In this article, John Keane speaks of the slow death of social democracy but suggests that there may be possibilities that social democracy could embrace Green movements, intellectuals and parties that have common interests. See extracts from article below and link to the full article in The Conversation. (more…)

Are conservatives better economic managers? Part 1

In my blog of 3 May 2016, I queried the claim by Malcolm Turnbull and apparently supported by many media commentators and also by the public, that conservatives are better economic managers. The evidence and the record do not show that.

In last week’s budget and in the public relations selling afterwards, Scott Morrison fell back on slogans again. In this case the slogans were ‘jobs and growth’, ‘jobs and growth’. This was quickly followed by ‘we have a plan’, ‘we have a plan’. But as Ross Gittins in the SMH has pointed out, there is really no economic plan to get the budget back into surplus. The surplus is now pushed out again for years. With no real economic plan, the government again resorts to slogans at it did at the last election – ‘stop the boats’ ‘eliminate the deficit’ and ‘reduce the debt’. But we know from experience that the Abbott and Morrison activities did not stop the boats. It was a myth, but still believed by many. And the deficit and debt are much worse.

In this blog Ian McAuley pointed out that in the post-war years only Labor Treasurers, Paul Keating and Wayne Swan have won the prestigious Euromoney Finance Minister of the Year award. Peter Costello and Joe Hockey didn’t make it.

In The Guardian on 2 May, economist Stephen Koukoulis said

‘In terms of jobs, the ABS data show that average quarterly GDP growth and average monthly increases in employment are stronger when Labor has been in government compared with the Coalition. … GDP and employment growth both rise at a faster pace when Labor is in government.’

In this blog, Ian McAuley has set out three reasons why we might be misled into believing that conservatives are better economic managers. The first is that Labor has been in office at the wrong time. Coalition governments held office in the long boom years from 1949 to 1972 and from 1996 to 2007. Both Robert Menzies and John Howard were very lucky. By contrast the Whitlam government, which made many mistakes, encountered the biggest economic shocks of the post-war era – the 1973 oil embargo, the end of the Bretton Woods exchange rate arrangement and severe contraction in the US economy after the end of the Vietnam War. The Rudd government was also unfortunate in that it was confronted by the Global Financial Crisis, the other major post-war shock.

Ian McAuley argues that conservatives have successfully persuaded many, including themselves that government spending is inevitably wasteful and Labor is all about taxes and spending. Yet there is much more to a successful economy than budget balance and public debt. In world terms, Australia does not have a large government sector and Australian government revenue is modest in global terms. The most successfully managed economies in the western world are the Nordics that have high taxation levels and high government spending.

As Ian McAuley also points out, there is thirdly an assumption that rich people are clever and therefore better managers. Some clever people may be good managers but many rich people have the benefit of inheritance. Other rich people like developers, are able to manipulate governments to obtain concessions, but they don’t show much ability to compete in an open market without government support. As John Maynard Keynes reminded us we need to distinguish between speculators and business persons who really make things. He might have had people like Malcolm Turnbull in mind. When Malcolm really had a business management job, the NBN, he failed badly.

My view is that the big and beneficial changes that have set the Australian economy up in the post war years were initiated by Labor governments – the Curtin and Chifley governments, and the Hawke and Keating governments.

The former guided Australia out of the depression of the 30s and the destruction of WWII into full employment and economic growth. The Hawke and Keating governments laid the basis for almost three decades of uninterrupted economic growth.

The Whitlam government clearly had problems, some of which I saw at first hand…too much spending and too many government supported wage claims. There was a poisonous relationship between the Government and Treasury. Both sides were at fault The Whitlam Government did however set Australia on the path to freer trade with a 25% across the board cut in tariffs. It refused to bow to the Department of Defence and knocked back the Navy’s plan for locally designed and built light destroyers. It chose instead to buy off-the-shelf frigates from the US. The Department of Defence went into quite a sulk. Bill Hayden was getting the budget back into shape in 1975 but the improved economic performance was cut short by the Dismissal.

The Fraser government’s economies performance was poor as both John Howard and John Hewson have told us. The Fraser Government was the most protectionists in history although Malcolm Turnbull may surpass him with the extraordinary French submarine deal. Malcolm Fraser said ‘we will give industry the protection it needs’. The effective rate of protection of the car industry rose from a high of 54% in 1974-75 to a peak of 143% ten years later. The effective rate of protection for the textile clothing and footwear industries peaked in 1984-85 at 250%.

The Hawke and Keating governments were undoubtedly the most successful economic managers we have had. Amongst other things, they floated the dollar, reduced protection, broke the wage spiral with a wages accord, introduced the concept of a social wage and broke down a centralised wage-fixing system. The political problem for the government at the time was the ‘recession we had to have’ and record high interest rates. But successful economic management reform was the hall mark of the Hawke-Keating governments.

The Howard-Costello government’s economic performance was poor despite John Howard grasping the nettle of the GST. The world economy and the mining boom gave the Howard-Costello governments an easy ride. But Peter Costello left us with more serious structural problems like no other Treasurer has bequeathed. He was described by the IMF as ‘the most profligate Treasurer in 50 years’. This view was shared by the Australian Treasury and the Reserve Bank. Peter Costello did achieve a brief budget surplus, but he squandered the mining boom with locked in and permanent tax cuts in response to a temporary increase in revenue There were eight tax cuts in a row.. He cut tax on capital gains by half. He made income from superannuation entirely tax free. With John Howard he handed out billions of dollars in middle class welfare. Money was being shovelled out both the front and back door as if there was no tomorrow.

Costello was true to his ideological bent. For ideological reasons he wanted to reshape the Australian economy by shrinking the public sector. The best way to ‘starve the government beast’ he believed was to reduce government revenue so that in future governments would have to contract government spending in areas such as health and education. We are still paying for the Costello legacy and profligacy.

The Rudd-Swan government, at a critical junction with the Global Financial Crisis, handled it extremely well. Australia was about the only advanced economy that avoided recession. Wayne Swann received international plaudits but was unable to explain his success at home. That success was obscured by the campaign of Tony Abbott with his slogans and the Murdoch media who picked holes in programs such as pink batts and the capital funding of schools. The success was blanketed out by the joint efforts of the Murdoch media and Tony Abbott. That economic success was also obscured by the political division between Rudd and Gillard. Swan also failed in his latter years to effectively bring the budget back into surplus. The Mining Super Profits Tax was good policy but in the face of a media blitz by the mining industry, mainly foreign owned the government failed to communicate the case for such a tax.

Are conservatives better economic managers? Part 2

In Part 1 I argued the best governments in economic management since WW2 were the Curtin/Chifley and the Hawke/Keating governments.

More recently we have had the Abbott-Hockey team which won an election through the default of Labor and by persuading us that we had a debt and deficit emergency. It was an artifice. In fact both debt and deficit have worsened under Coalition management. The last Swann budget forecast a deficit of $ 10 .6b .It is now $ $37b. In each year the budget prospects have got worse. Our budget deficit is now in the top third of of 39 advanced economies. Debt will grow from $ 450b last year to $ 497b this year.

From a budget and deficit emergency three years ago, the government has moved to denial that we have ever had a problem. It is abdication of economic responsibility.

Joe Hockey used to tell us that interest rate reductions by the Reserve Bank were the sign of a struggling economy. Yet on the day of Scott Morrison’s budget, the Reserve Bank cut interest rates again. Morrison told us that it was due to lower inflation. But the Reserve Bank refuted this by pointing out that the ‘prospects for sustainable growth’ were of concern. The Bank is clearly worried about the ‘growth and jobs’ that Scott Morrison tells us will occur under his watch. Economic commentators have similar doubts.

Joe Hockey blamed the problem of housing affordability on low income people who weren’t working hard enough and saving enough to buy a home. Malcolm Turnbull gives a variation on that theme by telling parents, presumably wealthy parents, that they should ‘shell out’ more to help their children get into the housing market.

In any event, Joe Hockey’s performance and particularly his 2014 budget meant that Washington couldn’t come fast enough.

Scott Morrison talks about the importance of transitioning our mining based economy to a more broadly based economy. But his budget made no mention of the importance of developing a sustainable economy based on renewable energy .That would make environmental, economic and business sense. But there was no mention of it in Scott Morrison’s ‘economic plan’.

For years, the Business Council of Australia has been urging repair of the budget. But has now been seduced by a large reduction in company tax. Corporate Australia was the real winner in the budget.

There is no credible evidence that a reduction in company tax or reduced taxes on the wealthy increases jobs and growth. As Michael Keating has pointed out in this blog that ‘where ever the tax rate has been changed it has never made a perceptive difference to investment, either here in Australia or anywhere else’. The ‘trickle down ‘theory does not really help ‘jobs and growth’

And after almost three years of Coalition Government the story on business investment is disturbing. The budget is framed around business investment falling by 11% in 2015/16, falling 5 % in 2016/17 and with no growth in 2017/18. The Treasury figures also show unemployment is expected to remain at 5.5% until at least the middle oy 2018.

The budget figures do not show much ‘growth and jobs’ in the years ahead despite what the Treasurer says. Ross Gittins in the SMH on May7/8, 2016 said ‘…there is no evidence to support Morrison’s claim that the budget will do great things for ‘growth and jobs’.

The Supply side’ economics of Ronald Regan, cutting taxes for companies and wealthy individuals that Scott Morrison is pursuing, left the US with record deficits and debt and dramatically increased inequality. This inequality is described by the OECD as ’harmful for long term economic growth. As Nobel winning Joseph Stiglitz put it ‘the world faces a deficiency of aggregate demand brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom. So that as money moves up, demand moves down’.

