Economics and the environment

By Kylie Wilson-Field, Journalist
Monday, 25 February, 2008

At a recent lecture series held in conjunction with an exhibition showing the environmental history of New South Wales at the State Library of NSW, a small audience of the general public listened to two of Australia's most prominent scientists discuss how the economic costs of trying to reach the 2050 carbon reduction targets of 60% would come at a very small cost to the wider community.

Mr Peter Cosier, a member of the prestigious Wentworth Group of Concerned Scientists, an independent group of Australian scientists who are concerned with the long-term future of securing Australia's biodiversity, land and water, talked about how becoming a low carbon economy did not mean rejecting economic prosperity.

"Firstly, we can achieve the 450 target without wrecking the economy because in the early years business can make a profit and households can save money when they invest in technologies like building insulation, fuel efficiency and solar water heating," he says. The IPCC says that to keep global warming below the critical 2° warming, we need to cap emissions at 450 ppm of CO2e by 2050.

"With a price signal on carbon and innovative government policies, we will create the opportunity for our industries to get us to the '450 by 2050' target, and to lead us to a carbon pollution-free 21st century economy."

Mr Cosier believes that a price on carbon will drive the next industrial revolution.

"We went to the moon with a machine with 10 times less computing power than in your mobile phone. If we can get to the moon for an adventure, surely we can build new ways to power our machines and save the world."

According to Mr Cosier, the solution to climate change has three components:

  1. Energy technology (energy production will need to be carbon pollution-free) - this needs to provide 50% of the solution.
  2. Energy efficiency (we need policy settings using less energy and in the process also saving money) - that's 25% of the solution.
  3. Landscape management (let nature help us, because trees and soils absorb carbon) - that's also 25% of the solution.

He believes that it is this last component that lies at the heart of driving the economic revolution of the 21st century.

"This is what I call the economics of nature, because it is a giant step towards putting an economic value on the service that nature provides us."

"By reducing carbon pollution in the atmosphere, we can also create an economic system that will conserve the world's biodiversity, because rainforests and restored river basins store vast quantities of carbon, so healthy landscapes will become more valuable than cleared ones," he says.

"Carbon pricing also has the potential to fundamentally change the pricing signals in rural Australia because, properly designed, it is capable of creating a self-funding mechanism to restore degraded landscapes, such as in the Murray Darling Basin and south-west Western Australia, at a scale that would have been unimaginable 20 years ago."

Steve Hatfield-Dodds, a senior researcher in integration science and public policy with CSIRO Sustainable Ecosystems, believes the culture and training of economists emphasises self-interested behaviour as the dominant mode of human activity and decision making.

"In recent decades, this pessimism has been challenged by empirical research into self-governing institutions for managing water, forests and other natural resources."

"This research lays the foundation for a more general theory of 'adoptive governance', which suggests, in its simplest incarnation, that three things are needed to achieve constructive change in environmental policies," he says.

"These are that society needs to (i) know how the system works, (ii) have options for doing something about it, and (iii) want to do something different."

"A key thread of my research is to understand how economic culture helps or hinders this third element; how we manage to come to a collective agreement that something is worth doing," he says.

"This emphasises the role of economics as a world view, described by some as the 'worldly philosophy' or the religion of modern life, which is supported by, but separate from, its more technical contributions."

Hatfield-Dodds says for sound methodological reasons economic analysis of the impact of reducing greenhouse emissions compares economic performance with policy action to performance without policy action, often described as the base case.

"This provides an estimate of the 'opportunity cost' associated with the policy. A first caveat is that these estimates do not take into account the impacts of not reducing emissions, which will result in increased droughts, heat waves, hurricanes and the like," he says.

"It is well established that people evaluate outcomes in relation to a reference point, rather than in terms of absolute levels, and that people feel the pain of losses much more accurately than they enjoy gains. But these insights have been completely ignored in the communication of expected policy impacts."

"In rough terms, it appears that ensuring clear communication results in around one-in-four uncommitted respondents switching from opposing emissions reductions to supporting policy action. This suggests that the dominant economic framing of climate change policy impacts is suppressing underlying support for decisive action," he says.

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