Climate Change Authority

You are here

Appendix C How economic modelling is used in this Review

The Authority requested assistance from The Commonwealth Treasury and the Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education (DIICCSRTE) to provide input to its economic analysis for the Targets and Progress Review. The Treasury and DIICCSRTE undertook the economic modelling of different climate change mitigation scenarios in close consultation with the Authority.

The scenarios modelled were agreed by the Authority and DIICCSRTE to provide analytical inputs to both the Authority’s Review and for emissions analysis within Government. This Appendix outlines how the modelling was used to inform different parts of this Review.

The Treasury and DIICCSRTE modelling report and the consultants’ reports on detailed modelling of the electricity, transport and agriculture sectors are published on the Authority’s website.

Appendix C1 Modelling approach

The Treasury and DIICCSRTE modelling report uses a suite of models because no single model adequately captures the global, national, state and sectoral dimensions or focuses on all relevant aspects of mitigation policy in Australia.

The suite includes two top-down, computable general equilibrium (CGE) models developed in Australia – the Global Trade and Environment Model (GTEM) and the Monash Multi-Regional Forecasting (MMRF) model. These are economy-wide models that capture the interactions between different sectors and among producers and consumers. The model for the Assessment of Greenhouse Gas Induced Climate Change (MAGICC) is used to map emission trajectories from the international scenarios to estimated atmospheric concentrations. A series of sector-specific models for electricity generation (undertaken by ACIL), transport (undertaken by CSIRO), agriculture (undertaken by CIE) and forestry and waste (undertaken by DIICCSRTE) are used to complement these CGE models, enriching the understanding of the economy’s likely response to climate change mitigation policy. The Treasury and DIICCSRTE modelling report and consultants’ reports provide further detail on the use of these models and their integration.

Figure C.1: How the suite of models fits together

This figure is a flow diagram to show the links between the seven models. The MAGICC model links to the GTEM model (taking outputs from GTEM as inputs to MAGICC and iterating back and forth). The GTEM model links to the MAGICC model and the MMRF model (the outputs from GTEM are taken as inputs to MMRF). MRRF links to GTEM and all of the bottom-up models (the outputs from the bottom-up models are taken as inputs to MMRF). The bottom up models (forestry, transport electricity and agriculture and waste link directly to MMRF (as outlined above). Some of the inputs and outputs from the electricity and transport models are used indirectly to calibrate the inputs to the GTEM model.

Note: Solid arrow indicates direct transfer of results as an input/output. Dashed arrow indicates use of results for calibration. GTEM does not take input from the agriculture model but does take input from the forestry sector.
Source: Treasury

Appendix C2 Scenarios

The modelling investigates the future economic and emissions outlook for Australia. The future level of the carbon price is uncertain. Assumptions about the level of international action and the extent of international permit trading are important determinants of the level of Australia’s carbon price. These assumptions also affect the prices of the goods Australia imports and exports, and have implications for energy exports in particular.

Two international action scenarios are modelled. They assume the world takes action to stabilise atmospheric concentrations of greenhouse gases at levels at either around 550 or 450 parts per million carbon dioxide equivalent (ppm CO2-e) in the long term. These international scenarios form the backdrop for the domestic modelling. Further detail is provided in Chapter 2 of The Treasury and DIICCSRTE modelling report.

As outlined in Chapter 10, assumptions regarding policy settings are especially challenging, as Australia’s climate policy settings are currently being revised. The Government has indicated it intends to repeal the carbon pricing mechanism and implement its Direct Action Plan to reduce Australia’s emissions. The policy details of this Plan are in development and the Authority has not speculated on the design. The modelling therefore assesses the economic impacts of achieving different targets in the context of the current legislative settings.

Economic activity and emissions are projected for three scenarios with carbon pricing and the Carbon Farming Initiative (CFI), and one scenario in which there is neither carbon pricing nor the CFI. The Australian carbon price scenarios are further outlined in Box 10.1 of Chapter 10 and The Treasury and DIICCSRTE modelling report.