We are learning at last that growing inequality is not only bad for society but it is also damaging for the economy. This is the path that the Turnbull government wants to take us down.

Malcolm Turnbull has told us many times that the Free Trade Agreements with several countries are ‘massive building blocks’ for our economy. However the Productivity Commission has warned us that there is more hype than benefits in these FTA’s. ‘Pebbles’ would be a better description than massive building blocks.

For a government that presumably has some regard for markets and free trade, its decision on a $50 billion submarine and naval build in Adelaide is remarkable. Christopher Pyne must really be a national treasure if the government needs to spend so much money to help keep him in public life. This submarine decision by the Turnbull government will surpass by far the protection ways of the Fraser government.

In this blog on 29 April, Jon Stanford and Mike Keating pointed to

‘The implications for industry policy constitute a particularly egregious element in the [submarine] procurement decision. … We need to remember that the Abbott government showed the door to the car industry. The end of the ‘age of entitlement’ meant that around $500 m. a year, not high by international standards, was too much to pay to support a high technology(car) industry that, directly and indirectly, employed around 200,000 people. Now the government is keen to support a (shipbuilding) industry with a cost disability, according to the Rand Corporation, of up to 40%. Given the likely moderate local value-added in an industry where all sophisticated hardware is important, the effective rate of protection (assistance to value added) will be much higher than this. Indeed a leaked paper from Defence suggested an effective rate of protection of 500% would be required to build the submarines in Adelaide. Even at the height of the Fraser government’s protection excesses … the effective rate reached only 143% for the car industry. … On the Prime Minister’s figures, 2,800 jobs will be created directly and indirectly, a far cry from the 200,000 jobs that are related to the car industry. Some early estimates suggest we are looking at a cost of around $4 m. for every job created.’

It is hardly good economic or business management.

In his interview with Laurie Oakes, Scott Morrison acknowledged that the contract with the French submarine builder had not been signed and the design and specifications were open-ended even though we have apparently agreed on a price. It sounds like a thorough business mess.

The crack down on high income earners who mis use the superannuation system is welcome but as Saul Eslake and others have warned these same people are likely to now transfer their surplus funds into negative gearing of property, a problem which the government refuses to tackle. In its cautious way the Reserve Bank has warned about the risks of negative gearing. ’Any change which discourages negative gearing may be a good thing from a (financial stability) perspective. The concessional rate of taxation of capital gains might encourage leverage speculation, particularly in combination with negative gearing provisions’

We are likely to see even more wasteful infrastructure spending, particularly on roads. As Michael Keating has pointed out in this blog we must have’ proper pricing signals and evaluation’ for infrastructure investment. A government that professes to understand business, markets and pricing should know this. Unfortunately it doesn’t and allows so much of road spending to be influenced by powerful motoring organisations and construction companies.

There is no credible plan to bring the budget back into surplus or secure ‘jobs and growth’. But we will have plenty of slogans in the coming weeks as we had at the last election.

And the budget is quite silent on the two most important issues of our time climate change and growing inequality. Ideology has been put ahead of good economic management

The case that conservatives are better economic managers does not stand up to serious examination.

Prime Minister Turnbull made a splash on urban transport recently. He sketched a vision of ‘30 minute cities’ where residents spend on average just one hour a day travelling to regular activities like work and shopping. He also considered mass transit solutions rather than just more motorways.

This article is the first of three raising questions about where politics and bureaucracy find themselves in transport and its infrastructure – and where they might head next. In a subsequent post, more on funding and the role of the Commonwealth. For now, the PM’s focus on mass transit and 30 minute cities:

Mass transit                                                                   

There is a case for favouring mass transit systems over motorways. In this, the current Rhodes Scholar distinguishes himself from the previous PM, who was more of a roads scholar (guided, one suspects, by Margaret Thatcher’s famous views on the emasculating shame of public transport ([i])). If PM Abbott’s objective was reducing travel time to power the city economy, he had it wrong: new motorways can appear liberating, but when ‘aimed’ at major centres in cities can induce more and more cars to use them – until they soon become full again ([ii]). You can’t bust congestion just by building more motorways.

30-minute capital cities

There is a theory, based on historical record, of long-term constant average travel times in some major cities of around half an hour. But these places mostly aren’t Australian capital cities. Our cities have around 200 years of development to consider; most evolved intensively only after the advent of the motor car; they spread out and luxuriated in wide spaces. Many Australians, especially in the biggest cities, already spend considerably more than 30 minutes commuting each way every day. Data for Sydney shows total average daily travel time to exceed 40 minutes, 35 minutes on work trips alone ([iii]).

Little wonder that a 30-minute city is an attractive political stance. Even less wonder that sections of Sydney and Melbourne’s media dismissed the Prime Minister’s proposal as ludicrously ambitious ([iv]).

What can the PM do about this? Will spending enough billions on big projects break the mould and reduce Sydney or Melbourne commutes to 30 minutes? Settled economic theory around equilibriums would say no. Whether the travel time is 30, 40, or 50 minutes, attempting to change these numbers could hazard many scarce billions for little long term gain: it is difficult to drop travel times sustainably through infrastructure, least of all by roads, and by inference through housing.  Naturally, this view won’t be popular with the infrastructure industry that stands to profit most directly from massive spending. But in this respect, as someone or other said recently, Canberra is not an ATM – not for the states, not for civil engineering firms either.

So is it all hot air? No. But Prime Ministerial effort will benefit most from avoiding blank-cheque public transport evangelists and instead playing a strong and focussed hand in the game, with an eye on creating a robust Commonwealth legacy:

• Canberra can influence better city transport design through road pricing. As distinct from charging to pay for roads, road pricing has the best potential to reduce congestion. It also can help resolve the vital but usually ignored question: which mix of transport, including public transport, gets the best results? This is especially the case if road profits are available to systems separated from car use, such as rail and bus rapid transit. Canberra can put its oar in the water here by asking for the theoretical application of road pricing in the identification and assessment of every major urban transport project proposal. An ‘as if there was road pricing’ test is a practical way of doing this today, without needing another bureaucratic study or debate on how to introduce road pricing.   Indeed, to not use such a test now entails major risks to the design, economy and amenity of Australia’s cities.

• Distributional effects of transport projects merit closer examination. The largest economic and social gains, such as increased workforce participation, may well be reaped by helping those at the physical and social margins of our cities; in this sense, the discussion should be more about access to services and less about speed/mobility. More about the ability of the young to get to good jobs; less about pandering to the privileged few by making their drive to the CBD or holiday home a little faster under the guise of ‘congestion busting’.

• Arising from this, as Mike Keating and Luke Fraser wrote for last year’s Fairness Opportunity and Security series ([v]), there is a need to give renewed consideration to buses in the Australian setting, including redesign of new housing developments to better accommodate buses, rather than just giving the westies a motorway, or inner city dwellers their longed-for token ‘iron pony’ (aka light rail), or some obscure minister his or her bronze dedicatory plaque on a motorway that points itself at a city centre.

• Lastly places like Newcastle, Wollongong, Geelong and Townsville seem a much more feasible testbed for the 30-minute city than Sydney, Melbourne and Brisbane. Among other things, unlike in the big capitals, this would not require an archaeological understanding of historical agendas for these cities, and avoids angsts such as having attractions close to where people live and not just near the CBD.

• Higher Speed rail connections between places like Newcastle or the Central Coast and Sydney can create a much larger ’30-minute city’ and the value capture from such projects might be larger than for projects confined to Sydney’s already expensive property market. This deserves proper consideration, in contrast to the eccentricities seen in Canberra’s recent high speed rail studies.

So, lots to be done – and none of it even remotely attended to by Canberra to date. Plenty of ideas for a Prime Minister who wants to take cities seriously. But to set up a real legacy, any Prime Minister, whether Turnbull or Shorten, must ensure their Government’s actions align with a proper and sustainable role for the Commonwealth.

John Austen is a happily retired former official. He was Director of Economic Policy for Infrastructure Australia from its inception in 2008 to his retirement in 2014. Further background is at: thejadebeagle.com.

Luke Fraser is the founder and principal of a transport policy and investment advisory. In 2012 he was appointed to the board of the Prime Minister and Premiers Road Reform Project. Prior to this he was a national freight industry chief executive and provided advisory services to Infrastructure Australia. He recently authored a tax-rebate-based road pricing reform model for the SA government. The views expressed here are his own.

[i] Worth quoting, a reminiscence, albeit from the other side, from UK Hansard (2 July 2003, Column 407): ‘The hon. Member for Wolverhampton, South-West (Rob Marris) said that the Conservatives had no policy on buses, but that is hardly surprising in view of the most famous quote of all time about the buses, delivered by Margaret Thatcher …in 1986:

“A man who, beyond the age of 26, finds himself on a bus can count himself as a failure”.’

[ii] http://www.citymetric.com/transport/does-building-more-roads-create-more-traffic-934

[iii] 2012-13 Household Travel Survey at http://www.bts.nsw.gov.au/Statistics/Household-Travel-Survey/default.aspx#top

[iv] http://www.smh.com.au/comment/the-30-minute-city-is-a-silly-idea-but-malcolm-turnbulls-cities-policy-isnt-as-hollow-as-it-seems-20160502-gokk5e.html

[v] https://publish.pearlsandirritations.com/blog/?p=3834

Scott Morrison’s Commonwealth budget aims to be politically balanced but, like the Hockey budgets, neglects struggle street. The budget still labours under the neoliberal belief in minimal taxes, small government and maximum freedom for private enterprise.

