GreenCellTechnologies: The Garnaut Climate Change Review - The Australian Economy
The Australian economy and the challenge of climate change
Australia has a larger interest in a strong mitigation outcome than other developed countries. We are already a hot and dry country; small variations in climate are more damaging to us than to other developed countries. We live in a region of developing countries, which are in weaker positions to adapt to climate change than wealthy countries with robust political and economic institutions.
The problems of our neighbours would inevitably become our problems. And the structure of our economy means that our terms of trade would be damaged more by the effects of climate change than would those of any other developed country (see chapters 11 and 23).
At the same time, Australia carries some major assets into this challenge. Australians are facing this new kind of challenge in the best of times. These are the times that earlier generations of Australians had hoped for their country. Australia is fortunate that humanity is enjoying the harvest of modern economic development in Asia and beyond. More people are emerging from poverty more quickly than ever before in human history. Australia's geographic location and economic structure make it a large beneficiary of these historic developments.
Australia is enjoying a double harvest. The internationally oriented market reforms in Australia from the 1980s were put in place just in time to take advantage of the new opportunities in Asia, and more broadly in the developing world. We are now riding the extension of the beneficent processes of modern economic growth into the heartlands of the populous countries of Asia.
In the early years of our federation Australians took pride in having the highest living standards in the world. On the eve of World War I, Australia's output per person was a bit above that of the United States, then and still the benchmark for economic modernity. Then, for seven decades, we turned in on ourselves, and paid the price. For seven decades, we fell further and further behind the global frontiers of productivity and incomes. The value of our output per person fell to less than two-thirds that of the United States.
Then, a quarter of a century ago, we caught that tide which taken at the flood leads on to fortune. On such a full sea we are now afloat. In recent times, the value of output per person in Australia has again been comparable to that in the United States when both are measured in the national accounts and converted into a common currency at today's exchange rates.
So we have much to contribute and much to lose as we face the diabolical policy challenge of climate change. We would surrender to this challenge if we left climate change unmitigated. We would also surrender if we bungled the attempt to mitigate climate change, which would bring back into the centre of Australian national policy all of the self-interested pressure groups and arbitrary interventions that retarded our progress for so long. It would encumber the international polity with another layer of barriers to and complications of international exchange.
Australians' recent relative economic prosperity has had two direct causes. The first is our decisive rejection and reversal of the mistakes of the early decades after federation at the beginning of the 20th century: our protectionism, xenophobia and bureaucratic trammelling of the market.
The second cause is the Asian economic boom. Australia's resources and human capacities are more closely complementary to those of the densely populated countries of Asia than are those of any other economies on earth. For other developed and many developing countries, the strong growth in industrial production and demand for raw materials and food that accompanies economic growth in China, India, Indonesia and other Asian countries is seen as a competitive and inflationary threat.
For Australia, it is an unbridled opportunity. Strong Chinese and other Asian economic growth has been the main factor behind the lift in Australia's terms of trade by about two-thirds over the past six years. This has lifted the average value of Australian output and incomes by more than one-eighth from the effects of increased export prices alone.
The combination of internationally oriented economic reform and opportunities provided by strong growth in the developing countries has so far set Australia apart as the 2008 financial crisis threatens to bring recession to many developed countries.
The increase in concentrations of greenhouse gases in the atmosphere over the last two centuries has generated the climate change that we have experienced to date and will experience over the next couple of decades and beyond. This is the result of economic activity in the countries that are now rich.
The Asian economic boom, half the cause of our prosperity, is also the source of the sharper immediacy of the climate change problem. The rapid increase in concentrations expected over the next several decades is primarily the result of activities that are expected in the developing countries that are becoming rich. The rapid increase in developing country emissions is what makes action to avert dangerous climate change urgent.
The links between Australia's own prosperity and the increase in greenhouse gas emissions in Asian developing countries are rather more direct than the general terms of trade effects would suggest. Fossil fuels have been a major component of increased Australian exports through the Asian boom of the early 21st century. The contribution to the value of Australian exports of the increase in price alone of just one fossil fuel commodity - coal - in 2008-09 is projected to equal about 2 per cent of Australian GDP.
It is neither desirable, nor remotely feasible, to seek to lower the climate change risk by substantially slowing the rise in living standards anywhere, least of all in developing countries. If such an approach were thought to be desirable in some expression of distant and idiosyncratic values, neither Australians, nor people in the developing countries, would accept it. Nor would it be in Australia's interests for Asia's developing countries to accept a dampening of their people's hopes for rising living standards in the interests of climate change mitigation. Their prosperity or its end is translated quickly into our own.
The solutions to the climate change challenge must be found in removing the links between economic activity and greenhouse gas emissions. For Australia, the commitment to the mitigation of climate change can be seen as the reinvestment of a part of the immense gains that have come from accelerated Asian economic growth, in contributing to reduction of an adverse side effect of that growth. In this, we are in a privileged position. We are different from most other countries, and certainly from all other developed countries except Norway.
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