The international scenarios form the backdrop for the domestic scenarios (as outlined in Table C.1). The ambitious international action scenario forms the backdrop for the high scenario. The carbon price is sufficient to drive the cuts in global emissions required to limit the probability of global average temperatures rising more than 2 degrees Celsius above pre-industrial level to 50 per cent. The medium international action scenario forms the backdrop to the medium and low scenarios; the lower carbon price drives more gradual cuts in global emissions, resulting in additional warming.

Table C.1: International and domestic scenarios modelled

International action scenario

Domestic action scenario

Ambitious action – stabilisation around 450 ppm

High scenario

Medium action – stabilisation around 550 ppm

Medium scenario*

Medium action – stabilisation around 550 ppm

Low scenario

Medium action – stabilisation around 550 ppm

No price scenario

 

*Referred to as ‘central’ price scenario in The Treasury and DIICCSRTE modelling report.

The high, medium and low domestic action scenarios assume Australia has a fixed carbon price in 2012–13 and 2013–14, then moves to a flexible price. A sensitivity analysis on the medium scenario is also modelled, with a fixed price in 2014–15 and a flexible price starting in 2015–16, in accordance with the current legislation. This changes emission levels in 2014–15, which affects the cap calculations presented in Part E and Appendix E. However, it has no material impact on the economic results, so it is not used further in the analysis in chapters 10, 12 and 13.

DIICCSRTE engaged consultants to undertake detailed modelling of Australia’s electricity, transport and agriculture sectors. The consultants also undertook a range of sensitivity analyses for each sector. Further detail on this modelling is provided in the consultants’ reports published on the Authority’s website.

Appendix C3 Emissions data

Historical and projected emissions for the period 1990 to 2030 are taken from The Treasury and DIICCSRTE modelling report.

In the modelling, historical emissions data for the period 1990 to 2011 are based on the 2013 National Greenhouse Gas Inventory report 2010–11 (DIICCSRTE 2013a); these have been converted to CO2-e values using global warming potentials (GWPs) from the Intergovernmental Panel on Climate Change’s (IPCC) Fourth Assessment Report (AR4)to permit simple comparison over the full period. For 2012, historical emissions are based on preliminary estimates of the National Greenhouse Gas Inventory, with the exception of waste and land use, land use change and forestry (LULUCF) emissions, which are modelled estimates.

Historical emissions for LULUCF for the period 1990 to 2012 are adjusted to be based on an estimate of emissions consistent with the new accounting rules agreed for the second commitment period of the Kyoto Protocol. Emissions data for the period 2013 to 2030 are modelled estimates.

Appendix C4 Australian action in a global context (Chapter 5)

The modelling is used to inform part of the analysis of countries’ targets presented in Chapter 5. The modelling is used for figures 5.1–5.4 to compare countries’ 2020 targets with their projected business as usual emissions. The business as usual emissions as estimated from the GTEM reference case for some countries, and the domestic emissions for Australia are estimated from the domestic no price scenario from MMRF. All Australian population estimates are from GTEM. Further information on the other data used for the comparison analysis can be found in Appendix B.

Appendix C5 Timeframe, form and scope of Australia’s emissions reduction goals (Chapter 8)

Net emission reductions from forest management and the election of optional land-use activities from bottom-up modelling undertaken by DIICCSRTE are used in Chapter 8 to calculate the implications of land sector accounting changes for Australia’s 2020 target.

The impact on the 2020 target is calculated as follows:

  1. The total additional emissions reduction over 2013–2020 provided by land sector accounting changes (accounting for activities under Article 3.4 of the Kyoto Protocol and forest management) is calculated as the difference between 2013 projections with and without Article 3.4 and forest management (Appendix B of The Treasury and DIICCSRTE modelling report).
  2. Projected emissions reductions are identified from Carbon Farming Initiative (CFI) projects in forest management, crop land management, grazing land management and revegetation. These are subtracted from the total additional emissions reduction in (1), giving 90 million tonnes (Mt) CO2-e of emissions reduction that would occur because of the Article 3.4 changes, regardless of policy incentives.
  3. The resulting cumulative emissions reduction from (2) is converted to an equivalent strengthening in the 2020 target that would result in the same cumulative emissions reduction over the period 2013 to 2020.

This calculation is not affected by changes in global warming potentials since the 2012 projections, as the relevant emissions are carbon dioxide only.