Morrison’s mantra is that cutting taxes on businesses and the wealthy will increase investment, growth and jobs. The trouble is, this is not the case, in part because the meagre income of much of the population reduces demand. It appears also that tax cuts for the wealthy make little difference to the growth rate.

In addition, the unfairness of the economic system builds up popular resentment against elites groups who often make the rules to benefit themselves. This explains much of the disenchantment with politics that we see in Australia. We haven’t reached the situation of the United States, where anger and resentment is very evident in the widespread support for Donald Trump and Bernie Sanders. Consider also the rise of populist movements in parts of Europe with very high unemployment. Youth unemployment in Greece is at 48 per cent. How long can nations manage such social distress without turning to extremes?

Trickle-down economics & inequality

The trickle-down assumptions of supply-side economics have been proven bogus, but they supply a rationale for rich individuals and corporations to justify the inequitable division of wealth.

Joseph Stiglitz and many other economists have highlighted how inequality has grown to astonishing levels in the United States and elsewhere. Mike Secombe in The Saturday Paper pointed out that in Australia, the top 20 per cent have 70 times more wealth than the bottom 20 percent. While 10 per cent of households own 40 per cent of the wealth, the bottom 40 per cent of households own just 5 per cent. Secombe quoted an OECD study that ‘growing inequality is harmful for long-term economic growth.’

This is certainly the view of Pope Francis and other religious leaders. The Pope’s recent social encyclical, Laudato Si’, identified inequality and climate change as two of the greatest challenges to human wellbeing today. Francis highlights greater equity as a key to sustainable growth and prosperity.

Scott Morrison declared an end to class warfare, yet it would seem that the very rich have been waging class warfare for years, largely unhindered.

Major budget problems

The 2016-17 budget makes superannuation somewhat fairer for low-income people, but three-quarters of the benefit goes to the top 10 per cent of taxpayers. In addition, few of the steep cuts to services and programs made by the Abbott government have been restored. Indeed, there are more cuts to health and aged care in particular, and some Medicare benefits.

Despite strong support from business groups to lift unemployment benefits, the government curiously refused to increase them. For people going on to Newstart, the benefit will actually drop because they will not receive the small carbon tax compensation benefit. Unemployment benefits remain under $530 a fortnight for a single adult without children, not enough to pay for board at a backpacker’s and for food, medication, clothing and a phone card. Many walk the streets by day, and at times sleep rough. Increasing numbers of people are relying on charitable agencies for emergency support, and you may have seen more people begging in the streets of major cities.

The budget does little for the homeless or those in housing stress. And what of the 600,000 children living in poverty? Instead the budget cuts 810 jobs from the Department of Human Services, and a further 344 from the Department of Social Services. There was little new for Indigenous programs either. The budget did not restore earlier cuts, and there were further cuts to Indigenous legal services and higher education participation programs.

The extraordinary cost of housing is raising great concern in the community, as it is pricing many young couples out of the housing market, or saddling them with crippling debts. The housing bubble is also socially damaging, a source of considerable stress and delaying family formation. The budget completely resiled from any attempt to tackle the problems arising from negative gearing, as well as from capital gains taxes.

Perhaps most surprising, the budget ignored the looming crises from global warming. At a time when Australia could be a world leader in sustainable energy, and developing ways to adjust to climate change with new technologies and know-how in farming, fishing, housing, health care etc., the Coalition seems diffident, despite the Prime Minister’s own personal views. The cuts to funding for our world-famous CSIRO, and for research on climate change, are emblematic of the blinkered thinking of the Coalition government.

As for the budget’s centrepiece, the ‘enterprise tax plan’ to cut company tax from 30 per cent to 25 per cent over ten years, Stephen Long called it a ‘con’, and Tim Colebatch considered it ‘breathtaking’ and ‘courageous’, in Sir Humphrey’s famous phrase. Will the tax cuts produce growth and jobs? Not for years, according to Stephen Long. Small companies will likely retain profits in the business rather than risk new investment. The lower tax rate will encourage investors from overseas, but that will take years to eventuate. ‘The gains for jobs and wages are so small they are trivial’, comments Long. Malcolm Turnbull eventually confirmed that the program could eventually cost nearly $50 billion.

One of the few bright spots in the budget is an effort to tighten multinationals’ tax avoidance and capital flight. Voters are naturally outraged at such systemic tax avoidance and governments themselves are suffering from this massive haemorrhage of capital into tax havens. All the political parties broadly support curtailing this tax avoidance.

Yet because the Coalition had reduced its funding, the Australian Tax Office cut its workforce from 22,000 to about 18,500. In a major about-face, Treasurer Morrison announced that the ATO would now gain an extra 1000 staff, with 390 of them joining a taskforce of 1300 to ensure tax compliance by multinationals. Better late than never.

In short, what we urgently need in Australia is stronger support for those on struggle street, and policies to restore a fairer distribution of wealth and opportunity.

Bruce Duncan is a Redemptorist priest lecturing in social ethics at Yarra Theological Union in Melbourne. He is one of the founders of the advocacy organisation Social Policy Connections.

Better concepts and measures of quality of life and wellbeing make sustainable development more achievable. 

The debate about progress and development is converging and merging with that about sustainable development. My analysis of the flaws in equating progress with modernisation, discussed in my previous article, contributes to this debate because it shows the equation counts modernity’s benefits to wellbeing but not all its costs.

Modernity’s dominant narrative of material progress gives priority to economic growth and a rising standard of living. It is being increasingly challenged by the alternative narrative of sustainability, which seeks to balance social, environmental and economic priorities and goals to achieve a high, equitable and lasting quality of life. Material progress represents an outdated, industrial model of development: pump more wealth into one end of the pipeline of progress and more welfare flows out the other.

Sustainable development reflects an ecological model, based on our understanding of complex systems, in which wellbeing results from many entities or factors interacting in often multiple, diffuse and non-linear ways. (Its implications include paying more attention to the quality of economic activity, not just its quantity; and trading off some growth to achieve other, social and environmental benefits.)

One approach to measuring sustainable development is to divide quality-of-life or wellbeing measures by energy use or environmental impacts. The New Economic Foundation’s Happy Planet Index does this, multiplying national life satisfaction by life expectancy and dividing the resulting ‘happy life years’ by a country’s per capita Ecological Footprint. My aim here, however, is to assess the wellbeing side of the equation. Wellbeing measures tend to reinforce the conventional view of progress by suggesting wellbeing is continuing to increase; even indices which include environmental impacts show Western nations performing best on the social and economic measures.

There is often an assumption, explicit or implicit, that there will be a cost to current quality of life in shifting to a sustainable path, as reflected in the title of a recent paper on the topic: ‘Untangling the environmentalist’s paradox: Why is human well-being increasing as ecosystem services degrade?’. The Happy Planet Index notes the ‘undeniable tension’ between its numerator of happy life years and the denominator of the Ecological Footprint. The Sustainable Society Index no longer aggregates beyond the three dimensions of human, economic and environmental wellbeing because of the negative correlation between human and environmental wellbeing, which it says seem to be on a ‘collision course’.

A 2008 study comparing countries’ Human Development Index scores with their per capita Ecological Footprints shows environmental impacts rise steeply with high development. Only one country (Cuba) of the 93 surveyed met the requirements for both high development (an HDI score of 0.8 or more) and global sustainability (a footprint of less than 1.8 global hectares). Among high-income countries over the previous 25 years, improvements in index scores came with disproportionately larger increases in their footprints, showing a movement away from sustainability. Some lower-income countries, in contrast, achieved higher levels of development without a corresponding increase in their footprints.

My wider perspective on wellbeing helps to resolve this dilemma by highlighting how Western high-consumption lifestyles and the type of economy and culture they reflect and require are not only increasing resource consumption and environmental damage, they are also hostile to health and wellbeing (especially in countries that are already rich). The importance of ‘correcting’, or at least questioning more deeply, the conventional picture of progress and development is underscored by environmental analyses which demonstrate the extent of the environmental costs, the limits they impose on orthodox development, and their potentially catastrophic impact on human health. That most measures of progress, including newer indices, do not reflect this reality – and show, in effect, that we are enjoying a high or improving quality of life even as we move ever closer and faster to an ecological abyss – demonstrates how far we have to go.

This perspective reinforces the message which is becoming clearer from global threats to humanity such as climate change, food, water and energy security, economic collapse, and technological anarchy. This message is that we need to change the myths, worldviews and values by which we define ourselves, our lives, and our goals. The necessary transformation can be compared to that in Europe from the Middle Ages to the Enlightenment: from the medieval mind, dominated by religion and the afterlife, to the modern mind, focused on material life here on earth.

Without this deeper change, we will not close the gulf between the magnitude of the challenges and the scale of our responses. A cultural transformation of this depth is very different from the policy reforms on which our public discussions and political debates focus and which, by and large, our indicators of development track. The 2015 Paris Agreement on climate change, hailed politically to be an outstanding success, but judged scientifically to be a failure, exemplifies well this ‘reality gap’

 

Richard Eckersley is a director of Australia21, a public-interest, strategic research company. This article draws on a longer paper published this month in the leading international development journal, Oxford Development Studies. For those with subscription access, it is available at: http://dx.doi.org/10.1080/13600818.2016.1166197. An author version is available at: www.richardeckersley.com.au

 

Carol Richards is Vice Chancellor’s Senior Research Fellow, Queensland University of Technology.  Bree Devin is Lecturer in Public Relations, Queensland university of Technology. This article first appeared in The conversation on February 29, 2016.

