Medium terms prospects for the Australian economy and the impact of Kyoto-compliance.

Main Points

With existing energy and greenhouse measure in place, our medium term basecase forecasts show GDP growth between 2003 and 2012 at an average annual rate of 3.2 per cent. The corresponding forecasts for growth in real private consumption and employment are 3.1 per cent and 1.6 per cent.

Our basecase forecasts imply that greenhouse gas emissions will grow at an average rate of 1.3 per cent per annum, considerably less than forecast growth in real GDP. The main factors underlying relatively slow growth in emissions are: slow growth of agricultural emissions, fast growth in forestry sequestration, a shift towards renewable sources of generation; favourable electricity-saving and fuel-saving technical change; and faster-than-average growth in low emitting service industries.

According to our basecase, Australia's actual emissions remain below the Kyoto target through to 2011. In 2012, the gap between actual emissions and the Kyoto target is projected to be 30.1 Mt of C[O.sub.2]-e or five percent of the basecase level.

These projections suggest that new measures are required if Australia is to limit emissions to the Kyoto target through to 2012. One such measure is a domestic permit trading scheme for greenhouse gases. Our analysis in the second part of this article suggests that, for a comprehensive scheme covering all greenhouse gases and all emitters, a permit price of $15 per tonne of C[O.sub.2]-e will be necessary to achieve a five per cent cut in emissions in 2012.

A carbon price of $15 per tonne is equivalent to a tax of around $8 billion. This is a big tax and it will have a significant dampening effect on activity. According to our simulations, in 2012 it will reduce real GDP by 0.24 per cent and real GNP by 0.25 per cent. Real private consumption is hardly affected, however, because we assume that the revenue from the trading scheme is returned lump-sum to the owners of emitting activities (i.e, to domestic and foreign households). Employment is projected to fall relative to its basecase value by 0.33 per cent, which is equivalent to around 35,000 full- and part-time jobs.

The scheme reduces activity in most sectors. For example, in 2012 output in the Electricity supply and distribution sector falls by 1.2 per cent, and in Agricultural, forestry and fishing sector by 1.1 per cent. These sectors are the major contributors to Australia's greenhouse emissions. In percentage terms the largest fall in employment is in the Agricultural, forestry and fishing sector, while in terms of jobs the largest fall is in the Wholesale and retail trade area where 9,300 jobs are lost.

Not all industries suffer output decline. Industries favourably affected by the permit scheme include the elements of the broader electricity sector that use renewable and low-emissions gas generation technologies, and the forestry component of the broader Agricultural, forestry and fishing sector. Forestry is a net sink and the emissions price acts as a subsidy for this industry.

Introduction

On 5 June 2002, the Prime Minister, The Hon John Howard, stated in Parliament: 'It is not in Australia's interests to ratify the Kyoto protocol. The reason it is not in Australia's interests to ratify the Kyoto protocol is that, because the arrangements currently exclude--and are likely under present settings to continue to exclude--both developing countries and the United States, for us to ratify the protocol would cost us jobs and damage our industry.' Subsequent to this statement, the Government has committed itself to work outside the Kyoto process to limit emissions to 108 per cent of their 1990 levels over the four-year period 2009 to 2012. This equals Australia's target under the Kyoto Protocol.

The purpose of this article is twofold:

1. to produce a basecase set of forecasts for the Australian economy and for Australia's greenhouse emissions covering the years through to the end of the Kyoto commitment period, 2012; and

2. to examine the economic (including employment) impacts on our basecase of a domestic trading scheme for greenhouse gas emissions designed to deliver Kyoto-compliance in each of the four years, 2009 to 2012. (1)

Included in the basecase are current measures to reduce energy usage and greenhouse gas emissions. Information from the basecase allows us to gauge the size of the likely gap between actual emissions and the Kyoto target in the target period. This gap is the abatement task to which the emissions trading scheme is calibrated. The basecase and deviations from basecase are computed using the MMRF-Green model (Adams and Horridge, 2002).

