Dialogue on Greenhouse Summary Discussion Paper

DATE: 7 May 2000

INTRODUCTION

During February and March 2000, the Australian Greenhouse Office, the Australian Institute of Company Directors and the Business Council of Australia facilitated two roundtable workshops on greenhouse. The aims of this 'dialogue process' were to: provide a forum for strategic thinking on greenhouse issues among a range of stakeholders; encourage constructive dialogue on the issues, options and implications of action for Australia; and facilitate the raising of awareness and understanding of these issues as a nation.

Why a Dialogue on Greenhouse?

How Australia responds to international greenhouse gas reduction policies is an important national issue with major implications for our economy, environment, community and international reputation.

The Prime Minister's 1997 greenhouse package - Safeguarding our Future - committed Australia to a range of domestic response measures to reduce our greenhouse emissions. However, it is widely acknowledged that there is likely to be a 'gap' between the reductions achieved through these current domestic policies and what our international obligations might be. Both the size of the 'gap' and the nature of future obligations are highly uncertain.

Against this uncertain policy background, stakeholders have a wide range of strongly held and differing views regarding what greenhouse response policies Australia should pursue and what the implications of these policies might be for Australia as a nation. These views are in part informed by perceptions and information about the importance of the greenhouse issue to Australia relative to each individual or organisation's own frame of reference, whether it be economic, scientific, values or morals based, or a combination of these.

Because Australia's response to greenhouse (both in the form of government policy and business decisions) has the potential to have a major impact on all aspects of our society, it is critical that all stakeholders have an increased and regularly updated understanding of:

the size of the greenhouse task (as clarified by developments in international negotiations); the policy options available to address this; and the implications of the policy options for Australia as a nation, as well as for sectors, regions and communities within Australia.

In this context, the Australian Greenhouse Office has held extensive public consultations on individual policies and measures, but no forum exists for public discussion of the overall strategic direction of Australian greenhouse policy, that is, the overall strategic framework within which these individual measures might be applied in reconciling Australia's international obligations and the national interest. This is widely considered a major shortcoming in the current approach to the development of Australia's greenhouse response . The dialogue process was initiated, in part, to explore ways to fill this gap and bring together a range of stakeholders with differing views to discuss strategic greenhouse issues.

The dialogue process commenced with two workshops, held a month apart, and involving a total of 39 individuals from business, Commonwealth and state governments and the community. In these workshops, some stakeholders were significantly under-represented as a group, notably community stakeholders.

The following paper is a summary of what were very preliminary discussions of the strategic aspects of the greenhouse agenda. The paper addresses the range of issues raised during the two days, including:
the uncertainty of the policy environment and timelines for international negotiations; the competitiveness of Australian industry, and aspects of structural adjustment and market opportunities; the concept of what will be a competitive Australian economy in a future where greenhouse emissions are expected to be priced; and the concept of a conditional framework to guide domestic greenhouse policy.

INTERNATIONAL NEGOTIATING CONTEXT

The nature of the response to greenhouse at both the international and domestic level is characterised by complexity, and with a large number of aspects of the Kyoto Protocol still to be negotiated, is highly uncertain. This is particularly so in the lead up to the first commitment period under the Kyoto Protocol, 2008-2012, as reflected in the conceptual decision tree shown by clicking the link below.

Figure 1.gif

In the international negotiations, policy decisions will be taken over the next few years which ultimately could result in outcomes, that is scenarios, ranging from the full Kyoto Protocol entering into force, to No Deal if international negotiations on the Kyoto Protocol fall apart, to various compromises in between - rubbery Kyoto's. More onerous commitments could be envisaged if, for example, a weather shock occurred with a series of extreme weather events around the world.

The scenario approach to understanding international uncertainty is developed further in the Appendix.

Figure 2 schematically depicts timelines and associated decisions related to the Kyoto Protocol, and indicates optimistic and pessimistic scenarios relating to the implementation of the Protocol. As such, it represents a subset of the conceptual decision tree shown in Figure 1.

