Ross Garnaut describes climate change as a "diabolical policy problem". It is harder, says the author of yesterday's landmark report, than any other important issue that Australia has confronted in living memory. Yet this is, for Australia and the world, the "last chance to get this difficult policy problem right".
Garnaut, one of a handful of Australian economists of true international standing, is no stranger to tough policy problems. He advised the Hawke-Keating governments on the intensely controversial matter of cutting manufacturing tariffs in the 1980s. Tearing Australia away from a century of protectionism was one of the most wrenching changes this country has ever made.
But in the report he delivered yesterday he comes very close to throwing up his hands in despair: "This issue might be too hard for rational policy making. It is too complex. The special interests are too many, powerful and intense."
Had he stopped there, it would have been a very slender volume. Instead, he plunged ahead, sketching the Australian landscape as he expects it by the end of the century if global warming proceeds unchecked - a country with savage coastal storms, with a scorching inland up to 7 degrees hotter, the collapse of the Murray-Darling Basin as a productive area where water flows shrivel by 90 per cent, the death of the Great Barrier Reef and the Kakadu wetlands, with a couple of hundred thousand climate refugees from inundated South Pacific islands clamouring for a home in Australia and New Zealand, an extra 4000 Queenslanders a year dying of heat stress and a further 5.5 million Australians contracting dengue fever annually, the extinction of all rainforest vertebrates and the loss of between 13 per cent and 23 per cent of today's rainfall, and average Australian wages 7.8 per cent lower than they would otherwise be in the absence of global warming.
"Damage - perhaps immense damage - is likely to be a part of the Australian reality," says the Australian National University professor.
For Kevin Rudd, it's a diabolical political problem. First, consider the highly perishable nature of his electoral appeal. Three principal reasons underpinned Rudd's election win last November.
One was the appeal of change - the desire to get rid of the Howard government, the freshness of Rudd. Another was the urge to repeal Howard's Work Choices. Third was Rudd's pledge to act on climate change.
The first two of these are now inoperable. Howard is gone; Rudd cannot campaign on being fresh a second time. And Work Choices is now irrelevant. That leaves climate change. Yet even here the picture has become more complicated.
First, a great global inflation surge is carrying oil and food and commodity prices higher and higher. The price of petrol has risen by almost one-fifth since Rudd first sat behind the prime ministerial desk.
This might help condition people to the idea of the inevitability of higher prices for energy; but not if the alternative government is holding out the idea that it is somehow possible to avoid this fate.
And that is the second big complication for Rudd.
The last time Garnaut was advising a federal Labor government, when Hawke and Keating were dismantling Australia's tariff barriers, they had the great comfort that the Opposition was supporting them.
All through the Hawke-Keating reform program, the Coalition stood behind it. This meant there was no real alternative to the reforms. It was a relatively straightforward matter for the government to withstand the special pleading by various companies and industries. The political system presented a united front.
Before the election, it seemed the task of dealing with climate change would also be a bipartisan affair. Although Howard could not bring himself to ratify the Kyoto Protocol, he was proposing to act to cut Australian carbon emissions. Remember that it was Howard who commissioned the Shergold report on the design on an emissions trading system, the same idea Garnaut is recommending in his report.
But today the picture is different. Brendan Nelson's Coalition is prepared to play populist politics. The Opposition is still playing tricky games on emissions trading.
Although it expresses its support for the scheme, it wants introduction delayed until 2012 and refuses to say whether it supports the inclusion of petrol.
"With petrol now a $1.70 a litre, Australians have already received a significant price signal on petrol. The Coalition is determined to protect Australian motorists from an additional tax on petrol," Nelson said yesterday.
It would be wrong to get too indignant about this - when Howard was trying to enact reforms, such as the tax review that introduced the GST and cut other taxes, Labor opposed him.
But the reality is that Rudd faces having to deal with the hardest policy challenge that the country has faced in living memory, without the benefit of reliable Opposition support. Rudd intends to deal with this by positioning himself as the responsible leader - the Government that is prepared to make the tough decision in the long-run national interest.
But can he lead the public debate and keep public support on his side? Can he stay the course in the face of persistent Opposition goading and opportunism?
The Garnaut report is the first tool in Rudd's political kit for leading the public debate. It is a credible account of the situation, with a sobering explanation of the costs of inaction, and a workable proposal for a solution. Among developed nations, Australia, says Garnaut, is uniquely vulnerable to the damage that climate change will wreak.
While the Russian Prime Minister, Vladimir Putin, jokes his country might benefit from a general warming of 1 or 2 degrees, Garnaut warns that Australia cannot say this.
The best way to prevent further climate change is to let the market take over through the creation of an emissions trading scheme, Garnaut argues.