Appendix C6 Australia’s emissions budget to 2050 (Chapter 9)

Calculations of Australia’s emissions budget to 2050 outlined in Chapter 9 draw on the international modelling from GTEM and further information provided by the Treasury.

C6.1 Approaches to sharing global emissions budgets

Estimates of Australia’s long term national emissions budget use global population projections from GTEM. Estimates for some approaches also use GDP and/or emissions by region from GTEM. The estimates for modified contraction and convergence, and simple contraction and convergence are Authority calculations based on the spreadsheet tool used for the Garnaut Climate Change Review 2008, with updates for emissions, population and GDP from The Treasury and DIICCSRTE modelling report.

C6.2 Australia’s 2013–2050 national emissions budget

Australia’s long term national emissions budget of 10 100 Mt CO2-e is calculated as follows:

  • First, the 2000–2050 global emissions budget based on Meinshausen et al. (2009; see Chapter 3) is adjusted to remove global emissions from 2000–2012. Global emissions from 2000–2012 are estimated to be 604 gigatonnes (Gt) CO2-e, based on International Energy Agency (IEA 2012a), using linear interpolation between 2000, 2005 and 2010 data points and the annualised growth rate for 2005–2010 to estimate 2011 and 2012 global emissions.
  • Second, projected emissions from international aviation and shipping for 2013–2050 are removed, as these are not allocated to any individual country. These are estimated to be 47 Gt CO2-e based on IEA (2012b). Cumulative emissions to 2035 are calculated using a linear interpolation of aviation and shipping emissions in the IEA’s ‘450’ scenario between 2010, 2020, 2030 and 2035. Cumulative emissions from 2036–2050 are estimated by assuming that emissions from 2036–2050 grow at the IEA’s annualised rate for 2020–2035.
  • Third, Australia’s share of the resulting 2013–2050 global emissions budget is calculated based on its share (0.97 per cent) of emissions under a modified contraction and convergence approach. This is an Authority calculation based on the spreadsheet tool used for the Garnaut Climate Change Review 2008 with updates for emissions, population and GDP from The Treasury and DIICCSRTE modelling report.

The Authority will carefully monitor new data with implications for the recommended national emissions budget and reflect relevant developments in its Final Report.

All emissions in the long term national emissions budget calculation use GWPs from the IPCC’s Second Assessment Report for consistency with the original Meinshausen et al. (2009) global emissions budget. This will tend to underestimate the global and national budget by a small amount; budgets calculated using AR4 GWPs are likely to be slightly larger in CO2-e terms.

Appendix C7 Economic implications of Australia’s emissions reduction goals (Chapter 10)

The modelling is a key input to the Authority’s analysis of economic impacts. All domestic scenarios are used to assess the outlook for the Australian economy and domestic emissions, in the context of different levels of international action and carbon prices.

C7.1 GNI adjustment for the high scenario

The modelling was also used to estimate the GNI impacts of moving to a stronger target. The scenarios reported in The Treasury and DIICCSRTE modelling report assumed a 5 per cent target for the ‘central’ (referred to as medium in this Review) and the ‘low’ price scenarios, and a 25 per cent target for the ‘high’ price scenario.

To assess the impact of moving from the minimum 5 per cent target to either a 15 or 25 per cent target, the Authority requires GNI levels for a 5 per cent target for all price scenarios. The Authority therefore adjusted the GNI results for the high price scenario to remove the costs of achieving the stronger 25 per cent target, using the following method:

  • First, the cost of the additional imports was added back. A 5 per cent target requires fewer international emissions reductions to be purchased. For example, in 2020 it requires 41 million fewer Kyoto units and 76 million fewer European Union allowances (EUAs) to be purchased. This increases GNI in 2020 by $5.9 billion.
  • Second, the positive terms of trade effect was added back (this stems from lower international transfers associated with imports, and is the same effect described in Section 3.7.2 of the modelling report). This effect is 0.3 times the cost of imports, increasing GNI in 2020 by $1.8 billion.

The additional revenue impact described in Section 3.7.2 of the modelling report is not included in the modelling scenarios. Therefore, it is not included in the analysis of the high price scenario for the 25 per cent target, and so did not need to be removed for the Authority’s estimate of the 5 per cent target.