Figure 2.gif

International Negotiations: Key Issues for Australia

Key aspects of the international negotiations, which are critical to the Australian position and future greenhouse policy, and which need to be resolved and elaborated include:

1. The extent to which developed countries are allowed to meet their targets through emissions trading, joint implementation and the clean development mechanism;
2. The extent to which sinks (forestry and land-use management) are allowed to contribute to meeting developed country targets;
3. The type of compliance system which applies, and the consequences of non-compliance;
4. The extent to which developed countries are required to partake in the transfer of resources and technologies to developing countries; and
5. How and when developing countries take on targets.

Australia's position in relation to each issue needs to be borne in mind in the context of the timing and outcomes of international negotiations and the potential scenario's we face.

Of the above, issues 1 - 4 are scheduled for resolution at COP-6 in November 2000. The question of how and when developing countries take on responsibilities with regard to the Protocol is the subject of ongoing negotiations, and adds additional uncertainty to the prospects for the Protocol.

While some analysts consider there is a good chance a package on issues 1 - 4 will be agreed at COP-6, the extent to which each of the above issues will be resolved, and whether they will be resolved in Australia's interest, means that even though the decision may be made the outcomes are still highly uncertain.

The combination of the timing of decisions and the prospect of the outcome of negotiations, relative to each decision creates a highly uncertain policy and decision-making environment. For instance, the treatment of issues such as sinks and supplementarity caps on emissions trading that may be agreed at COP-6 in November 2000 (or at a later COP), relative to Australia's negotiating position, may affect whether Australia ratifies the protocol.

Another level of uncertainty relates to the position of other key players vis-a-vis ratification. European Union countries, Japan and others have indicated a clear desire to ratify the Protocol. The position of the US is far less certain, and very dependent on satisfactory outcomes with regard to the flexibility mechanisms and developing country participation. The status of other players needs to be taken into account in the Australian debate on ratification. This key issue is likely to become critical in the period 2002-2005.

In short, without full knowledge of what international greenhouse policies will eventually look like, government and business must continue to make decisions that guide or affect investment and the structure of the Australian economy while knowing that such decisions may in fact be affected by the outcomes of international negotiations, but not knowing how they might be affected.

AUSTRALIAN COMPETITIVENESS: IMPACT AND MARKET OPPORTUNITIES

Against this background one of the critical issues to emerge during the Roundtable sessions was that of Australian international competitiveness.

The structure of the Protocol as it stands provides an in-built incentive for carbon intensive industry activity to "leak' to those countries not included in Annex B of the Protocol. The ongoing international negotiations also provide the opportunity for developed countries to seek to maximise their trade positions through the rules that will govern application of the Protocol.

Australia is more exposed to these economic pressures than its Annex B colleague nations, because of the importance of its natural resources and its position in a region where many of its major trade partners and competitors do not have obligations under the Protocol. It is therefore incumbent on both government and industry to understand the net economic impact of the Protocol on trade exposed and import competing sectors. The effect of passing extra costs through to domestic consumers also needs to be considered.

For these reasons, there are both sound environmental and economic drivers for Australia to protect its national interests in the effort to meet its international obligations arising from the Protocol. This can be done in the first instance by minimising the potential negative impacts of implementation, including through actions that minimise the costs to the domestic economy and promote investment in Australia. In particular, Australia should act to attract innovative investment.

Whilst recognising the environmental and social imperatives to address the issue of climate change, participants also emphasised that Australia's national interests do not lie in sacrificing international competitiveness and market opportunities. Thus Australia should continue to take a lead role in the international negotiations on the Protocol, with a view to being a responsible world citizen but not sacrificing its national interests.

