This month, the Australian government will release its emissions-reduction target for 2035, likely to be between 65% and 75% . A 70% cut would mean reducing Australia's emissions from about 440 million tonnes of carbon dioxide equivalent down to 132 million tonnes.
Author
- John Hawkins
Head, Canberra School of Government, University of Canberra
Ahead of its release, a split has emerged over whether achieving rapid cuts to emissions in ten years will be a net cost or benefit to Australia. Last week, Australia's top business lobby group released a report suggesting A$500 billion of investment would be needed to cut emissions 70% by 2035.
The report, by the Business Council of Australia, calls for an "ambitious" but "achievable" 2035 target on the path to net zero. But this report seems more likely to be used as ammunition by those opposing an ambitious target, because it includes costs - but no benefits. By contrast, an earlier Business Council report suggested climate action would give GDP a boost.
Cutting emissions requires both public and private investment. It can also spur on new industries. Climate change is already costing a great deal of money and will cost far more if allowed to continue unchecked.
Is climate action a net cost or benefit? To date, the most detailed analysis in both Australia and the United Kingdom give the same answer: when the escalating damage done by climate change is accounted for, climate action has vastly more benefit than cost.
The cost of action - without the benefits
The Business Council's $500 billion estimate has already become the headline figure used in the media as an estimate of the "cost" of ambitious climate action. This is unfortunate.
The $500 billion figure refers to the estimated capital investment required to achieve a 70% reduction in greenhouse emissions.
This figure is towards the upper limit of a wide band. And while $500 billion sounds huge, it is only around 1% of Australia's likely total GDP over the coming decade.
The Business Council report is also based on "current costs and technologies". But many of the technologies needed to achieve net zero, such as renewable energy, electric cars and grid-scale batteries, have steadily become more efficient and affordable. These trends are unlikely to halt.
The report also omits any benefits. It did not include any longer-term considerations, such as the costs of climate inaction and climate impacts. Neither did it attempt to measure GDP benefits associated with new investment.
Climate investment brings benefits
Iron ore magnate and green industry backer Andrew Forrest has publicly challenged the Business Council report over the missing benefits, claiming it "underplays the opportunities for our economy".
Forrest's company, Fortescue, has led a breakaway high-ambition group of more than 500 businesses pushing for more ambitious emissions cuts.
This group - Business for 75% - recently released modelling suggesting cutting emissions by 75% rather than 65% over the next decade would increase investment by $20 billion a year. This would lead to a net benefit. Under a 75% reduction scenario, Australia's GDP would be $227 billion higher than under a 65% reduction. There would be more exports and more jobs.
In 2021, the Business Council released a report on achieving a net-zero economy. The more comprehensive modelling here suggested substantial net benefits. On average, each Australian would be $5,000 (in today's dollars) better off in 2050, assuming a smooth transition to net zero. Regional Australians would be even better off.
Who should we believe?
To date, arguably the most extensive modelling of the cost of climate action in Australia is the 2008 Treasury study , led by David Gruen, who is now the Australian Statistician .
The Treasury study concluded the economic cost of climate action in Australia would reduce the growth rate of real GDP by 0.1% per year.
These costs are much less than the economic damage expected from climate change. One estimate suggests:
The cumulative loss of wealth for Australia from the impacts of climate change on agricultural and labour productivity is expected to reach $4.2 trillion by 2100.
Globally, the 2006 Stern Review in the UK remains arguably the most respected and comprehensive study.
The review found cutting emissions to limit global heating would cost around 1% of the world's GDP a year. That's a lot. But it's dwarfed by the damage climate change will do if allowed to continue - an estimated 5-20% of global GDP.
Estimates of how much climate change will cost have increased since then. Slow progress in reducing emissions has made action more urgent. Fortunately, the costs of renewable energy have dropped.
What does economics tell us?
Australian economists overwhelmingly recognise action is needed to reduce greenhouse emissions.
Most believe pricing carbon emissions is the most efficient method. This is an example of a Pigouvian tax - measures aimed at discouraging activities that cause other people harm.
Unfortunately, carbon pricing has been seen as politically unviable in Australia after a pioneering scheme was axed in 2014, despite recent interest .
What Australia has instead is the Safeguard Mechanism , which is akin to a carbon price. It sets gradually declining limits on emissions from Australia's highest-emitting industrial facilities, which collectively produce almost a third of Australia's greenhouse emissions. The New Vehicle Efficiency Standard will cut emissions from cars.
If politically viable, an emissions trading scheme or carbon tax would be the best approach. It would raise revenue for the government, which could be used to reduce or replace the most inefficient taxes . While critics might call it a tax on everything, it would bring widespread benefits.
Action stations
Many Australians like to think of themselves as minnows on climate change. But this is wrong.
The long economic success of wealthy Australia comes in part from cheap domestic coal and gas, as well as current exports of coal and liquefied natural gas. Australians are some of the highest per-capita emitters of greenhouse gases.
But Australia also has world-beating potential in green industries, from solar power to critical minerals to green iron. As a largely arid nation, it is likely to be hit hard by climate change.
Business leaders can often be cautious about change. But climate change will bring large, escalating and unwelcome change. The best modelling we have suggests the benefits of acting fast on climate far outweigh the costs.
John Hawkins was formerly a senior economist at Treasury and secretary of the Senate Select Committee on Climate Policy.