This methodology was used to adjust GNI in each year of the flexible price period. Throughout Chapter 10, the adjusted GNI for the high scenario is used.

C7.2 Calculating the GNI costs of stronger targets

Starting from the common 5 per cent target, the methodology discussed in Section 10.3.1 was used to calculate the impact of moving to stronger targets. Table C.2 shows the average annual GNI growth rate between 2013 and 2020 for different targets for each of the price scenarios.

Table C.2: Average annual growth in GNI per person 2013–2020

Target

High Scenario

Medium Scenario

Low Scenario

5 per cent

0.73

0.80

0.82

15 per cent

0.68

0.78

0.82

25 per cent

0.63

0.76

0.82

C7.3 Assessing the impact of Australia’s target on the international carbon price

A central question in analysing the economic implications of Australia’s emissions reduction goals is whether Australia’s choice of 2020 target would have an impact on the international carbon price. As outlined in Chapter 10, for this analysis we have assumed that Australia’s decision to move to a stronger target would not have a material impact on the international carbon price.

Under the current legislative settings, limits on the use of Kyoto units and the ability to bank units for future use mean the Australian carbon unit price is expected to track the European price. The majority of stakeholders consider that Australia will have little or no impact, because changes in Australian demand would not be big enough to shift the European market. The European Union emissions trading system covers roughly 2 000 Mt CO2-e (European Commission 2013), while the Australian carbon pricing mechanism covers about 300 Mt CO2-e, making the European market almost seven times bigger than the Australian market. Further, the European market currently has a substantial surplus of roughly two billion units, in part due to the sustained economic downturn. As a result, a stronger Australian target will reduce the supply of Australia’s domestic units, but have only a relatively small impact on aggregate demand for international units.

The Authority has consulted extensively on this question, including with market analysts and traders, and liable entities. Many stakeholders, including the Australian Industry Group and the Investor Group on Climate Change, indicated Australian carbon prices would be likely to follow European prices.

Some analysts consider that a stronger target in Australia would increase the international price. For example, in August 2013 Bloomberg New Energy Finance projected that Australia moving to a 15 per cent target could increase the Australian carbon unit price by an average of $7.80 (2020 Australian dollars) (€4.70) over the period 2016 to 2020 when compared to its 5 per cent scenario. Under this scenario, Bloomberg forecast an Australian carbon unit price of $80.40 in 2020, compared to $71.60 in 2020 under a 5 per cent target (in 2020 Australian dollars).

Other stakeholders suggested that the European price is largely contingent on the outcomes of proposed European Union structural reform, and finalisation of Europe’s emission reduction goals for the post-2020 period. These reforms could change the underlying demand and supply balance for EUAs, in which case additional demand from Australia may have a modest price impact.

Even if Australia’s target did have a price effect, the scale of the projected change would not be expected to materially change domestic economic activity or impacts on Australian businesses and households. Moreover, the scale of the projected change is small relative to the scale of uncertainty in the carbon price itself. In July 2013, analyst forecasts of the carbon price in 2020 ranged from roughly $6 to $80 (Bloomberg New Energy Finance 2013, RepuTex 2013) – a much wider range than any potential impact of a stronger Australian target on the international price.

The Authority has considered three carbon price scenarios spanning a wide range of possible future market conditions, which provide a robust basis to illustrate the potential costs. Table C.2 illustrates the GNI impacts for the different price scenarios, which show the potential range of impacts if Australia was to have an impact on the international price.

Appendix C8 Australia’s emissions outlook (Chapter 12 and Appendix D)

The review of Australia’s emissions outlook and progress toward its medium and long term goals draws on the four scenarios from the modelling (no price, low, medium and high scenarios) to show the scale and source of emissions reductions that may be elicited with different price incentives. The sensitivity analysis from the bottom-up models is also used in this review. The Authority’s approach to reporting sectoral projections is outlined below.

C8.1 Integration of sectoral and economy-wide model projections

C8.1.1 Emissions levels

The Authority has used emissions levels as reported in The Treasury and DIICCSRTE modelling report for all sectors for the period 2013 to 2030.

