Events and speeches

Transcript: Low-emissions technology and the innovation challenge

12:00 pm, Wednesday 23 March 2011, The Westin, 1 Martin Place, Sydney.

 
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MARTIJN WILDER;
Thanks very much Susan. Well welcome everyone to today's lunch and thanks very much for coming. It gives me great pleasure to introduce to you today Professor Garnaut who's going to present to us the seventh of his eight reports.

As you'll know last week's report was dealing with carbon pricing and the report coming out next week is on electricity markets so they're both very topical reports that will no doubt get lots of attention.

But today's report is equally important. It's looking at low emissions technology and the innovation challenge and we'll hear some interesting comments about that.

As many of you know, Professor Garnaut has been advising the government for some time now on the design of an adequate policy response to dealing with climate change. Professor Garnaut is now a Vice Chancellor's Fellow and Professorial Fellow in Economics at the University of Melbourne.

I just want to reflect on one comment which Ross made on Lateline a couple of nights ago when he was asked about the context in which he was presenting his current findings.

I think the comment Ross made was that in many ways the fundamentals of what he's talking about haven't really changed. Since the beginning Ross has talked about the need for action on climate change. The fact that the longer we leave it the more expensive it will become and that really the main tool through which we should do this is a cap and trade scheme.

The thing that is really changed around Ross and around the independent advice he's been given is the political context which has really gone from one which was a bipartisan approach to dealing with climate change, to one that is now relatively contentious.

So on that note it gives me great pleasure to hand over to Ross to present his report. Thank you.

ROSS GARNAUT; Thanks Martijn. Thanks Susan. It's good to be back at CEDA. I was here a couple of times when I was doing the first climate change review a few years ago and I've been talking at CEDA functions for about three and a half decades I think.

Especially good to be with you in the middle of what's turning out to be a vigorous discussion in the Australian community about what we do about climate change. This is, as Martijn said, the seventh of eight update papers of my review on particular topics.

The last of the series is next week and then I've got a couple of months to absorb the feedback from the community, very welcome to contribute to that and I give my final report to the Prime Minister at the end of May.

It might be useful just to very quickly go over the papers so far, just to mention some of the big issues that have been discussed since each of the presentations.

The first paper, first updated paper was on the decision making framework. I tried to put a bit of rigour around the way we look at this question. It's a very big and complicated question, it's very easy to get tangled in corners of it.

Very hard to have a disciplined logical approach to decision making. I set out that framework and I've been pleased at the feedback from that paper. It's been broadly confirmatory of the approach even when some people have sought to criticise parts of the later conclusions I reach within that framework.

That's exactly what we have to do. We have to have rigour, have to insist on good information, logical consistency and we should be debating about those things, not debating slogans.

The second paper was about the international context and that's important because we'll never solve this climate change problem except through all major countries making major contributions and in Australia, Australia more than anywhere else I know, there is a tendency to slide into the slogan.

"No one else is doing anything", or "we're small, why should we do anything when no one else is doing anything?" "Why should we get ahead of the field?" I carefully went through what is happening in the rest of the world there and it's quite clear that we've got to move a long way before we've caught up with the pack.

There's no risk of us getting ahead of the field and that's true obviously when you look at the half billion, high income people of Europe. Half the people in the developed world who've had an emissions trading scheme for quite a while and that's been effective in changing the trajectory of emissions growth.

But it's true also in the countries that we take comfort from when some of us say other countries aren't doing much. I look carefully in that paper at what actually is happening in China and the United States.

A lot is happening. In fact, if you take as your base business as usual, what would happen if there was no policy change to take account of the imperative of climate change, energy efficiency, reduction in emissions, the biggest change of trajectory in the world is in China.

It's a complicated story when you've got ten and a half per cent growth at China's stage of development. Then you can be doing an awful lot and imposing high costs on your community to reduce emissions a long way below business as usual and for a number of years absolute emissions can still be growing.

But don't kid yourselves that China's not doing anything. China's doing a lot. It's done much more to move itself away from business as usual than Australians have.

The United States' story is important too. There's been a lot of publicity here, true enough about the disappointment of the Obama administration in no longer being able to contemplate progress through the Congress, through the House of Representatives for a bill on emissions trading.

But they've kept the target that they put on the table at Copenhagen and Cancun, reducing emissions by 2020 by 17 per cent below 2005 levels. That corresponds to 16 per cent below 2000 levels.

And they're very serious about that. And they're doing it in regulatory ways. It happens that we could reach equivalent targets much more cheaply if we did it through market orientated ways, putting a price on carbon rather than regulatory ways.