Garnaut's vision for the scheme sees it start in 2010 and apply to all areas of the economy - including transport and petrol - but excluding agriculture. Permits would be needed for any business that puts greenhouse gases such as carbon dioxide into the atmosphere. The new market would be regulated by the Independent Carbon Bank, a Reserve Bank of Australia style of body.
Garnaut wants all the permits to be auctioned off, with no freebies handed out to companies with high emission records such as those in the coal and aluminium industry.
The money raised from the sale of the permits would be mostly spent on compensating low income households for the rises in petrol and energy costs.
However, some would be set aside for investment in renewable energy and some to compensate companies that do business overseas and would be at a competitive disadvantage because of the higher costs they would have to bear as a result of the scheme.
It would be very handy if the recent surge in petrol prices could do the work of curbing carbon emissions. But Garnaut gave two persuasive reasons why this is not the answer. First, because Australia needs a long-run system for addressing a long-run problem. Petrol prices might fall again in
a year or two, yet what is needed is a "system for all seasons".
Second, in his report he points out that in earlier oil price surges, this has indeed cut petrol use. But it has encouraged a switch to coal instead, and coal puts even more carbon into the atmosphere.
One of the strongest reasons for not acting is that for Australia to cut emissions while other countries do not would be the equivalent of unilateral disarmament. Australian industry and jobs would suffer, but that activity and those jobs would simply move to another country that was not penalising carbon emitters.
Garnaut calls this the "prisoners' dilemma". This is an old game played by economists and game theorists to show that it can be profitable to betray a friend or ally. Consider. Two people are arrested for committing a crime. They are questioned in separate rooms. Each may give evidence against the other, or say nothing.
If both say nothing, both get a minor reprimand and go free for lack of evidence. But if one rats on the other, he goes free and the other is severely punished. If both give evidence, both are severely punished. Not knowing or trusting what the other may do, the best individual - or local - strategy is to give evidence against your friend. In climate change, this translates into a strategy of allowing other countries to act while you do not.
But the best overall - or global - strategy for the prisoners is for them to each trust the other and for neither to give evidence. This way, both go free.
Garnaut argues that Australia, together with other rich nations, needs to lead. His report estimates that 90 per cent of extra carbon emissions over the rest of the century will come from developing countries. So the premium is to get these countries to bring their emissions under control.
But Garnaut argues that these countries will not act until the rich countries observe the principle enshrined in the Kyoto Protocol - that the developed nations will act first. Until Australia and the other rich nations do something, they are vetoing action by the poor nations.
This international prisoners' dilemma is now compounded by a local prisoners' dilemma - as long as the Opposition declines to lend full support to the Government.
It will take courage and cunning to lead on this, and to succeed. There remain concerns about the timing of the introduction of the scheme and the issue of whether the permits should all be auctioned.
The big power companies have been banging their heads against the doors of Garnaut and the Minister for Climate Change, Penny Wong, pleading to be given free permits.
They argue that they will have to buy so many permits that they will have to pass hefty increases on to consumers.
But their pleas have fallen on deaf ears with Garnaut.
The indications from Wong to date are that she also finds their arguments unconvincing.
Garnaut watched closely what happened in the first phase of the European trading system that handed out free permits with the hope of protecting consumers.
Power companies raised prices and their own profits accordingly.
In the second phase there were no such free rides.
Not all the talk of a changed economy is gloomy.
A CSIRO report last month found that at least 3 million Australian jobs could change beyond recognition because of global warming, but net employment will show healthy growth if the nation adapts smartly.
It has predicted that the hoped-for surge in "green collar" work will result in job growth even in the greenhouse gas-intensive industries of mining, energy, manufacturing and farming, despite the costs to business of introducing an emissions-trading scheme in 18 months.
The report contradicts statements by some industry groups that emissions trading and a shift to renewable energy could wreck some economic sectors.
But Australia has reached a turning point, it warns, and there is no sign yet of the improvement needed in skills and training.
"We are talking about mass change, on the scale of the Industrial Revolution," said Oona Nielsen, executive director of the Dusseldorf Skills Forum, which commissioned the report.
"It's not just a case of some jobs in renewable power; we're going to have to make every single workplace in the country more sustainable."
The report used different models to assess employment growth for two scenarios - one that predicted change under the federal plan to reduce emissions by 60 per cent by 2050, the other looking at a more ambitious scheme to become "carbon neutral" by mid-century. Both showed continued strong growth in jobs.
And Garnaut argues that if emissions trading is crafted in a comprehensive reform package with the tax review now under way, it could end up creating a net economic boost to Australia.
"Because carbon taxes - or emissions permit systems - are relatively efficient ways of raising revenue, you can end up having a major efficiency-boosting reform in a comprehensive package intelligently designed," he says.
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