The approaches used to estimate sub-sector level emissions depends on the level of detail available from different models:

  • for transport, agriculture and electricity (for example, emissions from coal-fired electricity generation), the Authority has used sub-sector ratios from the sectoral models to apportion emissions; and
  • for all other sectors, sub-sector emissions are based on information from The Treasury and DIICCSRTE modelling.

C8.1.2 Timeframe for projections

The Treasury and DIICCSRTE modelling provides emissions projections for the period 2013–2030. The sectoral models provide emissions projections from 2031 to 2050 for electricity, transport and agriculture.

As evident from The Treasury and DIICCSRTE (2013) modelling report and the consultants’ reports, there are small differences between some of the projected emissions from the sectoral models and the projected sectoral emissions from MMRF. For consistency over time, where appropriate the Authority has derived emissions from electricity and transport for the period 2013–2050 by applying the growth rates from the sectoral models to the level of emissions in 2030 from The Treasury and DIICCSRTE modelling report. Other sector emissions, and economy-wide emissions are not projected beyond 2030.

C8.1.3 Additional subsector detail

Some activity and any additional subsector details (for example, fuel shares) have been sourced from the sectoral models, and The Treasury and DIICCSRTE.

  • Electricity supply mix is based on ACIL (2013) using as generated gigawatt hours for projections, and BREE (2013) for historical disaggregation.
  • Transport fuel use and modal shares are based on CSIRO (2013) for projections, and BITRE (2011) and BREE (2013) for historical disaggregation.
  • Agriculture activity is based on CIE (2013).
  • Direct combustion activity is based on The Treasury and DIICCSRTE modelling report emissions data, and National Greenhouse Gas Accounts (DIICCSRTE 2013b) rebased to AR4 GWPs.
  • Waste production activity is based on data sourced from DIICCSRTE.

C8.2 Method for attributing changes in emissions since 2000 due to changes in activity or emissions intensity

The Authority developed an approach to attribute estimated changes in emissions over a period between simultaneous factors, such as between a change to activity level and a change to emissions intensity. The results are presented in Appendix D. This approach has been used for electricity and transport sectors only. For all other sectors, changes in emissions are based on absolute emissions changes and do not distinguish the contribution of changes in activity from changes in intensity.

Activity levels and emissions intensity at the start and end of the period are used as reference points. The year 2000 is used as the primary start point, as it is the basis for Australia’s national emissions reduction goals.

The method is designed to:

  • facilitate analysis of the factors contributing to changes in emissions, and highlight the largest contributors;
  • ensure all changes in emissions could be attributed to contributors without double-counting; and, as a result,
  • be additive, so that the sum of changes attributed to each contributor is equal to the total change across all contributors, and the sum of changes attributed to consecutive time periods is equal to the total change from the start to the end of the whole period.

Figure C.2 illustrates the method, apportioning a reduction in emissions between lower activity and lower emissions intensity.

Figure C.2: How changes in emissions are quantified and attributed

This figure is an illustrative example of how changes in emissions in the electricity sector over time are quantified and attributed. It shows emissions intensity (tonnes of carbon dioxide equivalent per megawatt hours) on the y-axis and electricity demand (terrawatt hours) on the x-axis. In the reference case, electricity demand is 249.5 terrawatt hours and intensity is 0.835 tonnes of carbon dioxide equivalent per megawatt hours. In the comparison case, electricity demand falls to just below 248 terrawatt hours and emissions intensity falls to just below 0.8 tonnes of carbon dioxide equivalent per megawatt hours. 9.2 megatonnes of carbon dioxide equivalent of the emissions reduction is attributed to the reduction in emissions intensity, and 1.3  megatonnes of carbon dioxide equivalent is attributed to the reduction in demand.

Figure C.2 compares demand and supply intensity in a given year against a reference year. The total change in emissions is represented by the area between the reference and comparison curves – in this example, 10.5 Mt CO2-e. Part of the change is attributed to the small reduction in demand: 1.3 Mt CO2-e. The remainder is attributed to the reduction in supply-side emissions intensity: 9.2 Mt CO2-e.

Appendix C.9 Caps for the carbon pricing mechanism (Chapter 14 and Appendix E)

The caps calculations presented in Chapter 14 and Appendix E draw on the emissions projections from the modelling. Details of the scenarios used and associated calculations are provided in Appendix E.