Basecase Forecasts, 2003 to 2012

We impose on MMRF-Green forecasts from specialist groups, and use the model to derive the implications of the extraneously given information for structural variables. In generating the basecase projection, we use:

1 state/territory macroeconomic forecasts from Access Economics (Access, 2003);

2. national-level assumptions for changes in industry production technologies and in household preferences from the Centre of Policy Studies (COPS);

3. forecasts for the quantities of agricultural and mineral exports, and estimates of capital expenditure on major minerals and energy projects from various sources, such as state government agencies, the Australian Bureau of Agricultural and Resource Economics (ABARE, 2003)), and the National Electricity Market Management Company (NEMCO); and

4. estimates of the impacts of current measures designed to reduce greenhouse gas emissions.

The energy-related measures are as follows.

Supply-side

1 Queensland (QLD) cleaner energy strategy. This is modelled as autonomous annual shifts towards gas-fired electricity generation and away from coal-fired generation in QLD sufficient to increase the share of gas-fired generation in total generation in QLD to 13.1 per cent by 2010 and to keep it at that level through to 2012.

2. Generator efficiency standards (GES). We assume that efforts in updating generators will result in a reduction (relative to what would otherwise be the case) by 2010 of 2 Mt of emissions from black coal generation, of 2 Mt from brown coal generation, and of 1 Mt from gas generation.

3. Mandatory renewable energy targets (MRET). The MRET target obliges wholesale purchasers of electricity to contribute proportionately towards the generation of an additional 9.500 GWh of renewable energy per year by 2010. This translates to an additional 34.2 PJ of generated electricity. We implement the scheme via autonomous annual shifts towards renewable electricity generation and away from fossil-fuel generation, sufficient to hit the renewable target in 2010.

4 Greenhouse gas abatement program (GGAP) and greenhouse friendly certification program. These programs provide support to activities that are likely to result in substantial emission reductions or substantial sink enhancement up to 2012. We assume that the GGAP will reduce emissions in line with estimates given in the GGAP spreadsheet provided by the Australian Greenhouse Office (AGO).

5. NSW electricity retailer benchmark scheme. Under the benchmarks, NSW electricity retailers are required to reduce per capita C[O.sub.2]-e emissions (2) to 7.27 tonnes by 2007. The scheme allows electricity retailers to comply with their benchmark obligations by: reducing the greenhouse intensity of electricity purchased from generators; improving the energy efficiency of their customers through the promotion of demand management; and offsetting emissions through the purchase of forest sequestration (3) credits. We implement the scheme via a combination of autonomous annual shifts towards gas-fired and renewable electricity generation and away from coal generation, combined with allowance for increased demand management and increased forestry sequestration.

Demand-side

6. Greenhouse challenge program (GCP). This is described as a co-operative program between industry and government whereby companies undertake action to abate their greenhouse gas emissions through no regrets energy efficiency and other measures. It is modelled as a combination of improved (relative to baseline levels) generation efficiency and improved energy efficiency in industrial usage targeted to achieve an Australia-wide reduction in emissions of 5.8 Mt. This is the estimate of the measure's impact based on data provided by GCP participants and published in the Greenhouse Challenge, February 2002.

7. Energy efficiency standards for residential and commercial buildings, for domestic appliances and for commercial and industrial equipment (PM 1997 statement). The measure has a technical effect that increases the energy efficiency of residential and commercial buildings. The AGO estimates that the measure will reduce total emissions by 7.1 Mt in 2010. It is modelled as cost-neutral annual increases in the efficiency with which energy is used in buildings.

Table 1 summarises the MMRF-Green-generated forecasts for macro variables.

Our GDP forecasts reflect, in the main, those made by Access Economics. Table 1 shows average growth in real GDP between 2003 and 2012 of 3.2 per cent. This is in line with average growth over the historical period 1996 to 2003. The first half of the historical period was a period of exceptionally strong growth. Growth in the second half though, was somewhat weaker, reflecting, in part, the adverse effects of a sluggish world economy, the trade-reducing impacts of September 11, and the recent drought. Access assumes normal seasonal conditions after 2003 and a stronger rate of world growth than in recent history.

Improving growth in the world economy and recovery from drought underlies Access's forecast for strong growth in Australia's exports. The prospects for growth in real private consumption are in line with those for real GDP, even though Access thinks that in the next few years the factors driving recent strong consumer spending--low interest rates, strong growth in housing construction and rising employment--will have been partly reversed. The outlook for investment is for slower growth than in the historical period. This reflects initial conditions: the ratio of investment to capital in 2003 is higher than in 1996 and so over the forecast period less growth in investment is required to maintain a rate of capital growth similar to that in the historical period.