Among the various interests at the Paris climate talks, it is arguably the voice of business that has emerged most clearly. Many business leaders are now saying that if the world is intent on reducing greenhouse gas emissions, there must be a worldwide price on carbonand a framework for linking the 55 schemes that exist in areas such as China, the European Union, and California.

Momentum has been building since May, when six of Europe’s largest oil and gas companies, including Royal Dutch Shell and BP, issued a letter calling for global carbon pricing system. That month, leaders from 59 international companies also signed a statement calling for carbon pricing to feature in the Paris agreement.

Advocacy has continued during the Paris negotiations. For example, Patrick Pouyanné, chief executive of French oil and gas giant Total, argued that the shift from coal to gas “will not happen without a carbon price”. He suggested that a price of US$20-$50 in Europe was required (well above the current price).

Oleg Deripaska, president of the world’s largest aluminium producer Rusal, put the issue in stronger terms, describing the idea of voluntary national emissions commitments (upon which the Paris agreement largely hinges) as “balderdash”.

Asked what success would look like from the Paris negotiations, Deripaska replied:

A success [for most people] would be lunch at a nice French banquette with foie gras and oysters. But no, seriously, it is carbon tax or die.

Carbon tax on the menu?

It is not clear whether a carbon price will figure in the Paris agreement. But it is important to consider what is motivating some of the world’s highest-emitting companies to advocate for a carbon price. And what other, perhaps more intrusive plans for tackling climate change would be taken off the table?

Businesses have a stronger presence at COP21 than at any previous climate negotiation. They know which way the wind is blowing and realise that governments might require painful and complex interventions to reduce emissions. Moves are afoot to decarbonise the world economy some time after 2050 (see Article 3 of the latest draft text, and there has been strong advocacy for a moratorium on new coal mines.

Helge Lund, chief executive of British oil multinational BG Group, argues that a carbon price reduces government intervention and attempts at “pick[ing] winners in terms of energy technologies.” Instead, he argues: “the market will dictate the most efficient solution”.

Forecasts from the International Energy Agency suggest that fossil fuels (including coal) will provide the bulk of energy demand for developing countries going into the future. Companies intend to meet that demand. Thus, Shell can simultaneously advocate putting a price on carbon and make plans to drill in the Arctic where production will not begin until 2030.

While that might sound perverse, there is actually nothing inconsistent about those two positions.

One way for energy companies to maintain economic growth in a carbon-priced economy is to shift investments gradually away from coal and oil, and towards gas. That is why Shell has paid US$70 billion for the BG Group.

Of course gas might come under similar pressure in time, but as the Financial Times has reported:

…oil companies’ skills and assets mean that finding and extracting gas is a short and natural step. Moving into renewable energy is a much bigger leap.

This can be seen in the many examples where energy companies have struggled to develop other forms of energy, such as BP’s ill-starred attempt to brand itself as “beyond petroleum” and invest US$8 billion over ten years in renewable energy. The company has since backtracked on that goal, has left the solar market, and has no plans to expand its onshore wind investments.

Beyond markets

Of the 185 countries that have submitted climate targets ahead of the Paris talks, more than 80 have referenced market mechanisms.

Clearly, a price on carbon is going to play a role in attempts to tackle climate change. This is a good thing but it is not sufficient and must not become a distraction from other serious interventions.

Recent research confirms that we do not have time to wait for energy companies to transition at their own pace from fossil fuels to renewable energy. For example, last week Kevin Anderson from the Tyndall Centre for Climate Change Research published a paper in Nature Geoscience which argued:

The carbon budgets associated with a 2℃ threshold demand profound changes to the consumption and production of energy … the IPCC’s 1,000 gigatonne budget requires an end to all carbon emissions from energy systems by 2050.

A carbon budget consistent with 2℃ (let alone 1.5℃) requires a dramatic reversal in energy consumption and emissions growth. Governments should treat overtures from business with caution, even if businesses are making the right moves. They need to ensure that these moves are made at a speed that suits the climate, rather than just business.

Peter Burdon is Senior Lecturer, Adelaide Law School, University of Adelaide. This article was first published in The Conversation on 11 December, 2015

Despite a generally positive reception to the Paris accord on climate change, the ideologues on both sides of the debate regard it as a failure. For the sceptics, the agreement that developing countries (which played a negligible role in causing the problem) can continue to increase emissions is so inequitable that it undermines the whole deal. For the more extreme green groups, given their view that renewables are ready to take over from fossil fuels now, the ambition is not nearly high enough and much more should have been done.

But for the non-ideological majority, the Paris agreement is significantly better than could have been expected even twelve months ago. The nations of the world, including the major emitters, have committed to taking action over time to meet a 2 degree target and even, potentially, a 1.5 degree target. It was always a dream to suppose that a grand global treaty could be achieved, with ambitious, legally binding commitments to cut emissions, sanctions for the underperformers and all achieved by recourse to a global emissions trading scheme. Post Kyoto, the US, China and India, all major emitters, signalled that they would not ratify any legally binding treaty that would commit them to reduce greenhouse gas emissions.

The Paris agreement, supported as it is by the major emitters and with each nation’s efforts subject to regular peer review, is as good as it was ever going to get and better than most observers expected. With the review mechanism and the widespread recognition that greater emissions reductions will be required in the future, countries are unlikely to take their commitments lightly.

To be sure, the current commitments, even if they were met, would not stabilise the global temperature increase at 2, let alone 1.5, degrees Celsius. Taking account of likely recalcitrants, we are now looking at perhaps 3 degrees. But that’s not the point. Dealing with climate change was always going to be a very long game. Even if nations were willing to write-off the current capital stock in the emitting sectors, the inescapable fact is that the world does not yet possess the necessary technologies at an acceptable cost to be able to get rid of fossil fuels. Close to home, the current problems with the South Australian electricity system, with its over-reliance on wind and consequent spikes in power prices, provide some evidence of this.

That is why people such as Bjorn Lomborg suggest that the clean technology fund established at the Paris conference by Bill Gates is more important than the agreement itself. Committing greater resources to R&D and innovation in the area of clean energy is a sine qua non for an effective response to climate change in the medium and longer term. Apart from hydro, nuclear energy is currently the only available technology for the provision of zero emissions base load power at reasonable cost (although outside China the costs remain excessive). If solar is going to provide base load power in any quantity in the future, not only must the problem of storage be solved, but the physical footprint of solar thermal technologies must also be drastically reduced. All this, of course, must also be achieved at an acceptable cost.

What are the implications of the Paris agreement for Australia? First of all, it is quite clear that early reports of the death of coal have been greatly exaggerated although, in the next few years, thermal coal at least may enter a slow but terminal decline. On the one hand we have yet to find a substitute for steel in many of its applications and demand for coking coal will not go away any time soon. On the other hand, developing countries, particularly India, will continue to rely on thermal coal for the foreseeable future to provide low cost electricity to millions of people emerging from poverty.

The main issues, however, are Australia’s emissions targets and the policy measures that are required to achieve them. Although our relatively high population growth needs to be taken into account, Australia’s current emissions targets are not particularly ambitious nor indeed, adequate in the context of stabilising at 2 degrees or less. There is a strong case now for raising Australia’s 2020 target from 5 to at least 10 per cent, which is achievable. The review of targets scheduled for 2017 could well look to increasing the 26-28 per cent target for 2030. Although our 2030 target is comparable to those of Canada and the US, it is now manifestly inadequate in the light of the higher global ambition since enshrined in the Paris agreement.

Finally, Australia has time to design a comprehensive policy approach to reducing emissions significantly post 2020. While most economists always will prefer market-driven mechanisms like a carbon tax and emissions trading, we must recognise that these have become politicised, perhaps fatally, and examine some second-best options such as regulation. The Grattan Institute is currently working on this, with a detailed report to be released early in 2016.[1]

A thorough review of these issues by the Productivity Commission could make a very useful contribution to the government’s consideration of policy options. Yet, fearing that such a review will merely lead to a clarion call for an ETS, the government may be reluctant to establish a Productivity Commission inquiry. This would be unfortunate, and the terms of reference could be crafted so as to address the government’s sensitivities. This could include a requirement to evaluate all major potential policy instruments and how they would impact on the different emitting sectors of the economy, on user industries and on the community in general.

Jon Stanford is a Director of Insight Economics and has undertaken numerous assignments on climate change for government and industry. While he was at the Department of Prime Minister and Cabinet in the 1990s, he was Chair of the Interdepartmental Committee on Greenhouse.

 

 

 

[1] Tony Wood, David Blowers and Greg Moran (2015), “Post Paris: Australia’s climate policy options”, Grattan Institute Working Paper, December.

There is a profound disconnect between Australia’s international climate diplomacy and its national climate and energy policies.

The diplomacy could be cast in positive terms, on the surface at least.

During the first week of the climate negotiations in Paris, Australia displayed a preparedness to be flexible and serve as a broker of compromises in the negotiations over the draft Paris Agreement.

Australia has also agreed to support the inclusion of a temperature goal to limit global warming to 1.5℃, which is a matter very dear to the hearts of Pacific Island nations for whom climate change is a fundamental existential threat.

Australia will serve as co-chair (with South Africa) of the Green Climate Fund in 2016, which will be channelling money to the most vulnerable countries in the Pacific and elsewhere to enhance their preparedness for the harmful impacts arising from a much warmer world.