Against these immediate concerns must be set the longer term consideration of what will constitute a competitive Australian economy in a world where carbon emissions may be priced and constrained for all significant emitting countries. Australia needs to take a visionary path; to maximise new market opportunities, particularly technological innovation, whilst optimising opportunities for our long established resource industries which will remain key drivers of the economy. Careful consideration must be given to the future shape of the economy and the implications of technological advances. Policy measures need to be designed to encourage optimal development of both new and established industries. Possible initiatives might be incentives for new investment, demand and supply side energy efficiency, for new design services, for whole-system engineering skills and for underlying and enabling technologies, including sequestration. A competitive edge may help Australia to develop significant industries and exports, including service industries and exports, in these areas.

Greater emphasis also needs to be placed on the ability of high quality Australian resources to contribute to sound global environmental outcomes in export markets, when used in place of poorer quality, more emission-intensive competing products.

OPTIMUM POLICY CHOICES AND DESIGN OPTIONS FOR AUSTRALIA

Against this background of uncertainty and potential implications for Australian competitiveness, participants discussed some of the issues regarding optimising Australian greenhouse policy choices and design options. These are by no means exhaustive but provide a guide to the types of issues involved in optimising the outcome for Australia.

Overall, participants generally felt that the design of future greenhouse policy should be guided by four clear high-level objectives:

1. Reducting greenhouse gas emissions;
2. Minimising the cost to Australia of meeting international commitments (cost framed in terms of the 'triple bottom line' of economic, social and environmental cost);
3. Paying special attention to the social costs of readjustment; and
4. Identifying and promoting areas of national competitive advantage in a future world where greenhouse emissions are priced.

These objectives relate specifically to the greenhouse policy area. However, the need to integrate greenhouse policy with other national policy objectives was also raised. The following were canvassed:

greenhouse and energy policy need to be explicitly linked; links between greenhouse and trade policy need to be explored; potential conflict with other policy areas needs to be reconciled (eg population and economic growth objectives); policy across portfolios, and between State and Federal governments, must be consistent; and international 'carbon leakage' must be avoided or constrained to the extent possible.
In addition, the following points and principles were raised in relation to designing future greenhouse policy.

To assess the impact of existing and new policies, we need a better understanding of the regional and sectoral impacts of options. To choose the right options, we need a greater understanding of win-win options, and of next lowest cost options. Ideally, actions taken now should be designed to be 'no regrets' or 'least regrets' initiatives when viewed against scenarios setting out the broad uncertainties to be faced in the future strategic environment. Principles applied in deciding what measures to implement, and when, should include cost-effectiveness and competitiveness. A measure is cost effective if it is the next available (and identifiable) lowest cost measure, and if it positions Australian industry and other stakeholders well with regard to the current and expected range of uncertainties. Decisions on key economy wide measures, such as emissions trading, need to be closely linked with developments in international negotiations and the ratification of the Protocol. Some concern was expressed regarding measures such as a greenhouse trigger under the Commonwealth Environmental Protection and Biodiversity Conservation Act that could act to constrain both new investment and technology replacement. A framework for assessment and management of growth in all greenhouse emissions was felt to be a better approach and evaluation of alternatives should be a prerequisite for a decision on the trigger. Decisions on policies that will influence investment decisions should take account of the need for global emission constraint and not add to the current incentive for investment decisions to result in emissions relocating to Annex B countries.

Whilst many participants expressed a preference for the use of market based solutions in policy design, there was by no means agreement on this point. It was noted that the cost-effectiveness of all measures, whether regulatory or market-based requires serious consideration. In a strategic sense, some regulatory approaches (eg. minimum energy performance regulation with regard to appliances or buildings) may be very cost effective options. For larger and more complex interactions in the economy, there may be a preference for market-based mechanisms to seek out and achieve the optimal adjustment path with least overall economic cost.

In addition, and by way of example, the following areas were raised as possible areas where action could be encouraged if binding national targets are adopted:

fuel switching (including to less greenhouse intensive fuels and renewable energy); improving land management practices, through managing land clearing and improving vegetation outcomes; achieving demand-side energy efficiency across all sectors, including commercial, transport and residential; technological innovation relevant to greenhouse solutions; and Financial innovation relevant to greenhouse.