Employment growth over the forecast period is expected to average 1.6 per cent per year, 1.6 percentage points less than average growth in real GDP. This rate of productivity improvement is stronger than the historical rate (1.1 per cent per annum).

Table 2 shows MMRF-Green forecasts for employment by industry aggregated to 19 industrial sectors. It also shows forecast average annual growth rates in production for each of the 19 sectors.

In terms of average employment growth, the sectors with the best prospects are: Basic metal products (3.8 per cent average annual growth), Other manufacturing (2.9 per cent), Public administration and defence (2.6 per cent) and Finance, property and business services (2.5 per cent). With the exception of the public industries, all these sectors are expected to experience above-average rates of growth in output, with relatively weak improvements in productivity (labour used per unit of output). Output in the Basic metal products sector is forecast to increase at an average annual rate of 5.8 per cent, assisted by strong growth in alumina and aluminium exports. Output in the Other manufacturing services sector, which is dominated by machinery and equipment (other than transport equipment), is also forecast to increase at an average annual rate of 5.8 per cent. This partly reflects our forecast of rapid growth in equipment exports. Another positive factor is our assumption that the intensity with which industries and households use machinery and equipment (particularly electronic equipment) will grow strongly, in line with trends through the 1990s. Favourable trends in technology explain our forecast of rapid growth in the output of the Finance, property and business sector. We are forecasting little change in productivity within the Public sector. Thus in our forecasts public-sector employment growth is strong relative to employment growth in other industries, despite below average output growth.

Employment is forecast to decline through the forecast period in eight sectors. The mining sector is forecast to have the largest percentage fall in employment (-1.2 per cent average annual growth). This reflects very strong productivity improvement arising from exogenously imposed technological change, which reduces the amount of primary factors used per unit of output in line with historical trends. Other sectors forecast to experience falls in employment include Wood and paper products (-0.9 per cent average annual growth), Cars and other transport equipment (-0.9 per cent) and Textiles, clothing and footwear (-0.8 per cent). All three sectors are forecast to experience relatively weak output growth mainly due to increased import penetration. Employment is also forecast to decline in Gas and water supply and distribution (-0.6 per cent average annual growth), Non-metallic construction materials (-0.5 per cent), Agriculture, forestry and fishing (-0.4 per cent) and Chemicals, petroleum and coal products (-0.1 per cent). Job numbers are expected to fall in these sectors, not because of especially weak output growth, but because of strong growth in productivity arising from strong capital growth. At the beginning of the forecast period, profitability in these industries was generally high. Thus we are forecasting relatively strong investment growth rates through the forecast period, which increases the ratios of capital to output and suppresses the ratios of employment to output.

An implication of Table 2 is that the dominance of the service sectors as employers is likely to increase over the next decade, in line with the recent historical trend. This is explained mainly by good growth prospects for service outputs, reflecting technological changes that are increasing service usage per unit of activity throughout the economy. Agriculture, mining and most manufacturing sectors are likely to have declining shares in total employment, reflecting rapid productivity growth combined with subdued production growth.

Table 3 presents our basecase forecasts for C[O.sub.2]-e greenhouse gas emissions, excluding emissions from land clearing (which are not modelled). Emissions are divided according to broad sources: energy sector emissions (fuel combustion and fugitives), emissions from industrial processes, emissions from agriculture, and emissions from waste dumps. Allowance is also made for forestry sequestration. The table includes the average annual growth rate of emissions from 2003 to 2012 and the levels of emissions (Mt) in 2003 and 2012.

According to our basecase, total emissions Australia-wide are projected to grow at an average annual rate of 1.3 per cent, considerably less than the projected GDP growth rate of 3.2 per cent. Some reasons are:

* the slow growth of Agriculture emissions (a major contributor);

* fast growth in forestry sequestration;

* the shift towards renewable sources of generation which suppresses emissions from electricity generation;

* favourable electricity-saving and fuel-saving technical change; and

* faster-than-average growth of the service sectors, which emit relatively little greenhouse gas.