In his address on the opening day of the conference, Prime Minister Malcolm Turnbull announced that Australia would ratify the second commitment period of the Kyoto Protocol (Kyoto II) and commit A$200 million a year in climate finance going forward to 2020.

And on the sidelines of the negotiations, environment minister Greg Hunt announced that Australia would provide A$1.2 million towards the Coral Triangle Initiative for Coral Reefs, Fisheries and Security.

He also unveiled the Blue Carbon research project to explore how the protection of marine and coastal habitats could reduce emissions by storing carbon while also protecting biodiversity and fisheries.

Yet appearances can be deceiving. The A$200 million in annual climate finance comes from the aid budget and is not new or additional. Nor does it represent an enhanced commitment relative to previous contributions.

And it is widely acknowledged that an enhanced commitment to climate finance by rich countries to assist poor countries to develop clean energy and adapt to climate change will be central to garnering the support of developing countries to a Paris agreement.

Australia had every reason to ratify Kyoto II, since it had one of the lowest emissions targets in the developed world for 2020 (5% below 2000 levels).

Australia has also been able to benefit from greenhouse gas accounting rules (including a carry over of surplus emissions allowances from the first commitment period) that will enable achievement of this target at the same time as greenhouse emissions outside the land sector are set to increase by around 11% by 2020.

Contrast this with Germany, the UK and Denmark, which announced that they will cancel their surplus emission allowances and not carry them over for Kyoto II.

Australia’s climate diplomacy is therefore like a doughnut: a few some promising initiatives around the edges but nothing in the middle.

The missing middle, of course, is robust domestic targets and policies for 2020 and the post-2020 period.

Get serious

If Australia was really serious about aiming for a more ambitious temperature target to stand firm with its neighbours in the Pacific, then it would have domestic politics that were commensurate with this ambition.

As the strong contingent of civil society organisations from Australia at COP21 have been quick to point out, Australia’s domestic policy settings, including significant fossil fuel subsidies, actively encourage fossil fuel production and use.

These subsidies, along with the government’s Emissions Reduction Fund, cast the burden on the public to pay for the cost of carbon pollution, rather than the polluters.

The first week of the negotiations included a string of announcements of new initiatives on divestment from fossil fuels and efforts to promote the phase out of fossil fuel subsidies. This included a communiqué on fossil fuel subsidy reform, signed by eight non-G20 countries (including New Zealand and Norway) and supported by France and the United States.

Australia declined to give its support to the communiqué. Turnbull said Australia would have supported it if it had been restricted to “inefficient” fossil fuel subsidies.

Yet economists describe fossil fuel subsides as perverse because they harm the economy (by propping up inefficient industries) and the environment, and soak up scarce public money that could be better spent elsewhere.

To make matters worse, the government’s decision to approve the giant Carmichael coal mine in Queensland will completely cancel out any of the modest goodwill provided by Australia’s diplomacy.

Germanwatch’s Climate Change Performance Index for 2015 ranked Australia 60th out of the 61 countries surveyed – second last to Saudi Arabia. This is down from 57th last year.

No amount of flexible and constructive climate diplomacy, or negotiating support for Pacific Island nations, can hide the fact that Australia’s domestic policies are part of the problem, rather than part of the solution.

Robyn Eckersley is Professor of Political Science, School of Social and Political Sciences, University of Melbourne. Robyn Eckersley is attending COP21 in Paris as an accredited observer. 

Since he became Prime Minister, Malcolm Turnbull has committed himself to Tony Abbott’s policies on climate change. He supports Direct Action. He supports the Abbott government’s carbon reduction targets. At the Paris Conference, the Turnbull government reaffirmed its commitment to the fuel rebate subsidy for miners. It plans to double coal exports.

In his blog on 7 December 2009, after he was dumped as Leader of the Liberal Party, Malcolm Turnbull said:

‘So, as a humble back-bencher I am sure he [Tony Abbott] won’t complain if I tell a few home truths about the farce that the Coalition’s policy, or lack of policy, on climate change has descended into. 

To replace dirty coal-fired power stations with cleaner gas-fired ones, or renewables like wind, let alone nuclear power or even coal-fired power with carbon capture and storage is all going to cost money. 

To get farmers to change the way they manage their land, or plant trees and vegetation all costs money. Somebody has to pay. 

So any suggestion that you can dramatically cut emissions without cost is, to use a favourite term of Mr Abbott “bullshit”. Moreover he knows it. 

It is not possible to criticise the new Coalition policy on climate change because it does not exist. 

As we are being blunt, the fact is that Tony and the people who put him in his job, do not want to do anything about climate change. They do not believe in human-caused global warning. 

As Tony observed on one occasion “Climate change is crap”, or if you consider his mentor, Senator Minchin, the world is not warming, it’s cooling, and the climate change issue is part of a vast left-wing conspiracy to deindustrialise the world. 

The Liberal Party is currently led by people whose conviction on climate change is that it is “crap” and you don’t need to do anything about it. Any policy that is announced will simply be a con, an environmental fig leave to cover a determination to do nothing. 

Tony himself has in just four or five months publicly advocated the blocking of the Emissions Trading System, the passing of the ETS, the amending of the ETS, and if the amendments were satisfactory, passing it, and now the blocking of it. … 

We have given our opponents the irrefutable, undeniable evidence that we cannot be trusted. ‘ 

Malcolm Turnbull is now taking to the Paris Conference, a policy on climate change that a few years ago he described as ‘crap’ and ‘a fraud’!

 

“The greatest trick the devil ever pulled was convincing the world he didn’t exist.”

Twenty years ago Kevin Spacey uttered this famous line about his alter ego, Keyser Söz, in The Usual Suspects. Keyser Söz isn’t climate change, but he might as well be.

Since the film was released an inordinate amount of money has been spent to trick the world that human-induced climate change doesn’t exist.

Recent data from the CSIRO suggests the ‘trick’ is yet to be completely foiled in Australia. Although almost 80 percent of people believe climate change is occurring, every second person routinely changes their mind and there is considerable divergence on whether human activity is a causal factor.

Thankfully, someone who requires no more convincing is Mark Carney, the Canadian Governor of the Bank of England.

“There is a growing international consensus that climate change is unequivocal,” Carney said in September.

“Human drivers are judged extremely likely to have been the dominant cause of global warming since the mid-20th century.”

Carney, like his Chief Economist, Andy Haldane, is what I call an unusual suspect, someone who looks beyond the parapet and leads on an issue when we don’t expect them to.

Think doctors and nurses on children in detention and sporting heroes like David Pocock on marriage equality.

Although we might deem these interventions ‘unusual’ given their infrequency, they can be perfectly natural for the individual speaking out. Often they are based on experience or expertise.

This makes unusual suspects particularly insightful, and especially powerful.

Carney’s incursion into the climate change debate shouldn’t be taken lightly. He also heads up the global Financial Stability Board, established after the Global Financial Crisis.

It was no coincidence Carney gave his speech at Lloyd’s of London.

Insurers know full well the rising cost of weather-related events, aggravated by climate change, from around $10 billion per year in the 1980s to $50 billion today. These losses, Carney conceded, will “pale in significance” to those on the horizon when we consider “broader global impacts on property, migration and political stability, as well as food and water security”.

Carney and Haldane argue the physical, liability and transition risks posed by climate change threaten financial stability.

They are progressives amongst a hitherto conservative central banking set.

Haldane in particular has bemoaned “quarterly capitalism”, which sees public companies over-discounting future income streams by 5-10 percent per year.

He believes “shareholder short-termism may have had material costs for the economy, as well as for individual companies, by constraining investment”.

Haldane is not alone. Larry Fink, Chairman and CEO of BlackRock, wrote to S&P 500 CEOs in April, accusing them of prioritising actions to deliver immediate returns and “underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth”.

Where are Australia’s unusual suspects in business and finance?

One would find it difficult to locate seminal speeches on climate change and quarterly capitalism by our central bankers or the Business Council of Australia

Much has been made of our tepid growth outlook. Reserve Bank Governor Glenn Stevens challenged the National Reform Summit to ask: “how do we generate more growth? Not temporary, flash in-the-pan growth, but sustainable growth”.

The adjective — sustainable — is key. Focusing on growth at all costs risks missing the wood for the trees. To engineer sustainable growth, one requires a sustainable economy. And that is what Australia lacks most of all.

It is a shame, because sustainability is in Australia’s DNA.

In fact, in 2011, then Treasury Secretary Martin Parkinson told us “the theme of sustainability will need to shape the approach to policy development of this generation”.

Parkinson was and remains spot on: his focus was on how each generation could bequeath to the next a productive base for sustainable wellbeing at least as large as the stock of capital inherited.

How shortsighted it was for one of our best unusual suspects to be dumped by the Abbott government.

His likely reemergence as head of the Department of Prime Minister and Cabinet is timely.

At his alma mater, Princeton, in September, Parkinson echoed Carney by saying company boards and financial market regulators give scant attention to climate change risks. Equally absent was examination of the “knock-on effects to macroeconomic stability of falling demand for carbon-intensive exports”.

Accelerating Australia’s transition to a sustainable economy will require those in business, finance, government and civil society to embrace unusual suspects on climate change and sustainability as the new normal, not the exception. If anyone can do this knitting, it’s Parkinson. Welcome back.

Travers McLeod is Chief Executive of the Centre for Policy Development. This article was first published in the Huffington Post on 26 November 2015.