Overall, the preferred approach to policies and measures expressed by participants can be summarised as:

a suite of environmentally and economically cost effective measures, with cost effectiveness a key criterion in terms of adoption and integration of measures; with an emphasis on synergistic solutions where initiatives in one area have positive outcomes elsewhere (eg. greenhouse revegetation initiatives that also address land degradation and salinity problems).

For each policy measure, there will be a range of parameters that industry would ideally like to know to assist decision-making. In each case, these parameters would need to be defined and decisions made on what can be said publicly, and when, without:

cutting off possible desirable options; or infringing Australia's international negotiating position.
Participants also recognised that greenhouse response measures may impose structural readjustments involving social costs that will need to be addressed. There are various options for addressing social costs, including through general revenue, safety net provisions, or recycling of revenue raised by greenhouse measures and policies. Broader discussion, particularly with community stakeholders, needs to take place on this issue.

DOMESTIC STRUCTURAL ADJUSTMENT AND TRANSITION ISSUES

Structural adjustment can be aided by a careful approach to encouraging early action in terms of greenhouse response. The following were felt to be responsible approaches.

Measures with no net (economic) cost to the community (social) should be adopted immediately. Measures with some cost but which can be proven to be cost effective in positioning Australia to meet its potential international obligations should be pursued through government investment and through encouraging private sector investment. Incentives should be provided for industry transition, including a "no disadvantage" principle for early movers, and consideration of an early crediting scheme. With regard to emissions trading, Australia should continue to improve its knowledge base and to refine policies, with a view to being able to provide greater certainty regarding timing, coverage and allocation when international developments have progressed to a point where it is appropriate to do so. Government and industry should start to focus on the potential costs of adjustment, and means of addressing them.

Current uncertainty about the reduction of greenhouse gas emissions is creating an arbitrage opportunity for financial markets, which are evolving means to reduce internal hurdle rates for carbon reduction investments.

The emergence of private sector markets for key measures such as emissions trading should be encouraged as a valuable learning experience in parallel with the formulation of government policy. However, this emphasises the importance of facilitating early action and reducing uncertainty to the extent possible, to allow for responsible risk management.

COMMUNICATING AND BUILDING A COALITION WITH THE COMMUNITY

A key area in which all participants felt both government and industry need to increase their efforts is in communicating the greenhouse issue to the broad Australian community.

Widespread understanding of the key issues involved in limiting greenhouse gas emissions is essential if there is to be an effective debate. One good example is the broad public perception that the issue will be fixed by investment in renewable energy. While renewable technologies are clearly a part of the solution, this perception seems to exist in isolation from an appreciation of the costs and timeframes involved in development of that technology, or of more immediate options such as fuel switching to less greenhouse intensive fossil fuels or other sequestration and abatement technologies.

In order to foster an effective debate, there needs to be transparency of policy deliberation processes, and the underlying analytical material. There also needs to be outreach involving local industry, government and community associations - particularly regarding effective action they could take, such as demand-side energy efficiency. It is not easy to convey a sense of the complex technical issues involved in a debate that is not yet resolved, without getting lost in the detail. Nonetheless, the entire Australian community has a right to know what is at stake in terms that are transparent and understandable.

Given the implications of potential greenhouse responses, the development of a coalition for change between government, industry and community is an essential precursor to effective political action.

THE CONCEPT OF A CONDITIONAL OR RISK MANAGEMENT FRAMEWORK

In response to the issues raised so far, a proposition that arose during the two days was the notion of stakeholders working together to cooperatively define and develop a 'Conditional Strategic Framework for Greenhouse' for Australia. Underlying the proposition was an emphasis on the need and importance of reducing uncertainty associated with international and domestic greenhouse policy wherever it is possible, and to do so in a way that is consistent with Australia's national interest, along with the need to facilitate management of the risks due to the considerable uncertainties that will remain for many years.

