The Australian Economic Review, vol. 40, no. 4, pp. 410–20 Policy Forum: Climate Change: Some Economic Policy Issues From National to International Climate Change Policy Warwick J. McKibbin* Centre for Applied Macroeconomic Analysis, ANU College of Business and Economics, The Australian National University; and The Lowy Institute for International Policy 1. Introduction have recently begun my second term on the Board of the Reserve Bank and serve on a vari- It is a great privilege to give the 2006 Sir Leslie ety of government advisory boards. It is impor- Melville Lecture. It is a lecture in the name of tant for academics to have this life as teachers a great Australian who was a key architect of and researchers, as well as contributing to pub- the Australia in which we live today. It is also lic policy. This is certainly a tradition estab- a privilege to be invited to give this lecture be- lished by people such as Sir Leslie Melville. cause of the distinguished people who have de- Whether universities will be capable of sustain- livered it in previous years. ing the quality of academics was the subject of I am very unfortunate to have never met Sir Max Corden’s Melville Lecture in 2005 Leslie Melville, although my career has over- (Corden 2005). Suffice to say, it is very diffi- lapped his in many ways—as I discovered in cult being an academic in an Australian univer- researching the substantial contributions made sity today and to contribute to public policy by Sir Leslie. His legacy can be found in many formulation. areas in which I currently work. Sir Leslie was Many aspects of Sir Leslie’s life have been a prolific writer as an academic but also served covered in earlier lectures, particularly the first critical roles in the development of universities lecture by Ian Macfarlane (2002). One aspect in Australia, both as an academic at the Univer- that is relevant for the substance of my lecture sity of Adelaide and later as Vice-Chancellor is the contribution that Sir Leslie made to the of the Australian National University. Sir Le- design and establishment of new international slie worked in the Commonwealth Bank as institutions such as the International Monetary Head of the Economics Department and even- Fund and World Bank for dealing with global tually served on the Board of the Common- macroeconomic interdependence. This was the wealth Bank and later the Reserve Bank of subject of the lecture by Ken Henry in 2003 Australia. I worked for 16 years on the staff of (Henry 2003). Sir Leslie was fully aware that the Reserve Bank before joining the Australian well-designed institutions are critical for deliv- National University as a Professor in 1993. I ering good policy outcomes. Although there are many issues today which are very similar to those that Sir Leslie grap- 1 * This Sir Leslie Melville Lecture was presented at the pled with, some new issues that Australia cur- Australian National University on 12 October 2006. This rently faces are somewhat different to those on lecture was originally released as a Lowy Institute Perspec- which Sir Leslie focused. His role in the Tariff tives. The author thanks Peter Wilcoxen and David Pearce Board was critical to the opening up of Austra- for much helpful collaboration on the theme of this lecture. lia, but the issue of tariffs and problems in the The views expressed are those of the author and should not 2 be interpreted as reflecting the views of the institutions macroeconomy today has been overshadowed with which the author is affiliated including the trustees, by a host of new problems which require new officers or other staff of the Brookings Institution. institutions and new policy approaches. One of © 2007 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Published by Blackwell Publishing Asia Pty Ltd McKibbin: From National to International Climate Change Policy 411 these issues is how to deal with the problem of carbon dioxide emissions: emissions from nat- environmental degradation and in particular ural sources and emissions from human how to respond to the problem of climate sources. The policy debate has had little to say change. about the role of natural carbon emissions be- I will spend the remainder of this lecture cause the focus has been on reducing human stressing that climate change policy is a prob- emissions. However, a comprehensive ap- lem in policy making under enormous uncer- proach would not rule out reducing emissions tainty. I will also stress the important role that from any source since both man-made and nat- price signals and local actions can play as a ural sources have the same impact on the cli- basis for a global system, and conclude with an mate. outline of what I consider to be the way for- Figure 1 shows the emission of carbon diox- ward on climate policy both in Australia and ide into the atmosphere from burning fossil globally. fuels since 1751. It is clear that there has been Much of this lecture is from joint work with a dramatic change in human-induced emissions Professor Peter Wilcoxen of the Maxwell especially since the Second World War. There School at Syracuse University through collab- is cause for concern that this cannot be sus- oration at the Brookings Institution. We have tained and indeed needs serious attention under been colleagues since graduate school and have a wide range of interpretations of climate sci- been working together on climate change is- ence. sues for more than 15 years. The importance of natural climate variability can be seem in Figure 2, which shows the tem- 2. The Climate Change Policy Problem perature record from the Vostok Ice Core sam- ples for the period from 425000 years ago to Climate change policy is a classic case where the present expressed as a deviation from the international cooperation is essential. Climate average temperature in the twentieth century. change is partly caused by the concentration of This is what econometricians call a long run of carbon dioxide in the atmosphere from all data! This figure shows that historically the av- sources. Thus to address this problem all major erage temperature (from this one location) has emitting countries will need to be involved in a varied from –9 degrees Celsius relative to solution. There are two important sources of today to +3 degrees Celsius. These large Figure 1 Global Carbon Dioxide Emissions from Fossil Fuels, 1751–2002 Millions of metric tons carbon 8000 7000 6000 5000 4000 3000 2000 1000 0 1750 1770 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 Year Source: McKibbin and Wilcoxen (2002). © 2007 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research 412 The Australian Economic Review December 2007 Figure 2 Global Temperature Record, Vostok Ice Core Data Difference in mean temperature, Celsius 4 2 0 -2 -4 -6 -8 -10 -12 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 Years before present Source: McKibbin and Wilcoxen (2002). swings in temperature had profound impacts trialised economies. Thus, the response to cli- on the earth’s ecosystems and life on the mate change will require both mitigation to planet. The sources of the historical variability alter future climate outcomes and adaptation to in climate are well understood and most of this respond to climate change that is not controlla- variability is not related to human activity ex- ble by current policy. Second, climate policy is cept for the past few thousand years. dominated by geographic reality—there is an It is important to note that it is not the amount enormous range of sources of emissions made of emissions in any year that matters for the cli- by just about every person and corporation on mate but the concentrations in the atmo- the planet. Third, it is a policy that crosses sphere—the emissions over a long period of many jurisdictions—international organisa- time that cumulate into concentrations. The at- tions and national, state and local governments. mosphere is like a bath with greenhouse emis- This makes formulating and coordinating a sions flowing from a tap. Reducing the flow of policy extremely difficult. Fourth, the time emissions by turning the tap does not empty the scales for climate policy are much longer than bath but only changes the rate at which it fills. most other policy problems. Policies today The idea that a policy should target emissions may not affect the climate for more than five in any given year independently of the cost of decades into the future. Finally, the uncertain- doing so, rather than focusing on carbon con- ties surrounding climate change are large, nu- centrations and smoothing the cost of taking merous and mostly intractable. action over time, is the key mistake that has The uncertainty compounds at each level— stalled the process of formulating a robust pol- there is uncertainty about future emission lev- icy to tackle climate change. els; about how these impact on future carbon concentrations; about the timing and extent of 3. Dealing with Uncertainty and Policy temperature change and climate variability Design (and distribution across regions); about the im- pacts of these temperature changes and vari- Designing climate policy is very difficult for a ability on ecological systems; and the extent of number of reasons. First, there is already com- economic damages and economic benefits in mitted warming in the system from the long different regions at different times. Critically history of previous emissions, mostly by indus- there is the problem of how to formulate a © 2007 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research McKibbin: From National to International Climate Change Policy 413 policy to respond to the entire probability dis- (iii) Politics.