A framework for economic analysis of greenhouse abatement options

Abstract

Economic analysis has been central to the development of greenhouse abatement policy in Australia. Current Australian policy is to remain outside the Kyoto Protocol, while still attempting to meet the emission targets established under the Protocol. Australia’s failure to ratify the Protocol has incurred international criticism; it is therefore appropriate to examine the validity of the economic analysis used to support this policy position. This paper reviews approaches to economic analysis that have been prominent in the greenhouse policy debate in Australia, including computable general equilibrium modelling, bottom-up energy sector modelling and policy specific cost benefit analysis. Alternative approaches that have received less attention in Australia are also reviewed. Flaws in existing economic analyses include a failure to consider the net cost to society of greenhouse abatement measures, a tendency to exclude abatement benefits, inadequate consideration of ethical and moral issues, a lack of accessibility and the assumption that economic systems are in an optimal equilibrium state. In response to these flaws, an alternative approach to economic analysis termed ‘integrated abatement planning’ is developed. Integrated abatement planning draws on the principles of least cost planning and integrated resource planning to identify least cost greenhouse abatement measures. A primary tool is the marginal abatement cost curve, which plots abatement measures according to their total abatement over a specified time period and the marginal cost of abatement. The approach is based on an explicit ethical position that values inter-generational and intra-generational equity. Integrated abatement planning is intended as a simple, practical approach that can be used by policy makers to explore the balance between long- and short-term objectives, to test the impact of varying assumptions, and to identify a robust set of measures for meeting politically determined greenhouse reduction targets. It draws on evolutionary economic theory, notably the insight that selected policies will always be sub-optimal but will provide opportunities for learning and continual improvement of policy. Integrated abatement planning offers a way to move beyond arguments about whether greenhouse abatement is required and to focus, more productively, on the best ways to achieve abatement.