The national total for all emissions (excluding land clearing) in 2012 is 541.4 Mt, an increase of 60.4 Mt from the level in 2003.

Based on our basecase projections, how close will Australia be to its Kyoto target in 2012? (4) Table 4 summarises the calculation necessary to measure the Kyoto abatement task. Our basecase total is shown in row 6. This excludes emissions from land clearings and includes our own estimates of forestry sequestration (shown with a minus sign in row 5). The numbers in row 9 equal our basecase estimates of gross emissions (excluding our estimate of sequestration) plus official estimates of emissions from land clearing (row 8) net of sequestration (shown with a minus sign in row 7) allowed for under the official Kyoto accounting rules. These rules allow for 21 Mt of forestry sequestration from 2010 onwards, and assume that emissions from land clearing in each year after 2010 will total 36 Mt. Overall based on the official accounting rules, total emissions rise from 521.6 Mt in 1990 to 593.4 Mt in 2012. Australia's Kyoto target is an eight percent increase on the level of emissions in 1990, or 563.3 Mt (= 521.6 x 1.08). Thus the gap between actual emissions and the Kyoto target in 2012 is projected to be 30.1 Mt, or five percent of our basecase level in 2012.

Impacts of Kyoto-Compliance

In this section we examine the impacts on our basecase forecasts of a domestic emissions trading scheme designed to deliver Kyoto compliance in the four years 2009-12. According to our basecase, Australia's emissions will be below the Kyoto target up to 2010. In 2011, there is a very small gap, while in 2012 the gap increases to 30.1 Mt. In our modelling, the trading scheme begins in 2011. However, its impact only becomes significant in 2012.

The trading scheme that we model is a comprehensive domestic cap-and-trade permits system with grandfathered permits and a cap set to meet the required abatement task. Under a grandfathering arrangement, at the start of each year emitting industries are handed a given number of permits to produce greenhouse gas. Revenue from these permits is assumed to accrue to the owners of the firm (i.e. to domestic and foreign households). Ignoring transactions costs, this is exactly equivalent to a comprehensive carbon tax set at a rate that meets the required abatement task (i.e., a rate per tonne of carbon equal to the equilibrium permit price under the cap-and-trade system).

The main effects of the emissions-reduction policy are shown in Table 5 (macroeconomic variables), Table 6 (industry employment and output) and Table 7 (greenhouse gas emissions). These show deviations of a range of variables in 2012 from their values in the basecase. In 2012, the permit price is $15.0 per tonne of C[O.sub.2]-e.

Our explanation is given in a series of numbered points. The italicised headings to the numbered points outline the main structure of the explanation.

1. In 2012, the trading scheme reduces employment. Table 5 shows that the permit scheme in 2012 reduces employment by 0.33 per cent relative to its basecase level. The main reason for the decline is that the emissions penalty raises the real cost of employing labour, i.e., it raises the real wage rate from the employers point of view. (5) The emissions charge puts a wedge between the price of expenditure (the CPI, for example) and the price received by producers (the deflator for GDP at factor cost). With the real wage rate from the employee's point of view assumed to be sticky, the nominal wage diverges only slowly from the CPI. (6) Hence, the emissions penalty causes the nominal wage rate to rise relative to the factor cost GDP deflator. The fall in employment in 2012 is 0.33 per cent, which is equivalent to a loss of around 35,000 full and part-time jobs.

2. The employee's real wage rate falls along with employment. According to the labour-market specification in MMRF-Green, if employment is below its basecase level, employees allow a decrease in their real wage rate. This strengthens producers' incentives to substitute labour for capital, leading to an increase in the ratio of labour to capital. Consequently, in 2012 the negative influence on employment of the carbon charge is moderated somewhat by a fall in the employee's real wage rate (see Table 5).

3. Real GDP falls in line with the decline in factor inputs. In 2012, capital is down 0.09 per cent relative to its basecase level, reflecting a reduction in investment in the first year of operation of the scheme (2011). Employment has fallen by 0.33 per cent (see point I) and real GDP has been reduced by 0.24 per cent. Note that the costs of abatement and shrinkage of the real indirect tax base cause the decline in real GDP at market prices (as reported in Table 5) to exceed the decline in factor inputs (capital and labour). Our modelling recognises that abatement is costly, i.e., that to reduce their emissions of greenhouse gases per unit of output producers must use more inputs per unit of output.

