PHOTO: AAP/Lucas Coch

Climate storm shows political failure

16 December 2016

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Professor Warwick McKibbin is an ANU Public Policy Fellow at Crawford School. Professor McKibbin was a member of the Board of the Reserve Bank of Australia from 2001- 2011. He teaches Modelling the World Economy: techniques and policy implications (IDEC8127).

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Australia’s economy needs clear climate and energy policies in a time of global uncertainty. This means putting an end to the destructive political processes plaguing Federal and State governments, Warwick McKibbin writes.

With the Australian economy shrinking by 0.5 per cent in the September quarter, it is becoming increasingly obvious that there are problems with Australia’s future growth prospects.

The core problem is not the state of innovation in Australia or the inability of Australian companies and workers to compete in the global economy. There is enormous untapped potential growth in an Australian economy which is located in the most dynamic region in the world. There is no need for another round of inefficient government subsidies to encourage industries and pick winners. One of the key problems for the economy is the current state of Australian politics and the impact this has on uncertainty.

Uncertainty discourages investment by companies and undermines the confidence of households and investors. This has been a growing problem for the past decade since the state of policy debate degenerated into a game where the party in Opposition opposes everything a government is attempting to implement and then attempts to implement the opposite to their original position when in government.

This destructive style of political process across the political spectrum creates enormous policy incoherence and uncertainty. Who would invest a billion dollars in a new venture unless there was a very high return in order to compensate for serious political risk. This political uncertainty adds substantial costs to infrastructure projects when bidders have to price in additional costs to cover the likelihood that a contract would be broken with a change of State governments. Add to this the role of twentieth-century employment practices in contributing to cost blowouts in large projects, and the key drivers of Australia’s future growth are held hostage to narrow interest groups.

Attempts to address rising Australian government debt are in the right direction but completely inadequate relative to the scale of the problem. Energy and climate policies are other important cases in point. Low cost and reliable energy is critical for economic growth. Investment in energy generation involves decades of substantial investment in generation and transmission. When investment stalls, as it has with the decade of ambiguity about Australia’s climate policies, the cost of producing energy inevitably rises. A lack of any consensus among politicians and the apparent destruction of good policy processes will continue to lead to rising input costs for Australian companies and a lack of investment in new and existing technologies for Australia’s energy future.

There is apparent glee amongst some commentators that US climate policy will stall under President Trump. This could well be a serious misunderstanding of what might eventuate from a Trump Presidency. If an incoming President Trump carries out his promise to scale up gas and oil production in the US then he will drive down the cost of these energy sources. This will cause even more substitution in the US out of coal-fired electricity generation into gas generation. This will continue the trend of lower carbon emissions that emerged under the Obama Administration. It has been market forces rather than climate policy under the Obama Administration which has been the main cause of the loss of coal mining jobs in the US. The decline of coal has been primarily due to technological innovation in oil and gas production.

Given this reality, and the pledge by President Trump to bring back coal mining jobs, his most likely policy intervention will be some form of subsidies to coal. This will unlikely increase the use of coal in electricity generation in the US because market forces will be driving generation towards gas and other energy sources including nuclear. The result of this policy will be to increase the export of US coal to the global economy. This will drive down the world price of coal as it did during the US energy boom from 2010. Thus US carbon dioxide emissions may continue their downward trend under the Trump Administration and make the Paris Accord feasible and strategically useful for the US. For other countries, the falling world price of coal could complicate their domestic emission targets. In Australia this raises several problems. One is a further drop of the terms of trade. Another is a fall in State and Federal government revenue. The third is the need to stay within the Paris Agreement especially if the US does not abandon it.

Given the extreme state of uncertainty in the global economy, there are many events that will be outside the influence of Australian policymakers. But there are some policies that Australia can influence. It is well past time for Australia to have clear and sensible climate and energy policies that enable large scale investment in low-cost generation technologies to be undertaken. Bipartisan coherence and cooperation on climate, energy and budgetary policy would be an enormous stimulus to private investment and help with reversing the trend decline in Australia’s economic prospects.

The benefits of the apparent breakdown of sensible bipartisan policy design at the national and state level over the past decade are short term and largely accrue to vested interests and politicians seeking power. The costs will be large and will ultimately be borne by Australian taxpayers and future generations.

This article was first published in the Australian Financial Review. It was also published by Policy Forum.net, the website of the Asia and the Pacific Policy Society and Crawford School. http://www.policyforum.net/climate-storm-shows-political-failure/

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