Leading up to this month’s major climate change conference in Paris, there has been a welcome increase worldwide in the commitment to address climate change generally and, in particular, to restrict global warming to two degrees Celsius. Although they are still insufficient to meet the two degree target, the initial national commitments to be taken to the conference are, perhaps, more ambitious than might have been expected a couple of years ago.

One of the side effects of this increased ambition has been a growing focus on the role of coal in increasing carbon emissions. In particular, there has been a developing sentiment in favour of banning investment in new and expanded coalmines in Australia. The “keep it in the ground” campaign started mainly as a green activist movement, although supported by respected media outlets such as The Guardian. Yet the campaign appeared to be more ideological and emotional than one that would attract the support of rational policy analysts. More recently, however, the campaign has been endorsed in an open letter to world leaders by 60 eminent Australians, including two highly regarded economists, Bernie Fraser, a former Secretary of the Treasury and Governor of the Reserve Bank, and Professor John Quiggin of the University of Queensland.

In this article, I address the following issues:

• The main findings of the recently published World Energy Outlook by the International Energy Agency (IEA), including the projected use of coal in generating electricity out to 2040 and how this would change if the world was on a two degree pathway
• In this context, whether prohibiting new coal mines would be an efficient or effective means of reducing carbon emissions globally so as to meet climate change objectives.

IEA’s World Energy Outlook, 2015[1] 

In its latest projection of global energy use, the IEA has reduced its previous estimates of the role that coal is likely to play in future electricity generation.[2] Its main scenario is based on an assumption that the world will take action along the lines of the national commitments for the Paris summit. It has been suggested that this would put the world on a pathway to stabilising the global temperature increase at around 2.7 degrees Celsius. While this outcome would fail to meet the two-degree target by a significant margin, this outcome remains perhaps the most reasonable assumption at this stage.

In analysing pathways to meeting emissions targets, it needs to be appreciated at the outset that we are not dealing with a slow growing market. The IEA estimates that global demand for electricity will increase by 70 per cent between 2013 and 2040.

The IEA’s main scenario takes account of the Paris commitments to counter climate change. While negotiations at the summit may produce a slightly more ambitious result in terms of pledges, on the other side of the coin it is likely that over time some countries will fall short of meeting their commitments. On that basis, it seems likely that this scenario is based on assumptions that are realistic and may be closest to the eventual outcome.

Under this scenario, fossil fuels would still supply over half of the world’s electricity in 2040, with the main fuel type shares being:

• Coal – 30%
• Gas – 23%
• Nuclear – 12%
• Hydro – 16%
• Wind and Solar PV – <10%

While coal’s global share of the power generation market would fall substantially under this scenario from 41 per cent in 2013, its use in absolute terms would increase by nearly 25 per cent in a much larger market. ‘Conventional’ fuels capable of providing continuous power (coal, gas, nuclear and hydro) would account for over 80 per cent of supply. Under this scenario, the two technologies much favoured by some green groups, wind and solar PV, together would account for less than ten per cent of global power supply in 2040.

The IEA also produced a more optimistic scenario of fuel shares in electricity generation in 2040 should the world follow a pathway consistent with achieving the two-degree target. This would result in the following fuel shares in power generation in 2040:

• Coal – 12%
• Gas – 16%
• Nuclear – 18%
• Hydro – 20%
• Wind and Solar PV – >30%

Depending on which scenario you believe, therefore, coal is still likely to play a considerab;e role in power generation in 2040. Much of the coal combustion is projected to occur in Asia, particularly in India. Of course, much depends on technological changes and their relative costs, which are extremely difficult to predict. If there were a breakthrough in the commercial applicability of carbon capture and storage (CCS), for example, coal could claim a much greater share of future carbon budgets. The same argument applies to renewables, where the development of practical long-term storage solutions is perhaps potentially greater than a CCS breakthrough. Also, the potential of small modular nuclear reactors appears promising, with considerable development work occurring in both the US and China.

An important conclusion from the IEA’s analysis is that even under the optimistic outcome of the nations of the world agreeing to take actions to limit global warming to two degrees, coal could still play a significant role in power generation in 2040. If the outcome falls short of this, as seems likely, coal’s future role will be commensurately greater.

Would banning new coal mines provide an efficient policy approach?

The proposal to ban investment in new and expanded coalmines signifies that substantial public costs, or negative externalities, are associated with the use of coal. There is little doubt that the combustion of coal to produce electricity has made the greatest contribution to increasing carbon concentrations in the atmosphere. Therefore, the most prominent miscreant in bringing about climate change is clear and, except for a few deniers and “sceptics”, overwhelmingly accepted by policy makers globally. Unless the resulting emissions can be captured and stored, there is a substantial negative externality associated with the combustion of coal.

In light of this clear conclusion, the question addressed in this section is how the issue should be addressed in policy terms so as to bring about the most efficient outcome. One widely canvassed approach in recent times is to ban investment in new coalmines and in expansions of existing mines.

Fundamentally, this is a resource allocation issue and is, therefore, more a question for economists than scientists or engineers. Most economists would agree that the most efficient way to deal with negative externalities is to impose a tax on the externality and then allow the market to determine the optimal allocation of resources. For example, if coal-fired power generation threatens the environment in terms of climate change, the most efficient way to deal with this is to tax the resulting emissions of carbon dioxide. Applied over all forms of power generation by means of a carbon tax or an equivalent emissions trading system (ETS), this application of a cost on carbon would help to ensure that carbon emissions from power generation were reduced by means of a strong market signal to investors in the electricity generation market. A carbon tax or ETS would provide a disincentive to invest in coal and other fossil fuel power generation plant and an incentive to invest in low or zero emissions technologies.

Banning new coalmines would reflect an arbitrary approach to reducing emissions. On what basis should various fuels be permitted or banned? Why is coal to be singled out but other fuels with significant emissions such as oil and gas are not? There is also a problem in that many of the interest groups that want to prohibit coal mining would also like to ban other fuels as well. Not only are some environmentalists ideologically opposed to all fossil fuels, including gas, but they also object to competitive zero emissions power generation technologies such as nuclear power and hydro-electricity. Banning coalmines may well be the thin end of the wedge. Some groups would also like to ban uranium mining and the construction of new dams. Then, of course, on the right of the political spectrum, there are groups who are vigorously opposed to wind farms on the grounds of their visual pollution. Once the size of the physical footprint of solar thermal generation is understood and the massive land resource required, some groups would probably be opposed to that technology as well. What would we then be left with?

Restricting the supply of coal by banning new mines would be contradictory to the more efficient approach to climate change of taxing carbon emissions and thereby allowing the market to determine what technologies are adopted to generate electricity. It would give a clear advantage to existing mines, which may be near the end of their economic lives and are often less efficient than new mines. It would also benefit other fossil fuels with a significant carbon footprint, such as oil and gas. The strong market signal arising from the ban would also inhibit, perhaps totally, any incentive to work on more greenhouse friendly ways to utilise the earth’s vast reserves of coal through technologies such as CCS.

Were it to be widely adopted, such a policy would also eventually raise the price of coal in developing countries, such as India, where a large proportion of the nation’s population is struggling to emerge from poverty and where currently there are very many households that have no electricity supply. In my view, it ill behoves people in countries like Australia, where their high standards of living have been built, in part, on the foundation of a secure, relatively cheap, coal-based electricity supply, to attempt to force people striving to emerge from poverty in other countries to renounce coal and pay much more for an interrupted electricity supply via renewables. For this reason, among others, nations need to think long and hard before denying natural resources to other countries that may not be so fortunate in terms of their resource endowments.

Would banning new coal mines provide an effective policy approach?

Abstracting from efficiency considerations, if the Australian government prohibited the development of new coal mines, would this be an effective approach to reducing the global use of coal for power generation?

It is difficult to see how this could be an effective policy in the absence of an agreement between all of the major coal-producing countries to restrict supply. Such an agreement would be very unlikely. There are abundant resources of coal worldwide and, hence, many alternative sources of supply to Australian mines. As may be seen from the tables below, many of the countries with abundant coal reserves are less wealthy than Australia and are most unlikely to agree to prohibit investment in their coal industries.

While the Australian coal industry is a very efficient producer, it does not dominate the global market and could not be said to possess any significant market power. Data produced by the US Energy Information Administration, for example, suggest that while Australia’s coal endowments are extensive, they amount to less than nine per cent of global reserves.[3] In 2013, Australia ranked fifth in overall coal production (metallurgical and thermal coal), accounting for less than six per cent of the global total.[4]

Exhibit 1: Major Thermal Coal Producing Countries (2013)

Country	Production (Mt)
China	3,034
USA	756
India	526
Indonesia	486
South Africa	255
AUSTRALIA	239
Russia	201
Kazakhstan	103
Colombia	81
Poland	65

Source: World Coal Association, ‘Coal Statistics’, < http://www.worldcoal.org/resources/coal-statistics/>

In terms of the world’s largest producers of thermal (steaming) coal used for power generation, however, Australia is not ranked in the top five (Exhibit 1). In 2013, China’s production of thermal coal was over 12 times as great as Australia’s. The production of thermal coal in the USA and India was also far higher than in Australia, while Indonesia’s thermal coal production was over twice as great. Importantly, India now has a policy objective of being self-sufficient in coal by the early 2020s. This will require massive new investment in coal production.

Until recently, Australia was ranked first in terms of coal exports. Of Australia’s total coal exports of 336 Mt in 2013, 182 Mt were thermal coal. But in recent years, Indonesia has recorded a very rapid growth in exports (overwhelmingly in thermal coal) and has overtaken Australia. Coal exports from Indonesia more than doubled between 2008 and 2013, compared with a 33 per cent increase from Australia (Exhibit 2).

