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Sunday Agenda

Access Economics, Dr. Ric Simes

15th November, 2009

Interview with Access Economics Director, Dr. Ric Simes

Sunday Agenda program, 15th November 2009

Helen Dalley: Aside from the environmental rationale behind the emissions trading
scheme, does it make sense economically? Joining me now to discuss this is Dr. Ric
Simes, a director of Access Economics, who’s an expert in this field.
Ric Simes, thanks very much for joining us.

Ric Simes: Thank you.

Helen Dalley: Now let’s go back to basics, because you’ve done extensive analysis on
the economic modelling I guess, not that we want to use that word modelling, but does it
add up for Australia or any country to have an ETS in place, a trading scheme, and to
put a cost on carbon emissions?

Ric Simes: It certainly does. Given that manmade climate change is a real event and
it’s happening today and it’s going to happen indefinitely, the most efficient way and
most effective way of addressing that is to put a price on those emissions and put that
price on as many emissions as possible, so do it as comprehensively as possible.

Helen Dalley: Well just on that score, there’s word today that perhaps Penny Wong will
back down and agriculture will be permanently excluded. Do you have a view on that?

Ric Simes: Ideally agriculture should be in. It’s a practical issue though, it’s very difficult
to work out how you implement that, both in Australia and overseas. And so as I see it,
the decision today is being driven by practical considerations rather than overall
economic efficiency.

Helen Dalley: So agriculture should be in, as far as you’re concerned?

Ric Simes: If you could implement it. We couldn’t implement agriculture today or
impose an ETS on agriculture today . . .

Helen Dalley: . . . But it was supposed to come in after 2015, wasn’t it?

Ric Simes: Yes, and 2015 might have been too soon also, but at some stage in the
future it may have become possible, and in those circumstances it should have been in.

Helen Dalley: Alright, so given that you and your analysis has accepted the science,
should a trading scheme come in sooner rather than later?

Sunday Agenda 15th November, 2009 Dr. Ric Simes

Ric Simes: It’s important to get the price signals in there fairly soon, and so ideally as
soon as possible, but we shouldn’t hope to get large reductions in emissions happening
very quickly. What this is all about is getting price signals in there, so that we can make
important decisions in terms of investment in new technologies, in how we build our
buildings or what motor vehicles we drive or whatever. And that takes quite a while to
have the capital stock in the country adopt less emissions intensive technologies.

Helen Dalley: So again, to give certainty to business, to people who are going to invest
in massive infrastructure in some cases in terms of power stations and things like that.
But some on the national side of politics say that our scheme, an Australian scheme,
won’t make any difference at all. Is that true?

Ric Simes: Well if no one else around the world has similar schemes, it won’t make
much difference. But we’re part of a global community, and what Australia is looking at
doing is comparable with what other developed countries are doing, and we’re trying to
also bring developing countries onboard. So just how that all comes together, that’s up
to the politicians to work out how to bring it together. But it’s important that all countries
do take part in this effort.

Helen Dalley: From your analysis, is it your view that really an ETS must only be in a
sense a short term solution? The idea is to get people to change their behaviour and to
cut their dependence on emitting carbon?

Ric Simes: That’s the ultimate goal, to get people to change how they produce or how
the economy produces, and peoples’ dependence on activities that are related to
emitting carbon.

Helen Dalley: So the short term solution . . .

Ric Simes: . . . No, no, to do that though, to do that you need to have a price on carbon
forever. And so it is a long term policy.

Helen Dalley: Alright, so the price on carbon eventually should make people change
their behaviour and move to alternative forms of technology?

Ric Simes: That’s right. That’s right.

Helen Dalley: And how much or how adversely is that going to impact on our economy?

Ric Simes: If there’s sufficient time to turn over the capital stock and make these
investments, it should not have a large impact. The best estimates suggest that we can
have quite deep cuts in emissions by 2050 and effect gross domestic product by around
.1, .2 percent a year, i.e. instead of growing at 3.5 percent on average, we might be
growing at 3.4 or 3.3 percent. And so that’s not very big.

Helen Dalley: It’s not a huge impact on the economy, is it?

