A tale of two futures: Australia's economy under climate change

Economic modelling and its associated forecasts are always open to criticism, particularly when the results align with the predisposition of the modellers or their paymasters. Such criticism has been a feature of economic modelling on energy and climate change for several years.

When it comes to climate change and Australia’s economic future, different crystal balls can produce vastly different results.

That’s usually because different economic models can be operating under quite different assumptions about the extent to which world leaders will act in the face of overwhelming scientific evidence showing significant climate change is on the way.

By way of illustration, it’s worth examining two competing narratives: one in which Australia is a future energy powerhouse and another in which its emissions intensive export revenues fall short by $100 billion a year by 2030.

Australia: a future energy superpower?

Federal Government publications consistently portray a positive future for Australia as a global energy superpower in the coming decades. Australia is among the world’s largest exporters of LNG, coal and uranium.

Yet that particular economic future only exists if Australia and the world fail to stop the globe warming beyond two degrees Celsius – which can only be done by restricting worldwide use of the very resources that make Australia the energy powerhouse portrayed in this scenario.

The Australian government’s recently released Energy White Paper notes that:

Australia’s energy sector underpins a modern economy and a high national standard of living. The sector accounted for 7% of GDP and $71.5 billion in export earnings in 2013–14.

With certain policy settings, our importance to global energy markets will continue to grow, particularly to meet the increasing demand for energy from Asia. Australia has the potential to reap substantial economic gains in meeting future global energy demand, which is expected to increase by over one-third by 2040.

The positive outlook is supported in these documents by reference to the International Energy Agency’s 2014 World Energy Outlook:

For the foreseeable future, Australia will continue to be a major supplier of crucial energy and raw materials to the rest of the world, especially Asian countries. At present, about 80% of the world’s primary energy needs are met through carbon-based fuels. By 2040, it is estimated that 74% will still be met by carbon-based sources because of growing demand in emerging economies

Yet there is a paradox in these figures. In this International Energy Agency scenario, the world fails to meet its agreed goal of limiting the long-term global average temperature increase to no more than two degrees Celsius. And Australia has committed to this goal.

Australia: a country that keeps its two degree promise

If the world does act to meet the two degree challenge, then the global share of fossil fuels will fall to 59% by 2040. Coal’s share will decline the most, falling from 24% to 17% – and it only retains this share by adopting carbon capture and storage (CCS) technologies.

By 2040, 580 Gigawatts of coal-fired power generation – or 80% of the total – would have to be fitted with CCS. Further, 22% of gas-fired generation would come from plants fitted with CCS. This is a non-trivial challenge in which Australia has a high interest.

Beyond Zero Emissions (BZE), a not-for-profit organisation that has published research on a zero-emissions future. It recently released report titled Fossil Economy assessed the financial consequences for Australia’s export earnings if the world limits the long-term global average temperature increase to no more than two degrees Celsius.

It concludes that Australia’s:

emissions-intensive export revenue will fall short by $100 billion per year by 2030 due to emission reduction efforts by Australia’s trade partners.

This headline figure of $100 billion per year in earnings shortfall is designed to add weight to the argument that Australia should pivot away now from emission intensive industries like coal, as they are likely to be a lot less lucrative in future.

But the BZE analysis that delivers the headline number assumes the world will follow a path to the two degrees goal. Should that actually happen, the consequences will be big - $100 billion in losses per annum by 2030 may not be precisely right, but it is unlikely to be very far wrong.

But the evidence of the commitments made by countries to date suggest that a credibility gap remains. On current policies the world won’t meet its stated goal to limit warming to two degrees Celsius.

The negotiations that will lead up to the international climate talks in Paris at the end of 2015 will be the big test. On one side is the simple but profound consequence of failing to meet climate change. On the other is the self-interest of each of the some 200 countries involved.

The BZE report cites the actions of Australia’s four key trading partners, China, Japan, Korea and India to add weight to its analysis. These countries have distinctly different circumstances and are active in the international positioning and negotiations. It remains feasible that national economic interest will yet outweigh stated intent to reduce fossil fuel imports.

The likely future

It has been the Government’s own choice to rely for its positive outlook primarily on the scenario outlined in the IEA’s 2014 World Energy Outlook.

In this scenario, the world follows a path to a 3.6 degrees future, one simply inconsistent with the Government’s own commitment to help limit global warming to two degrees Celsius.

But even if one places low weight on the BZE call for an Australian shift to clean energy, there are profound consequences for Australia if our key trade partners move away from emissions intensive energy like coal.

Whatever the exact economic consequences of climate change will be, it surely behoves our policy makers to acknowledge the risks and plan for the consequences.

Tony Wood owns shares in a number of energy and resources firms through his superannuation fund.