Greenhouse policy with incomplete global coverage

Background

Current understanding of the broad economic costs of climate mitigation policies such as the carbon pricing mechanism included in the Securing a Clean Energy Future1 package mostly derives from simulations undertaken with a number of economic models.

The model based analysis of the carbon price package undertaken by the Commonwealth Treasury is one of the best known of these modeling studies2.

Like all modelling analyses, the Treasury work is based around a number of assumptions and the reported results are, presumably, sensitive to these underlying assumptions. Key assumptions include:

  • projections of baseline economic growth and emissions (which defines the magnitude of the abatement task);
  • a range of model features and settings that define the ‘marginal cost of abatement’ for all economies;
  • the assumed flexibility and time frame over which the economy can adjust to these changes.

In addition to these, some of the most important assumptions relate to the country coverage of abatement efforts put in place along with Australia’s own carbon pricing.

In particular, the Treasury analysis assumes that all countries implement and achieve their Copenhagen commitments in the period up to 2020 (after that, these commitments are subsequently increased according to a phased schedule to 2050 and beyond). A further presumption in the Treasury analysis is that a world price of carbon emerges via one means or another (either through unilateral or bilateral trading) and that low cost abatement countries actually do more abatement than required in order to sell abatement to other countries where abatement is more costly. In the Treasury analysis this trade is crucial to minimise the cost of the carbon pricing policy to Australia.

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