Ric Simes: No, the real issue isn’t so much the long term impact. The real issue is how
we get there, the transition. Because if we try to impose very tight targets early on and
we don’t have all the new technologies coming on-stream or there’s some sort of lag in
the investment adjustment, well then to meet those targets basically we need to slow the

Sunday Agenda 15th November, 2009 Dr. Ric Simes

economy down more. And so it’s the adjustment process towards that long term that’s
really the important thing.

Helen Dalley: So have you picked a target that works for you in terms of not being too
steep to have a really strong adverse impact on the economy? Or perhaps I should ask
you another way, what do you think of the minimum target that the government has set
of five percent reduction?

Ric Simes: We don’t know whether that’s going to be good or bad because there are so
many uncertainties going forward. The issue here in my mind is that having an interim
target based on the level of emissions might be the wrong way to look at it. Instead,
what we should be looking at is how quickly we are being able to bring new technologies
on, or transform the economy. For example, to meet these changes by say the 2030s,
we should be having quite a different electricity generation sector.

Helen Dalley: Away from coal fired, do you mean?

Ric Simes: Well either away from coal fired, or if coal fired is going to be used, it’s going
to be accompanied by being to capture the gas . . .

Helen Dalley: . . . Carbon capture storage technology.

Ric Simes: Either that, or geothermal or solar or whatever. We’re not sure which one of
those technologies is going to be most commercial longer term, but we need to make
sure that we’ve had the investments and we’ve got all of that up and running. It’s very
difficult to see with any of those new technologies that will provide the potential to have
baseload electricity being provided, it’s very difficult to see much action on those in the
next decade.

Helen Dalley: Why is that? The government’s brought in the legislation about 20
percent renewable.

Ric Simes: That’s right, and when you look at the incentives behind that, what that’s
going to do is encourage the adoption of a lot of technologies that are ready to go today.
And the main one in terms of electricity generation, is wind. Now wind should play a
useful part in the long term solution, but only maybe 15, 20 percent at most of the total
generation, because it’s not consistent and too much wind would tend to cause problems
with the overall electricity system with transmission and the like. And so to get that
complemented, or get other technologies to play that larger role . . .

Helen Dalley: . . . The other 85 percent, yes.

Ric Simes: Yes, will take some time.

Helen Dalley: Alright, do you think the carbon capture and storage for coal is going to be
a real viable option?

Ric Simes: Look, I’m not an expert on all the technologies, but as I understand, each
element in that is technically feasible. So it’s technically feasible and people are already
capturing it. The oil and gas industry has been good at transporting the gases and it’s
technically feasible to store that carbon in saline aquifers under the ground or in past

Sunday Agenda 15th November, 2009 Dr. Ric Simes

reservoirs or whatever. So it’s technically feasible. The big question is, is it going to be
commercial to do this at scale? And that requires a lot of work, a lot of effort to get that
right, and that’s going to take at least one decade and probably two or three decades to
get right.

Helen Dalley: So what is the solution? You’re saying it needs to be across all those.
The current technology we have which is essentially coal fired, but to get a technology to
make it cleaner in terms of its carbon emissions, complemented by these other
technologies. But you’re saying all of those new things are still a long way off?

Ric Simes: Yes, and so it will take time. Early on, the biggest changes are going to be
getting a bit more efficiency, or having fewer emissions for the same level of energy
being produced out of the existing operators, then moving, replacing some of the coal
fired generation to gas, which is available today, bringing on a bit of renewables, and
over time the new technologies will become more commercial, the cost of producing
them as we understand the technology better will come down, and so over time it will
occur. The problem is when we say we want so much on a particular date, that’s when
we end up with the risk that we might miss those early targets.

Helen Dalley: Okay, so the next two weeks are really quite crucial in terms of the debate
in the parliament?

Ric Simes: The next two weeks, basically if we can end with an agreement where we
get a price on carbon happening fairly soon so people start to adjust and act on that,
that’s the goal. Some of the details will be negotiated, but the goal is to get that price on
carbon early.

Helen Dalley: Dr. Ric Simes, we’ll leave it there, thanks so much for giving us that
update.

Ric Simes: Thank you.

Sunday Agenda 15th November, 2009 Dr. Ric Simes