Exhibit 2: Major Coal Exporting Countries by Volume

Country	Exports, 2013(Mt)	Exports, 2008(Mt)	Growth 2008-13(%)
Indonesia	426	203	110
AUSTRALIA	336	252	33
Russia	141	101	40
USA	107	74	45
Colombia	74	74	0
South Africa	72	62	16

Source: World Coal Association, ‘Coal Statistics’, < http://www.worldcoal.org/resources/coal-statistics/>

Both Indonesia and Mongolia have the capacity to increase their exports substantially. Russia, South Africa and Kazakhstan are also potential rivals. In none of these countries, as far as I am aware, is there any significant questioning of the legitimacy or acceptability of the coal industry or any support for prohibiting new investment in the industry. Indeed, investment in these industries is generally keenly sought. Also, these countries generally have less rigorous approvals processes for new projects, less of an emphasis on environmental protection and lower labour costs than Australia.

In terms of effectiveness, therefore, the question is what environmental benefit would accrue from banning new coal mines in Australia and what would be the costs? It is difficult to see any possible benefits in terms of reducing global emissions, because, as the Prime Minister has pointed out, the investment in new coalmines displaced from Australia would merely take place in other countries. As demonstrated above, Australia lacks any monopoly or even oligopoly power in this market. If Australia took a position based on ideology and emotion, it would be very unlikely to have any impact on the demand for coal globally, but at the same time would provide an opportunity for other countries to step in and capture some of the market previously supplied by Australia. It would be a classic case of carbon leakage, where, in return for no tangible benefit, Australian investment and jobs migrated to other countries. People who depended for their livelihoods on the coal industry would be sacrificed without any offsetting tangible benefit in terms of climate change.

Conclusions

It appears that the governments of the world are likely to step up to the plate and commit to taking substantial action to counter climate change at the Paris summit commencing at the end of November 2015. This is most welcome. Under most plausible scenarios of emissions reductions, however, the forecasts by the IEA suggest that the combustion of coal will continue to generate a significant proportion of the world’s electricity supply until at least 2040.

Proposals to ban investment in new coalmines or expansions, either unilaterally or globally, would be neither an efficient or effective approach to addressing climate change.

First, it would not be an efficient approach because it would be arbitrary and selective and would fly in the face of the more efficient policy of taxing the negative externalities produced by burning coal and other fossil fuels more generally. It would, therefore, provide disproportionately favourable treatment to other fossil fuels such as oil and natural gas. In addition, it would provide a boost to other low emissions base load technologies such as nuclear and hydro, which may also be in the black books of some of the groups that want to ban coal.

Secondly, it would not be an effective approach. Australia has less than 10 per cent of the world’s coal reserves and is not in the top five countries that export thermal coal. Other countries would be happy to step in to fill the gap in coal exports left by Australia. This would be a classic case of carbon leakage. Investment and jobs would be exported from Australia with no tangible benefit in terms of climate change.

There are equity issues here as well, both in terms of people in other countries currently living in poverty who seek access to the cheapest electricity and also those Australians whose livelihoods depend on the coal industry. The people who advocate banning new coal mines would generally not suffer any tangible adverse consequences if their proposal were adopted.

Finally, in the absence of commercial clean technologies such as CCS, those who believe that substantial action needs to be taken to counter climate change will accept and even welcome the longer-term decline of the coal industry. Global action to counter climate change suggests that coal is a declining asset that, in the medium to long term, may well become stranded. Yet the dismal scientist in us also recognises that Australia’s endowments of coal represent a significant asset on our national balance sheet. The industry has given rise to well remunerated employment opportunities as well as very substantial royalty income to the benefit of the Australian community as a whole. In a declining market for coal, therefore, rather than banning new investment in the industry, the rational approach for Australia would be to seek to ensure that as much as possible of the declining future demand for coal is supplied from Australian mines. This is not inconsistent with a policy stance that encompasses strong action to address climate change and achieve the two degree target.

Jon Stanford is a Director of Insight Economics and previously worked in a senior role in the Department of the Prime Minister and Cabinet. He has acted as an expert witness in a number of court cases involving proposals to develop new coal mines.

[1] In reporting this summary of the recent IEA report, I am much indebted to Keith Orchison’s analysis in his This is Power blog and his articles in the Business Spectator.

[2] International Energy Agency, World Energy Outlook 2015, http://www.iea.org/publications/freepublications/publication/WEB_WorldEnergyOutlook2015ExecutiveSummaryEnglishFinal.pdf

[3] US Energy Information Administration, ‘International Energy Statistics’, <http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=7&aid=6>

[4] World Coal Association, http://www.worldcoal.org/resources/coal-statistics/

Richard Di Natale has called on the Greens to get ready for government. Well and good. The direction in which he is prodding his party is a rare glimmer of hope in an otherwise bleak Australian political landscape.

Whether in a coalition (likely with Labor), or in its own right (unlikely), what sort of public policy agenda would a Greens government pursue? It is time for it to come up with a broad and innovative policy agenda; otherwise a completely new political party will have to be created.

The other major parties, Labor and Liberal, have become ossified under the thumb of ideologically blinkered, self-perpetuating elites, the consequence of what Robert Michels once called the “iron law of oligarchy.” The Nationals are mostly irrelevant to mainstream policy debates, but they too suffer from the same organisational malaise as the ALP and the Liberals.

For over three decades now Labor and the Coalition parties have been in obsessive thrall to a neoliberal mindset, utterly insensitive to the havoc that neoliberalism has been wreaking on our economy. However, what they are clearly incapable of comprehending today is that the whole neoliberal (or “economic rationalist”) project is about to come crashing down.

Some of the catastrophes that neoliberalism has unleashed on us in Australia include: stagnating economic growth rates; sharply increasing socio-economic inequalities that are undermining capitalism itself (though, as with most subtleties, this irony escapes most neoliberals); the running-down of vital public services and the devaluing of public goods (for example, hospitals, schools, public transport); the appalling expansion of what were once termed “repressive state apparatuses” (increased powers for police and border protection authorities, state-sanctioned human rights abuses on Manus Island and Nauru, draconian meta-data gathering laws, the use of legally prescribed secrecy by governments to hide what they are really up to); and a society in which a range of social pathologies (family violence, depression, narcissism, drugs, begging, violent crime) are becoming the sine qua non of everyday life.

The licence that big private sector corporations have been granted by successive neoliberal regimes has not resulted in better services, cheaper credit, or widely shared prosperity across the community. As Milton once observed, licence is not the same thing as liberty. Markets are now being crowded out by start-up ingénues and fraudsters while being bullied by big local and overseas corporations intent on feathering their own profitability nests and with little interest in the needs or rights of their employees and consumers.

For example, the billion dollar profits that the big four banks are presently announcing (even as they increase their lending rates) point to the abject failure of the principles of deregulation and privatisation – that neoliberals have boasted endlessly will free up a shackled market, to benefit everybody. In the case of the banks, the only beneficiaries have been their obscenely overpaid executives and a narrow grouping of major shareholders. And, remember, many of those shareholders are offshore corporations.

Consider, too, the myriad private providers of electricity that have exploded on to the scene since the privatisation of energy generation. Neoliberals promised that privatising the delivery of electricity would bring vigorous competition into a previously lazy and cosseted industry, driving down the price of electricity in household budgets. But, as every household knows only too well, this simply isn’t happening. In fact there are now far too may competitors in the market devising all sorts of byzantine schemes to woo customers, while investing in costly advertising and hustling campaigns to cajole bemused and confused customers into signing up with one or other of them. The result has been a shocking escalation in the costs of a fundamental public good – affordable electricity. The privatisation of electricity has been one of the most spectacular of neoliberalism’s disasters.

These are only two examples of many failures by neoliberalism to progress our economy and enhance people’s lives.

So what sort of agenda should the Greens espouse?

Their first priority must be to counter-attack in neoliberalism’s war on public goods and services. Reimposing regulatory constraints on a private sector that is out of control is an impossible task. That horse has well and truly bolted. However, neoliberals love to extol the virtue of competition in the economy. So why not give them some real competition?

This is where Greens should enter the policy debates. They should can mount a political campaign explaining that there is no competing mechanism in the neoliberal quiver to challenge the social destructiveness and economic vandalising that neoliberalism’s privatising and deregulating have unleashed. They need to explain that the only achievement of neoliberal policies has been to oversee capital roaring up the system, not trickling down.

This should be the prelude for advocating a policy of strategically targeted public competition into the so-called “free market.”

The first item on the post-neoliberal policy agenda should be the setting up of a publicly owned bank, to provide genuine competition in the banking industry. Of course the neoliberal beneficiaries of the current banking order will scream like stuck pigs about the unfairness of a publicly owned competitor in their midst, insisting that only they be allowed to compete on that most sacred of neoliberal cows – the fabled level playing field.

Anyway, why must a publicly owned bank be seen as unfairly tilting the economic arena? Its establishment would simply provide more competition to bring the banking field back to an even keel, while returning profits to the community either though cheaper, more consumer-respectful services, and/or profits being invested in public goods (for example, better schools, railways, medical services).

Another strategic area in the contemporary economy is legal services. Thousands of Australians are locked out of the justice system because of prohibitive fees charged by the big law companies that as greedy as the banks. A publicly owned law firm providing cheap and friendly (dare one say compassionate) legal advice would help address the unjust over-representation of social minorities and the poor who are routinely and unjustly the majority victims of the pointy end of the country’s legal system. When did you last hear of a senior partner in a law firm, or a distinguished surgeon, or a bank CEO going to jail?