Obama and his senior people, and I've spoken to people who report directly to the President on these things, know that they could do it much more cheaply. They could reach their target much more cheaply if they did it through an economy wide price on carbon but they're having to do it in a high cost way because the low cost path has been blocked.

And a point I made in presenting the carbon pricing last week was that just because the American House of Representatives has shot America in the foot, it doesn't create a case for us shooting ourselves in the foot. We can reach similarly ambitious targets through a cheaper method and that makes sense.

The third paper was on global emissions trends and the main message coming out of that is that we've got a colossal task.

I've, in a number of contexts; I've called the acceleration of economic growth since the beginning of the 21st century the platinum age because it's the period in world economic history when very large numbers of people from the populous countries in the developing world have entered the process of modern economic growth.

It's a wonderful period. Wonderful for someone like me who's spent a lifetime working on global development and Asian development but the other side of that coin is that there's very strong momentum in emissions growth. We've got a big task, an urgent task if we're going to deal effectively with climate change.

The fourth update paper was on the land sector, transforming land use in Australia. And there, there was a lot to update.

There's been a lot of research in Australia in the last few years on the opportunities for bio-sequestration, sequestering carbon in the soils, the pastures, the woodlands, the forests of Australia.

And the potential is very large. We will not know how much of that potential we can realise until we put the incentives in place and we see how land owners and farmers respond to those incentives.

The key incentive is to link the incentives for investment in sequestration in the land sector to a system that puts a price on carbon, that gives full value to the farmer for carbon that's sequestered.

I pointed out in the paper that if ten per cent of the technical potential that's been identified by the CSIRO were utilised then we'd have, by 2020 an industry as big as the Australian wool industry. We would have added another wool industry to the rural sector.

I noted in the discussion of the carbon pricing paper last week that on the parameters that I put into the carbon pricing paper, putting some limits on credits that could be sold into the scheme from the land sector, that would be enough to fund an industry as big as the wool industry.

The fifth paper two weeks ago was on the science of climate change. I pointed out that here we were living through an awful contest between knowledge and ignorance. I noted the strange dichotomy between the science getting firmer, clearer, more confident about the dangers of climate change and Australian public perceptions weakening on all of that.

I speculated a little bit about why that might be the case. I commented that a little bit of it might be the response of a strange sense of balance in parts of the Australian media; a balance of words rather than a balance of knowledge and authority.

Well in this great contest between knowledge and ignorance we will see outcomes that are of great importance to the future of our civilisation. It's not the first time we have had contests between knowledge and ignorance that have great significance for the future of our civilisation.

But this is certainly one of them. It is a great contest between the academies of science of Australia, the Royal Society of the United Kingdom, the academies of science of the United States, France, Germany, India, China, Russia. Between the academies of science of all of the countries of scientific achievement on the one side and the shock jocks of Australia on the other.

In our country and other high income countries the judge will be the democratic polity. This is a test of our democracy.

The sixth paper last week was on carbon pricing. I made the point that economy wide carbon pricing is the centrepiece of low cost mitigation.

I think it's a point that most of us understand by now, but I went through the basic logic again. I also made the point that when you put a price on carbon the money doesn't just disappear. It's available for other uses and one of those uses can be reduction in the distortionary costs of the tax system.

That's quite a legitimate use of the funds. There has been quite a lot of discussion of that over the past week, but the points that I made are there in the economic literature of climate change mitigation from the beginning.

They are standard points, well accepted and using a substantial part of the funds to improve the efficiency of the tax system is good for the environment and good for the productivity of the economy.

Then another issue that has been much discussed in the past week since that carbon pricing paper is the treatment of emissions intensive trade exposed industries, including some comments from a well known Australian steel maker yesterday.

Well, welcome to the public discussion, it's good to have these issues discussed in a transparent, open way; this is a step forward. Let's judge facts, let's judge logic, let's judge knowledge on their own merits. If we step back, look at the quality of arguments on their own merits then that will be helpful to a good policy outcome.

I will just make one further point. Getting this issue right, the appropriate level of assistance for trade exposed emissions intensive industries is complex. The principles are simple, and I set out the principles first of all in the review in 2008 and discussed them again in last week's paper.

We will only get good outcomes if they are administered by an independent authority. I say an independent authority like the Productivity Commission reporting to an independent regulator of the carbon pricing system.

The independent regulator would need a lot of authority in the use of funds. There are simpler ways you could do these things, but all of the simpler ways will get us into economic efficiency and to tangles in our policy-making processes.