4. The permit scheme reduces real GNP relative to its basecase level by 0.25 per cent in 2012. This is in line with the fall in real GDP of 0.24 per cent. Real GNP is the real income that accrues to residents of Australia. It equals real GDP less net real income paid overseas from GDP plus net real income from sales of carbon permits. The main form of income paid overseas is capital income. Real GNP falls by slightly more than real GDP because the trading scheme reduces real income accruing to foreigners proportionately less than it reduces real income paid to domestic residents. This is because, as a result of the trading scheme, the industries that contract most (relative to basecase levels) have, on average, a smaller share of foreign ownership than industries that contract least.

5. Investment falls relative to its basecase level. Reflecting the permit scheme's deleterious impact on average profitability, investment in 2012 falls by 0.85 per cent.

6. Surprisingly, in 2012 private consumption expands a little relative to its basecase value. In our modelling, private consumption moves in line with after-tax income accruing to domestic residents, with an allowance for the lump-sum return of permit revenue. If there were no income from permits, then real private consumption would fall roughly in line with the fall in real GDP. The permit income, though, offsets the reduction in income from conventional sources. This, along with the improvement in the terms of trade, leads to a slight increase in real consumption spending.

7. Real gross national expenditure (GNE) (7) falls by a little less than real GDP, leading to a mild deterioration in the net volume of trade. Public consumption (G) is assumed to be unaffected by the permit trading scheme. Real private consumption (C) rises slightly, while real investment (I) falls. Overall, the fall in real GNE (C+I+G) is less than the fall in real GDP (Y), implying a mild deterioration in the balance between export and import volumes (X-M).

8. In 2012, the volume of exports falls (relative to base) by 0.55 per cent and the volume of imports falls (relative to base) by 0.40 per cent. Mild appreciation of the real exchange rate is required. Despite the adverse effect of the emissions charge on Australia's energy-intensive exports, mild real appreciation is still necessary to ensure that the deterioration in the net trade volumes is in line with the projected effects on real GDP and real GNE. The reduction in export volume causes the average foreign-currency price of exports to rise relative to its basecase level, leading to an improvement in the terms of trade.

9. At the broad sectoral level, most industries are adversely affected by the permits scheme. Prominent among the industries most adversely affected by the introduction of the emissions policy are Electricity supply and distribution (output falls by 1.2 per cent relative to base), Agriculture, forestry and fishing (output falls by 1.0 per cent) and Basic metal products (output down 0.8 per cent). Within the electricity sector, the two high-emissions electricity generators, Electricity-black coal and Electricity--brown coal lose market share to renewable and relatively low-emissions gas generation. Overall, though, electricity production is down as the average price of electricity rises, causing the economy generally to become less electricity intensive. The Basic metal products sector, especially the alumina and aluminium industries, is energy-intensive and export oriented. The rise in electricity prices, along with a milder increase in the price of gas, increases the cost of basic metal production significantly, leading to a loss of exports. The agricultural sector is a major emitter of greenhouse gas, particularly methane from animals. The price imposed on C[O.sub.2]-e emissions, therefore, imposes a significant production tax on agricultural production leading to lower output. Note that in our sectoral aggregation agriculture is combined with forestry. Unlike agriculture, which generally suffers from the imposition of the permit scheme, the forestry industry is stimulated. Forestry is a net sink and the emissions price acts as a subsidy for this industry.

Mining output as a whole is projected to fall relative to base by 0.4 per cent. Most of this fall is due to a reduction in coal output: less demand for coal-fired generation and lower exports due to the taxing of fugitive emissions from coal mining. Oil and gas production is also adversely affected, but by less than coal production due to the increase in gas demand for electricity generation.

Reductions in output for other manufacturing industries largely reflect lost exports and/or increased import penetration arising from increases in costs. A good example is Cars and other transport equipment. The one exception to the general pattern of declining manufacturing output is the Wood and paper products sector. It experiences a very mild increase in output, due to the reduced cost of primary forestry inputs.

