likely to cause Australia to lose its competitiveness in some industries, with or without global action, Treasurys modelling found little evidence to support claims that there would be movement of Australian industries overseas.
This is because the emission prices used in the various scenarios are not high enough to induce significant industry relocation.
Will the CPRS cause plants to close?
While pricing emissions could bring forward the decommissioning of some conventional fossil fuel plants, the introduction of the CPRS will stimulate the construction of new generating capacity, which is less emissions intensive.
Treasury estimated that renewable energy sources will account for 40 per cent of electricity supply by 2050. It was also stated that Australias electricity supply to 2050 is secure.
What greenhouse gas mitigation opportunities exist in Australia?
The marginal costs for Australia to reduce its emissions is higher than for many other developed countries. The key reasons are:
- Australias abundant low cost fossil fuel makes low-emission technologies less competitive
- agriculture comprises a larger share of Australias economy than many other developed economies and agriculture has fewer mitigation opportunities
- Australias pre-existing energy efficiency standards are high by international standards
Given the reduced range of mitigation opportunities, Australia will have to import emission permits. By 2050, the modelling suggests that imported permits will be needed to meet about half of Australias demand for permits.
Is developing technology important to reducing emissions?
Progress in developing low-emissions technologies is important for reducing global and Australian mitigation costs.
Australian costs are sensitive to technology assumptions, as technological progress will affect the value of, and demand for, Australian coal.
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