We will take a little bit of time to get things exactly right. We can use interim processes along the way because it will be very costly if we leave the starting of a carbon pricing system any longer; if the delays are even greater than they have been.

But we have to have a very clear goal of movement towards what I have defined as the economically efficient approach to assisting trade exposed industries. In the end that economically efficient way, administered by an independent authority, will be the least distorting to our political processes.

Then next week I'll release the eighth and final paper in this series, "Transforming the Electricity Sector." But today it's "The Innovation Challenge."

Well carbon pricing is not the whole mitigation story and on its own it will not deliver the lowest cost abatement. The carbon price will provide important incentives for innovation and there's no more important incentive for innovation than the carbon price.

But new technologies have the power to significantly affect the cost of a global effort to mitigate climate change and also to significantly affect the cost to Australia. You don't get an optimal level of private expenditure on innovation without sound supporting policies.

There will be many opportunities for cost reducing innovation right across the economy. Obviously in energy and electricity generation, in the paper I tend to take examples from that sector. But don't take that as an indication that I think other sectors are unimportant in innovation.

There is big scope for innovation in transport; in fact we are already seeing that happening more quickly than I had anticipated. In urban planning and design, in agriculture, forestry and bio-sequestration more generally, in manufacturing and in mining.

As I have talked to business leaders in each of these sectors and talk about what the response might be to the combination of a carbon price and properly structured support, fiscal support for innovation, usually a good business leader will have a lot of things that she or he has already thought about that would be candidates for innovation.

In a chat with Ian Smith, the former chief executive of Newcrest and through a period until late last year, chairman of the Mining Industry Council, my raising these issues sparked a very interesting conversation as he went through all the innovative ideas that had come up when he was head of Technological Services at Rio Tinto, that all had elements of risk and he might have had a chance of getting them over the line if there had been appropriate fiscal support for innovation.

Why is fiscal support necessary for innovation? Because the firm that is first in the market with the application of a new idea takes risks that change everyone's knowledge of the possibilities of the technology. It spends money on learning things that everyone benefits from.

It's a well known clich? in business that you never want to be the first with a new technology, that you want to be the second. You want to see and learn from the mistakes of those who get in first. Well the only way the private markets will deliver a socially optimal level of innovation is by there being fiscal support for those who are genuinely innovating.

There are two important dimensions of innovation in Australia that require support, the early application of technology as developed abroad and early stage research and development of technology in areas in which Australia has comparative advantage in research and strong national interest in successful application of the ideas.

Well, there are very good reasons why innovation, in general, should receive public support and we have economy wide mechanisms for doing that. We've had research and development incentives in the tax system for a long time. Following the Cutler Review, they've been reformed and there's legislation either just come before the Parliament or about to come before the Parliament turning those old research and development tax deductions into tax credits which don't depend on the recipient being a tax paying entity. They're all, I think, very productive developments.

But why do we need something special in the low emissions area, why not just rely on the general mechanisms for research, development and commercialisation of new technologies? The reason is that we need a lot of technological change fast in this area of reduction in emissions. We're going to see a big change in relative prices - I hope we're going to see a big change in relative prices - with the introduction of a carbon price.

Immediately there will be stronger incentives to reduce emissions right through the economy. There'll be a greater need for innovation than there is generally in the economy, simply because we have to adjust to a large recent change in relative prices and opportunities. That's why, on top of the normal support for research and development, there's a case for transitional support, over a transition of a decade or so for innovation in the area of low emission technologies.

In the paper, I talk about the different parts of the innovation chain, starting with basic research, pure research going all the way to being the first firm to commercialise, on a commercial scale, a new technology. In designing government innovation policy, we have to take account of the different characteristics of innovation along that chain.

The role of government and of government funding support is different at different stages in the innovation chain. At the basic research end of the chain, there is no alternative to governments and independent experts on behalf of governments, taking decisions on projects into which public finances will be allocated because we are dealing with public goods.

At this end, market forces cannot drive Australia's public and private research organisations towards the most beneficial projects. Here, government will obtain the best results if it entrusts the task of selecting basis research projects to a well equipped independent body that is able to allocate finite resources towards areas of research. Those areas should be where Australia has a strong research capability and, secondly, where the research, if successful, will generate large national benefits.

At the demonstration and commercialisation end of the innovation chain, government can rely on market processes to pick those projects that have the best chance of success. Those which are likely to generate large gains if successful and which are therefore most worthy of taxpayer support. Good governance and simple criteria are of central importance to this approach.