Most of the service sectors suffer contractions in output. The main influence on these sectors is macroeconomic final demand. As explained in point 7, the permit scheme reduces real GNE. This suppresses general demand for sectors such as Wholesale and retail trade, leading to reduced output.

10. For most sectors, employment falls in line with output. Table 6 shows that the permits scheme reduces employment in nearly all sectors. In percentage terms, the largest fall is in the Agricultural sector (down 1.8 per cent relative to base). Employment in mining and metals manufacturing falls by nearly 1.0 per cent. The only sector projected to experience a non-negligible increase is Wood and paper products, in line with the very mild stimulus to production.

11. Significant losses are projected for Agriculture and the service industries. The Wholesale and trade sector does not figure prominently in the percentage change columns of Table 6. However, the sector experiences the largest fall relative to base in job numbers (9,300 in 2012). Job losses are large in other service sectors too, with 6,100 jobs lost in the construction sector and 4,500 jobs lost in the Finance, property and business services sector. The other area in which job losses are significant is Agriculture, forestry and fishing, where 7,400 full and part-time employees lose employment.

12. Table 7 shows that the trading scheme reduces emissions by 5.1 per cent (Kyoto accounting) relative to their basecase level. The largest percentage reductions are for activity-related emissions in industrial processes (largely cement and metals manufacturing). The percentage change in emissions from this source (-10.4 per cent) is much larger than the average percentage change in output of the associated sectors, reflecting extensive uptake of abatement technologies. Abatement in agriculture is somewhat more costly than in industrial processes, meaning that for agriculture the percentage change in emissions is much more in line with the percentage change in output.

The reduction of 5.1 per cent relative to base (Kyoto accounting) in 2012 is generated by a 5.9 per cent reduction in emissions as modelled. The 5.9 per cent reduction in modelled emissions is equivalent to a fall of 31.8 Mt. Emissions from the energy sector are down 26.1 Mt, while agricultural emissions are down 1.8 Mt, emissions from industrial processes are down 1.6 Mt, and emissions from waste dumps are down 0.6 Mt. The amount of forestry sequestration increases by 1.6 Mt.

Concluding Remarks

There has been vigorous debate on the issue of whether Australia should ratify the Kyoto protocol and hence enter into a binding global agreement to limit emissions to 108 per cent of their 1990 levels by the end of the decade. On one side are groups, such as the Federal government, who favour non-ratification mainly on the basis of the short- and medium-term economic impacts. On the other side are groups that weigh the potential long-term costs associated with global warming more highly than the short/medium-term economic consequences. Further confusing the scene is the Federal government's current stance that it will go-it-alone with the aim of meeting the Kyoto target, using domestic measures designed to limit the economic impacts for Australia.

The modelling reported in this paper sheds some light on the issues underlying the Kyoto debate. Our basecase projection provides a guide to the size of the likely gap between actual emissions and the Kyoto target in 2012 with current energy and greenhouse policies in place. It shows that the abatement task to meet the Kyoto target in 2012 is around 30 Mt of C[O.sub.2]-e. In other words, to meet the Kyoto target Australia would need to put in place new measures that reduce emissions in 2012 by 30 Mt or around 5 per cent of their basecase level. In the second part of this paper we examine the economic consequences of one such measure, an Australia-wide domestic emissions trading scheme covering all greenhouse gases and all sources of emissions calibrated to deliver Kyoto-compliance. According to our simulation, compliance would require a permit price (analogous to a specific tax on C[O.sub.2]-e emissions) of $15 per tonne. The revenue from this scheme would amount to around $8 billion. Our simulations show that in 2012 the tax would:

* reduce real GDP relative to its basecase level by 0.24 per cent;

* leave real private consumption roughly unchanged (the permit revenue is assumed to be returned to the owners of the emitting activities); and

* reduce employment by 0.33 per cent, or around 35,000 full- and part-time jobs.

Output and employment fall across most of the broadly defined industrial sectors. The sectors in which job losses are projected to be largest are Agriculture, forestry and fishing, Basic metal products, Construction, Wholesale and retail trade and Finance, Property and business services.