It needs to be noted that the notion of a conditional strategic framework is one option canvassed and the concept, along with potential objectives and principles, is discussed below. However, other options to address the issues identified earlier in this paper may also exist.

Some participants felt that a conditional strategic framework could define, to the extent possible at any point in time, which greenhouse strategies and response measures would be expected to be in the national interest, and in what form, conditional upon the scenarios which emerge as most likely in terms of greenhouse obligations.

This could potentially provide a risk management framework that, with government support, will increase certainty to the business and the investment community through greater clarity around the types and timing of actions that might be taken.

The effectiveness of the risk management framework and the degree of increased certainty would necessarily be constrained by:

the continuing international negotiations process - key decisions that will affect Australia's national interests are still to be taken and until such time as some of these are resolved very large uncertainties will remain; and Australia may need to preserve its negotiating position on some of these issues, which constrains what the government may state publicly ahead of the negotiations.

Any conditional framework, if developed, would need to aim squarely at constraining greenhouse gas emissions, but would necessarily need to be cautious, flexible and responsive to international obligations as they evolve through the continuing negotiations. In the longer term, emissions need to be constrained, as agreed with the international community, at minimum domestic social and economic cost and in a way that minimises any disadvantage to Australia's competitive position.

Ideally, if a conditional framework were to be developed, it should be done cooperatively between stakeholders, whilst recognising that government remains ultimately responsible for national strategy and for the development of individual policies.

Potential Objectives and Principles

Participants identified a range of possible objectives of a Conditional Strategic Framework, including:

providing a strategic framework describing the expected policy approach to compliance with Australia's obligations under the Kyoto Protocol, and under other selected scenarios that might be contemplated; providing an effective risk management framework and greater certainty on policy under whatever scenario may eventuate as the most likely, recognising the inherent contradictions in trying to do this; optimising the competitiveness of Australian industry in several planning horizons - the lead up to the first commitment period of 2008-2012, through 2008-2012, and beyond the first commitment period; and optimising conditions that will result in new areas of competitive advantage for the Australian economy in the future.

The following principles could underpin a Conditional Strategic Framework.

Acknowledgment that climate change is an important global environmental problem with potentially significant economic and social implications for Australia and all other nations, and that the international community has embarked on a course of action to constrain anthropogenic greenhouse gas emissions. An agreement that Australia's domestic response should be in line with the precautionary principle. Australia's contribution to the international objective should be a fair and equitable one, relative to its circumstances, size and position. Australia will need to take a leading role in the debate on critical elements of the Protocol to maximising a positive environmental and economic outcome (such as, sinks, flexibility mechanisms, an effective compliance regime and finding a pathway for future developing country involvement). There is interdependence between leadership in the debate and leadership in actions that needs to be carefully managed. Some involvement of developing countries in the Kyoto Protocol is essential in order to address the environmental problem and to not distort world trade. At the minimum, a path towards commitments by developing countries should be negotiated prior to ratification of the treaty. Progress on the definition of meaningful participation also needs to be made. Sustainability provides the longer-term context for strategic direction.

In the context of a conditional framework and the principles articulated above, the question arises as to which actions (or suite of actions) could Australia undertake ahead of increased international certainty. The converse questions also arise as to which actions should not be undertaken until the international situation becomes clearer.

This implies that if stakeholders were to embark on the development of a conditional framework it would need to be dynamic, and sufficiently flexible to allow government to make decisions as negotiations progress. A conditional framework that is too narrowly constrained runs the risk of misleading industry and other stakeholders. The danger of getting advice wrong, by creating false certainty, needs to be avoided: where uncertainty cannot be reduced this should be clearly flagged and explained. The objective is a risk management one: to promote an optimal adjustment path, taking account of these uncertainties.

CONCLUSION

The prospective requirement for national compliance with the Kyoto Protocol and the need to limit global greenhouse gas emissions is a complex issue with important implications for Australia's national competitiveness.