Other strategic areas in the Australian economy in urgent need of tough public competition include the real estate industry (agents’ costs and fees are a significant factor in pushing up already escalating house prices), medical (including psychiatric) and dental clinics, a publicly owned pharmaceutical corporation (once a dream of the Whitlam government), childcare centres, a government airline, and a comprehensive news and entertainment media agency (an expanded and properly resourced ABC and SBS).

A cautiously progressive introduction of public competition into strategic sectors of the economy would certainly contribute to improving the barrenness of our contemporary public policy environment. As each new public competition agency is settled in, further competition could be contemplated – for example a publicly owned supermarket chain.

And once people realise that this kind of state intervention doesn’t cause the sky to fall in, then even the nationalisation of certain crucial industries could be considered – an obvious example is urban rail networks and road tollways.

Indeed with the institutionalisation of a healthy culture of public competition in the post-neoliberal economy, further private competition could even be encouraged. But any new private enterprises will have to operate on a truly level playing field. Regulators will require them to demonstrate that their services are consumer-respectful and that the efficiencies they promise are genuine, not bogus as so many are right now.

If the Greens are unable to mount a public policy program for the coming post-neoliberal era, then a new political party will be necessary. That will be the time for all good men and women to come to the aid of the party.

Allan Patience is a political scientist at the Asia Institute in the University of Melbourne.

On a wide front developers and other commercial interests are moving into our public parks, gardens and beaches. They are our new squatters and the community is feeling powerless in the face of this invasion.

In earlier blogs I outlined the historic encroachment of private interests on our ‘public commons’ – the land and facilities we share as citizens.

In Sydney, there are many glaring examples of how the new squatters are moving onto public land.

Darling Harbour has been ‘developed’ to within an inch of its life. Instead of a spacious recreation area we now have a congested and ugly commercial ghetto.

Without due process and with political influence writ large, the public commons at Barangaroo has been dramatically reduced in favour of commercial interests. The original plan was to keep about half of the site, including the whole 1.4 km waterfront, as inalienable public land. That has been junked in favour of James Packer’s six-star casino to bring in ‘high rollers’.

The original architect of Barangaroo, Philip Thalis, said ‘the vibrant public space envisaged seven years ago has shrunk to become basically an enclave of privilege and exclusion’.

But worse is in prospect. The Sydney Morning Herald has reported ‘the city’s newest park, Barangaroo Reserve has attracted 200,000 visitors since August. But kite flyers, soccer players, fishers and musicians will find it off limits from this weekend. Anyone wanting to hire exclusive use of Barangaroo foreshore, lawns, coves and walkways for public functions however are welcome-if they are prepared to pay.’ Slowly the takeover continues.

Another Sydney example of squatter encroachment on public land is the Sydney Botanic Gardens. For many years part of the gardens have been alienated for four months each year for opera and cinema. Wealthy patrons and wealthy sponsors have been the main beneficiaries. But this isn’t enough for the new squatters. The Botanic Gardens and the Domain Trust have released a master plan for the parks to be developed with cafes, an $80 million hotel and year-round concerts. This is desecration of the hallowed grounds bequeathed by Governors Phillip and Macquarie.

In congested Watsons Bay where I live, a developer from Darling Harbour has applied to develop wedding facilities and restaurants within the South Head National Park and spill his patrons onto a beautiful public beach.

Step by step our public commons is being eroded. When governments refuse to adequately fund our parks and gardens it is likely that commercial interests will seize the opportunity for a land grab. The economy is put ahead of society.

In the 18^th and 19^th Century, wealthy and privileged landowners in England passed Enclosure Acts forcing people off common land which they had used for centuries. About 20% of land in England was enclosed.

We followed suit in Australia in the 19^th Century with ‘squatters’, mainly from the upper echelons of colonial society, occupying large tracks of crown land to graze livestock. Over time, this occupation of the pastoral ‘commons’ and the dispossession of indigenous people was enshrined in law and enforced by the police.

History tells us that we need to be very careful about those who want to take possession and erode our public ‘commons’. It happens slowly, almost imperceptibly, often without our knowledge or understanding of what is at stake.  And it is not just about getting shooters out of national parks or protecting waterfront land without public tender. Councils often carelessly allow commercial interests to encroach on public parks, botanic gardens and beaches.

Some council do oppose many crass and vulgar developments, but too often they don’t have the resources to combat a phalanx of celebrity architects, lawyers and public relations lobbyists. Some councils are obviously concerned that if they reject such developments, it will lead to expensive legal appeals to the Land and Environment Court.

We owe a great debt to foresighted citizens and governments in the past who established our public ‘commons’, national parks ,botanic gardens and beaches, for the enjoyment of all.

If governments and their agencies are unwilling or unable to protect our natural and built environment, I would hope that our unions would take up again what the BLF pioneered 40 years ago in Kelly’s Bush in Hunters Hill, Sydney. We need an association of professional and community groups, including unions to develop a charter to safeguard our public commons.

With the rapid increase in our urban populations, protecting and expanding our public commons is more important than ever. The new squatters must be turned back.

 

The following are extracts from a speech given by Mark Carney, The Governor of the Bank of England at a Lloyd’s of London dinner on 29 September 2015

He outlines how climate change is a huge financial risk, particularly for investments in unburnable fossil fuel assets. He points out that  the vast majority of these assets could be ‘stranded ‘and that the window of opportunity to address climate change is ‘finite and shrinking’

The media has described this as a ‘milestone speech’   See link  to full speech and references.

Extracts follow   John Menadue

The tragedy on the horizon

There is a growing international consensus that climate change is unequivocal. ²

Many of the changes in our world since the 1950s are without precedent: not merely over decades but over millennia.

Research tells us with a high degree of confidence that:

• In the Northern Hemisphere the last 30 years have been the warmest since Anglo-Saxon times; indeed, eight of the ten warmest years on record in the UK have occurred since 2002; ³
• Atmospheric concentrations of greenhouse gases are at levels not seen in 800,000 years; and
• The rate of sea level rise is quicker now than at any time over the last 2 millennia. ⁴

Evidence is mounting of man’s role in climate change. Human drivers are judged extremely likely to have been the dominant cause of global warming since the mid-20th century. ⁵  While natural fluctuations may mask it temporarily, the underlying human-induced warming trend of two-tenths of a degree per decade has continued unabated since the 1970s. ⁶

While there is always room for scientific disagreement about climate change (as there is with any scientific issue) I have found that insurers are amongst the most determined advocates for tackling it sooner rather than later.  And little wonder.  While others have been debating the theory, you have been dealing with the reality:

Since the 1980s the number of registered weather-related loss events has tripled; and inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980s to around $50bn over the past decade. ⁷

The challenges currently posed by climate change pale in significance compared with what might come.  The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security.

We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix.

That means beyond:

• the business cycle; ⁹
• the political cycle; and
• the horizon of technocratic authorities, like central banks, who are bound by their mandates.

The horizon for monetary policy extends out to 2-3 years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle – about a decade. ¹⁰

In other words, once climate change becomes a defining issue for financial stability, it may already be too late.

This paradox is deeper, as Lord Stern and others have amply demonstrated. As risks are a function of cumulative emissions, earlier action will mean less costly adjustment. ¹¹

The desirability of restricting climate change to 2 degrees above pre-industrial levels ¹² leads to the notion of a carbon ‘budget’, an assessment of the amount of emissions the world can ‘afford’.

Such a budget – like the one produced by the IPCC ¹³  – highlights the consequences of inaction today for the scale of reaction required tomorrow.

These actions will be influenced by policy choices that are rightly the responsibility of elected governments, advised by scientific experts.  In ten weeks representatives of 196 countries will gather in Paris at the COP21 summit to consider the world’s response to climate change. It is governments who must choose whether, and how, to pursue that 2 degree world.

Climate change and financial stability

There are three broad channels through which climate change can affect financial stability:

– First, physical risks: the impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade;

– Second, liability risks: the impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible.  Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest;

– Finally, transition risks: the financial risks which could result from the process of adjustment towards a lower-carbon economy.  Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.

The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability.  There have already been a few high profile examples of jump-to-distress pricing because of shifts in environmental policy or performance.

Risks to financial stability will be minimised if the transition begins early and follows a predictable path, thereby helping the market anticipate the transition to a 2 degree world.

Transition risks

The UK insurance sector manages almost £2tn in assets to match liabilities that often span decades. While a given physical manifestation of climate change – a flood or storm – may not directly affect a corporate bond’s value, policy action to promote the transition towards a low-carbon economy could spark a fundamental reassessment.

Take, for example, the IPCC’s estimate of a carbon budget that would likely limit global temperature rises to 2 degrees above pre-industrial levels.

That budget amounts to between 1/5th and 1/3rd world’s proven reserves of oil, gas and coal. ²⁴

If that estimate is even approximately correct it would render the vast majority of reserves “stranded” – oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics. ²⁵

The exposure of UK investors, including insurance companies, to these shifts is potentially huge.

Conclusion

Our societies face a series of profound environmental and social challenges.

The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity.

While there is still time to act, the window of opportunity is finite and shrinking. ³¹

Others will need to learn from Lloyd’s example in combining data, technology and expert judgment to measure and manage risks.

The December meetings in Paris will work towards plans to curb carbon emissions and encourage the funding of new technologies.

We will need the market to work alongside in order to maximise their impact.

With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy.

By managing what gets measured, we can break the Tragedy of the Horizon.