Table 1: Basecase macro forecasts (average annual
percentage growth rates)

                           History        Forecast
                           1996 to 2003   2003 to 2012

Real private consumption   3.3            3.1
Real public consumption    2.9            2.9
Real investment            4.7            3.1
Exports, volume            2.3            6.5
Imports, volume            5.6            6.2
Real GDP                   3.0            3.2
Employment                 1.9            1.6

Table 2: Basecase employment and output forecasts for industrial
sectors (average annual percentage growth rates)

                                           Percentage     Percentage
                                           growth in      growth in
                                           employment,    output,
                                           2003 to 2012   2003 to 2012

Agriculture, forestry and fishing          -0.4           2.2
Mining                                     -1.2           2.9
Food, beverages and tobacco                0.2            2.9
Textiles, clothing and footwear            -0.8           0.6
Wood and paper products                    -0.9           1.4
Chemicals, petroleum and coal products     -0.1           2.7
Non-metallic construction materials        -0.5           2.5
Basic metal products                       3.8            5.8
Cars and other transport equipment         -0.9           1.0
Other manufacturing                        2.9            5.8
Electricity supply and distribution        0.3            2.4
Gas and water supply and distribution      -0.6           2.9
Construction                               1.4            3.1
Wholesale and retail trade                 0.3            2.2
Transport and storage                      0.7            3.5
Communications                             0.8            5.9
Finance, property and business services    2.5            5.5
Public administration and defence          2.6            2.8
Other Services                             1.4            3.8

Table 3: Basecase forecasts for greenhouse gas emissions (C[O.sub.2]-e)

                         Average annual   Level,           Level,
                             percentage     2003             2012
                                 growth     (Mt)             (Mt)
                           2003 to 2012

Energy sector, total                1.6    385.1            446.0
  Fuel combustion                   1.6    352.7            406.1
  Electricity                       0.7    184.6            196.2
  Transport                         2.0     83.1             99.5
  Other industries                  3.1     81.9            107.4
  Household
consumption                        -0.3      3.1              3.0
  Fugitive emissions
from fuels                          2.3     32.4             39.9
Industrial processes                2.9     11.7             15.1
Agriculture                         0.2     95.8             97.4
Waste dumps                         1.5     17.4             19.9
Forestry sequestration              2.8    -28.9            -37.0
Total                               1.3    481.0   541.4

Table 4: Greenhouse gas emissions (Mt, C[O.sub.2]-e): Kyoto accounting

                                  1990 (a)   2012 (b)

Basecase forecasts
1. Energy sector, total              299.5      446.0
2. Industrial processes               12.0       15.1
3. Agriculture                        91.2       97.4
4. Waste                              14.9       19.9
5. Forestry                          -27.2        -37
6. Total as modelled                 390.4      541.4

7. Kyoto-compliant forestry                     -21.0
8. Other land use change (land
clearing)                            104.0       36.0
9.Total (Kyoto accounting) (c)       521.6      593.4

(a) Source: 2000 National Greenhouse Gas Inventory published by the
Australian Greenhouse Office (AGO).

(b) Source for items 1 to 5, the basecase forecasts shown in Table 3.
Source for item 7, estimates of net forestry sequestration from
Kyoto-compliant plantations published in Table 1, 'Tracking to the
Kyoto Target: Australia's Greenhouse Emissions Trends, 1990 to 2012',
AGO, 15 August 2002. Source for item 8, estimates of emissions from
land clearing taken from the AGO document cited above.

(c) Total of items 1 to 4, 7 and 8.

Table 5: Macroeconomic deviations from basecase in 2012: Impact of
permits scheme (percentage deviations)

Real private consumption    0.05
Real public consumption     0.00
Real investment            -0.85
Exports, volume            -0.55
Imports, volume            -0.40
Real GDP                   -0.24
Real GNP                   -0.25
Employment                 -0.33
Real wage rate--employee   -0.23
Terms of trade              0.09

Table 6: Industry deviations from basecase in 2012: Impact
of permits scheme

                                         Percentage    Absolute ('000
                                          deviation   jobs) deviation
                                      in employment     in employment