Without effective risk management and increased clarity related to the range of strategies for the reduction of emissions, there is likely to be continued excessive uncertainty and confusion for industry, with potential for loss of investment in Australia, a decrease in Australian industry competitiveness and damage to Australia's balance of trade position. This could be expected to make it more difficult to implement the Kyoto Protocol. Business, others within the community and government should look to cooperatively developing a sensible strategic framework to move Australia forward in meeting its international obligations.

In this context, a 'Conditional Strategic Framework' could be developed and articulated to describe Australia's likely approach to reducing GHG emissions in accordance with our international commitments, conditional upon the scenarios which emerge as the most likely. Its strategic aim would be to effect responsible action on greenhouse, minimise the costs to the economy, address the inevitable social and industry costs of structural adjustment and build a coalition between government, industry and community to achieve effective outcomes.

WHERE TO FROM HERE?

It is clear from discussion during and after the Roundtable sessions that while conclusions were not reached on key issues, there was considerable value in bringing together a wide range of stakeholders to discuss these issues and canvass possible options.

Participants agreed that as a first step, a summary paper should be developed as an outcome of the dialogue process, and if necessary another meeting be held to further develop issues that emerged. In terms of future meetings of the dialogue participants, there was a high level of congruence that there would be greater value if a broader and more inclusive dialogue process was put in place to further explore these issues and ideas.

It is therefore proposed that, with the continuing support of the three organisations involved:

This summary paper be finalised and put forward for discussion with government and wider stakeholder groups to encourage greater public discussion on how best to place development of Australia's greenhouse response measures in an appropriate strategic context. The accompanying slide presentation should also be consolidated and made available. In the context of the above, the paper be used as background for the forthcoming WBCSD-BCA Forum, scheduled for May 5 in Melbourne. That a more focussed Roundtable concept be continued, with further sessions between now and COP 6, and that these be broadened to included interested original participants, industry and NGO associations, and other key stakeholders who express an interest. As a starting point, the concept of the conditional framework could be further explored and developed. A session after COP-6 could also be valuable to take stock of the results of the negotiations.

APPENDIX

Scenarios

A means of thinking about Strategic Uncertainties

Ratification of the Kyoto Protocol is still uncertain, as are technical and other details related to compliance. A range of scenarios can be envisaged which reflect possible outcomes of domestic and international negotiations over the next few years: three have been outlined below in preliminary form, which if fully developed, could act as a basis for testing elements of a conditional strategic framework.

Three Scenarios for 2012

On Target

-Kyoto Protocol enters into force and by 2012 Annex B targets are successfully being met with low carbon leakage. Developing countries are being drawn into the international framework through trading, technology transfer and adaptation support, and are beginning to respond to the need to constrain emissions.

Tough Times

Kyoto Protocol enters into force in a form that is relatively disadvantageous for Australia, with no involvement of developing countries, sinks not covered, and restricted emissions trading. By 2012, targets are largely being met in the developed countries, but at significantly higher cost.

False Start

No formal ratification of the Kyoto Protocol, but informal unilateral action by some countries and companies around the world; by 2012 some developed countries have achieved greenhouse gas emissions reductions but emissions from developing countries have increased significantly and there is no global reduction of emissions.

Wildcard Scenario

Weather Shock

A worsening pattern of extreme weather events around the world drives rapid entry into force of the Kyoto Protocol, with renewed negotiations to toughen country targets.

It is impossible to predict today which scenario will eventuate. Under a Conditional Strategic Framework, each proposed policy measure would be tested to assess its implications against each scenario. Some measures would make sense irrespective of the scenario outcome (eg. No Regrets), others may have advantages or disadvantages to varying degrees depending on the outcome. Accordingly, action taken at any point in time will have to be weighed in the balance.

The process would assist in developing an optimal response path as we progress through the decision tree to 2008 and beyond.