Stern Recommendations

At last, 'the most detailed economic analysis ever conducted' into the impact of climate change has found what many of us long suspected it is not possible to have an economy without an environment.

The Stern Review, commissioned by the UK Treasury and conducted by Sir Nicholas Stern, a former World Bank chief economist, has found that a business-as-usual approach to carbon emissions will cost the world's economy $AUD9 trillion a bill greater than the combined cost of the two World Wars and the Great Depression, and a fifth of the current global economy.

 

It also found that a combination of rising sea levels, droughts and floods could make large tracts of the planet uninhabitable, turning 200 million people into refugees and creating the largest human migration in history.

 

That's the bad news.

The good news is that Stern also found the cost of avoiding a climate crisis on this scale is not as great as many of the world's worst carbon emitters argue the worst of the crisis could be avoided at a cost of just $AUD500 billion, or 1 per cent of global GDP.

The question is, do we laugh or cry?

Do we laugh at the absurdity of having to conduct such a rigorous, exhaustive analysis to establish the obvious no planet, no economy? Or cry because the world Stern sketches out to 2100 is a nightmare of our own making?

The world's political leadership will greet Stern's review in a variety of ways. Britain's Tony Blair has used the report to argue that the US, China and India need to begin pulling their considerable weight in the fight against global warming. George Bush will probably use it to argue the need for more nuclear power plants. But what of John Howard?

Having only just recently accepted the relationship between global warming and the current drought a drought that is set to knock between 0.7 and 1 per cent off our GDP Howard may find the Stern Review a little challenging.

For the last 10 years, Howard has argued that ratifying the Kyoto Protocol and introducing a carbon tax would cost the Australian economy too much and therefore it is not in our 'national interest' to ratify it. He has been able to argue this in part because no one in business or the media asked him what the cost of not ratifying the protocol would be.

So let's re-cap on what global warming will cost Australia.

An increase in temperatures of just two degrees Celsius   which is now guaranteed regardless of what we do will produce coral bleaching; increased and more severe droughts; increased and more intense bushfires; and decreased rainfall accompanied by more intense rain storms. Diseases like dengue fever and malaria are expected to move south, affecting many more Australians.

An increase of three to four degrees Celsius which is where the world is heading, given that carbon emissions are growing faster than previously thought sees all of the above intensifying, plus: up to 48 per cent less water flowing in the Murray Darling Basin; 20 per cent less rainfall, which will lead to a 6 per cent decline in agricultural production; a 200 per cent increase in the number of old people that will die from heat-related causes; and a loss of half the species unique to the wet tropics.

There is not room to go into the national security and equity issues thrown up by this impending crisis. Suffice to say, they are enormous.

The politics of Howard's denialist position are pretty simple. As the largest exporter of black coal, supplying nearly 30 per cent of global demand, we earn close to $AUD2 billion a month in trade revenues from 35 countries. So, the longer Howard can neutralise the issue of coal's carbon liability, the longer this happy state of affairs can continue without any demands for cleaning it up or imposing a pollution tax.

As Consultant Economist to Credit Suisse Asset Dr Barry Hughes told me yesterday, 'The problem with global warming is it will produce winners and losers. Politicians like to pretend that everyone gets a prize. Well, not this time.'

 

Thanks to Fiona Katauskas

 

But Howard is not alone in attempting to argue that it is still possible to have a strong economy in a devastated environment. The world's leading investment banking companies have implied no less.

For instance, a recent Goldman Sachs report suggests that, 'in less than 40 years, the BRICs (Brazil, Russia, India, and China) economies together could be larger than the G6 in US dollar terms. By 2025, they could account for more than half the size of the G6.' In one scenario, Jim O'Neill, head of Goldman Sachs Global Economics Research, argues that, 'by 2050 China may have overtaken the US to become the world's biggest economy, possibly reaching $US45 trillion dollars 20 times bigger than today.'

The problem with these predictions is that they do not take into account the impact global warming will have on China. And, given that the world's scientists are now suggesting the rise in the world's sea level could lead to the inundation of cities like Shanghai, this could be a slight problem. Indeed, as this goes to print, a small, discreet taskforce is working away within the World Bank, running scenarios of what the environmental collapse of China will look like in 10 to 20 years time.

This is where the Stern Review breaks with the past and where its real value lies. For the first time, Stern has given the world a rational, economic analysis of the cost of a heating planet. And from Australia's point of view, the application of real world economics has not come a moment too soon.

Global warming has been a gnawing, quiet anxiety for many Australians for the last decade. The combination of drought, belated media attention and water restrictions have brought this anxiety to the fore. We are living in a fragile moment of self awareness one that could be easily co-opted by the allure of cheap, simple solutions.

Enter the nuclear debate.

Howard's response to the Stern Review was to tell Federal Parliament on Monday 30 October, ' The only things that will ever replace the current dirty power stations are cleaner uses of fossil fuel, or nuclear power.'

Like a tired old magician, Howard uses nuclear power and mirrors to divert the nation's attention away from where the real action is.

And the real action is around the true cost of our 'cheap' coal-fired power generation because right now most Australians pay around $33 per Mega Watt Hour (MWH) for electricity supplied by coal-fired power stations. But this does not come close to reflecting its true cost.

The east coast pool price (the equivalent of the wholesale price is at least $32 per MWH. But in a document released last month, 'Our Water, Our Future,' the Victorian Government admitted that the Latrobe Valley brown coal power generators were using 117,000 megalitres of drinking water per year to cool the power stations and make steam. This equates, in Victorian prices, to $117 million worth of water, which means that the water cost is $2.25 per MWH of power produced by these generators.

As black coal uses more water than brown, the real cost of water for Australian power stations using it would be about $5.08 per MWH, according to the ABS Water Account (document 4610, page 85). But this is not costed into the power price because the power stations do not pay market rates for the water they use.

If we factor in the price of carbon emissions at $40 per MWH which is the price established by the Victorian Renewable Energy Certificate (VRCE) another cost the industry does not pay for then add the figures for the export parity pricing loss on black coal (because we could export coal for a much greater price than we charge for its use domestically) which is around $30 per MWH; this gives us a total price of $107.08 per MWH.

And if then we add the projected cost $70 to $90 per MWH of geo-sequestration (cleaning coal by burying its carbon underground), the total price for clean coal is between $177.08 and $197.08.

This compares with nuclear power at $120 per MWH.

And anaerobic digestion at $70 per MWH.

That's right, Australia already has the technology to produce base load power for cities or small towns. A technology that uses no water, emits no carbon and runs on everything from dead cats to crops. It's called anaerobic digestion, not nuclear power: more on that next week.