Agriculture, forestry and fishing             -1.84              -7.4
Mining                                        -0.90              -0.6
Food, beverages and tobacco                   -0.47              -0.8
Textiles, clothing and footwear               -0.20              -0.1
Wood and paper products                        0.10               0.2
Chemicals, petroleum and coal
products                                      -0.46              -0.3
Non-metallic construction materials           -0.68              -0.3
Basic metal products                          -0.89              -2.3
Cars and other transport equipment            -0.59              -0.4
Other manufacturing                           -0.44              -1.5
Electricity supply and distribution           -0.79               0.0
Gas and water supply and
distribution                                   0.00              0.00
Construction                                  -0.63              -6.1
Wholesale and retail trade                    -0.42              -9.3
Transport and storage                         -0.54              -2.8
Communications                                -0.20              -0.4
Finance, property and business
services                                      -0.24              -4.5
Public administration and defence              0.05               1.3
Other services                                -0.03              -0.2
Total                                                           -35.4

                                         Percentage
                                       deviation in
                                             output

Agriculture, forestry and fishing             -1.05
Mining                                        -0.37
Food, beverages and tobacco                   -0.34
Textiles, clothing and footwear               -0.21
Wood and paper products                        0.03
Chemicals, petroleum and coal                 -0.33
products
Non-metallic construction materials           -0.50
Basic metal products                          -0.75
Cars and other transport equipment            -0.42
Other manufacturing                           -0.42
Electricity supply and distribution           -1.22
Gas and water supply and                      -0.14
distribution
Construction                                  -0.47
Wholesale and retail trade                    -0.30
Transport and storage                         -0.41
Communications                                -0.06
Finance, property and business                -0.12
services
Public administration and defence              0.02
Other services                                 0.03
Total

Table 7: Deviations in Greenhouse gas emissions in 2012

                                   Absolute change      Percentage
                                   (Mt, C[O.sub.2]-e)     change
1. Energy sector, total                 -26.1             -5.86
2. Industrial processes                 -1.6             -10.40
3. Agriculture                          -1.8              -1.88
4. Waste                                -0.6              -2.96
5. Forestry                             -1.6               4.45
6. Total as modelled                    -31.8             -5.87

7. Kyoto-compliant forestry              0.0               0.00
8. Other land use change (land
clearing)                                0.0               0.00
9. Total (Kyoto accounting) (a)         -30.1             -5.07

(a) Total of items 1 to 4, 7 and 8.

ENDNOTES

(1) Industry and governments support such a measure as the most efficient means for providing substantial greenhouse gas reductions.

(2) C[O.sub.2]-e is shorthand for carbon dioxide equivalents. There are six primary greenhouse gases, of which three are the most important, carbon dioxide, methane and nitrous oxide. Each gas has a different global warming potential. For example, the global warming potential of a tonne of methane is 21 times the global warming potential of a tonne of carbon dioxide. The measure of carbon dioxide equivalents is a weighted total of emissions from all greenhouse gases, with weights reflecting the global-warming potential of each gas (the global warming potential of carbon dioxide is 1).

(3) One might expect that the carbon sequestered by Forestry should be related to the rate of planting; we connect it to Forestry activity as a whole, which includes logging.

(4) For the purpose of calculating the abatement task to which the emissions trading scheme is calibrated, we assume the commitment relates to each of the four years, not to a four-year average of emissions.

(5) The employer real wage rate is the nominal wage rate deflated by the price of output. At the macro level, the price of output is equivalent to the price of GDP at factor cost.

(6) The employee real wage rate is the nominal wage rate deflated by the CPI. In the short-run, the employee real wage is sticky. Hence the nominal wage rate tends to move with the CPI.

(7) The percentage change in real GNE is the weighted average of percentage changes in real private consumption, real public consumption and real investment.

References

ABARE (2003), Australian Commodities: Forecasts and Issues, Commonwealth of Australia, March and September quarters.

Access Economics (2003), Access Economics Five Year Business Outlook, Access Economics Pty. Ltd., September quarter.

Adams, Philip D. and M. Horridge (2002), MMRF-Green: A Dynamic Multi-regional Applied General Equilibrium Model of the Australian Economy, Based on the MMR and MONASH models; Draft Documentation, prepared for the Regional GE Modelling Course, June 26. Available from the Centre of Policy Studies.

Philip D. Adams, Centre of Policy Studies, Monash University