So we can be quite certain from experience in other areas where we've had sudden changes in relative prices that the cost of new technology will fall with time and experience. But forecasting the rate of change is another story and we can see the complications of that by just looking at what's happened to energy technology costs across the world in recent years. There's been a surprisingly rapid reduction in costs of most of the low emissions technologies as a result of the big increase in commitments of government funds for research around the world, as part of stimulus packages through the great crash of 2008.

That's been a very important part of the European packages, the Chinese stimulus packages, the Japanese and Korean stimulus packages, a very important part of the American stimulus packages. For the world, as a whole, there's been expenditure on research in low emissions technology as a result of the stimulus packages in response to the great crash reversed a 35 year decline in investment in the world, as a whole, in low emissions energy technologies.

That's starting to pay off and in the United States, Steven Kennedy, the head of my secretariat and I, received briefings from the energy department and elsewhere on progress and that is changing technological opportunities. In addition, the increase in scale of investment in low emissions technologies is bringing down costs rather more rapidly than the proponents of the new sources of energy had expected.

Here, the most impressive developments are in China simply because this is where you've had the biggest scale of investment in the low emissions technology. You see the developments right across the space of low emissions technologies, in the purely energy sector, the costs of photovoltaic solar have come down dramatically as scale has increased.

It's partly simple economies of scale but it's partly the benefits of learning by doing - you get better at things, you find ways of doing things more cheaply as you do more of them. There's been a very rapid rate of reduction in the cost of nuclear technology in China and a lot of the gains seem to be associated with the increased scale of investment in nuclear, where they're able to put more and more of the components effectively onto an assembly line, getting away from the high costs of batch engineering where you built the component for one plant, the engineering team goes away and when you need another one, you bring the team together again.

Well, they're now developing nuclear plants on a scale where the production can be continuous and costs are coming down dramatically. But in other spheres as well, away from energy, developments have been more rapid than we were anticipating. For example, in the modelling for the review a few years ago, we had technological assumptions that led to about fourteen per cent of the Australian transport market being supplied by electric vehicles, by the middle of the century, by 2050.

Well, it's now clear that the technological developments are running way ahead of that. Partly because in response to climate change concerns, there's been a considerable tightening of emissions standard regulatory approaches, high cost approaches in Europe, Japan, America, China. China had far more restrictive emissions standards in cars than Australia does, for example.

In all of these countries, that's been one of the sources of pressure for electrification. Also, there's recognition that whichever of the car companies wins the race for truly competitive electric cars, wins the race for the future of motor vehicle production and so you get investments for the future. Notably in Japan and China but also in Europe and the United States. As a result, those assumptions that were in my modelling two and three years ago, are already looking outdated.

Of course, it will take the combination of electrification of transport and the decarbonisation of electricity to take the emissions out of transport. But the world is making rapid progress.

So across a lot of these technologies, costs are falling rather faster than we expected. But in Australia, and for this update on innovation, we commissioned papers from the CSIRO and the Australian Academy of Technological Sciences and Engineering, and costs haven't been falling in the same way. When you dig down into that it's because we've been going through a once in a century resources boom, which is raising costs generally through the economy and especially for a lot of the inputs into these advanced engineering projects, the capital costs of doing new things that require advanced engineering have risen a lot in Australia because of the resources boom.

Across a lot of that technology - for Australia but not for the rest of the world, that has outweighed the effect of falling basic technological costs. But that will be a temporary process and one can expect the continuation of advance of falling costs of new technologies in Australia, as in other countries.

I've got case studies of a number of technological developments in a number of sectors in the paper. I won't go through those in detail here, but you might be interested in the assessment of what's happening to carbon capture and storage, to solar energy, to biofuels, to electric vehicles.

Well, I'll move now to recent improvements, the Australian innovation policy system. I've mentioned the Cutler Review and the policy response to that. I think that that's a big step forward. Another major development since 2008, since my climate change review, is the development of new sources for low emissions electricity, derived from both renewable sources and low emissions fossils fuels, which have received a boost in government support, primarily as part of the five billion dollar Commonwealth Government's Clean Energy Initiative.

The paper analyses what has happened with that. A lot of these have moved rather gradually and we're yet to see the fruition of some of them. But I think we're heading towards worthwhile outcomes in the most important of the initiatives. That will prove to have been a productive enterprise. Details of that are in the paper. There may even be an opportunity for increasing funding, increasing the scale of some of the projects identified in the programs that are already underway.

But for the future, what I am suggesting is that we give incremental funding for commercialisation. Once these other programs have properly run their full course, that in the future we fund projects through a process that's more technology neutral, that looks across the whole range of low emissions technologies, that's driven very much by private demand. So long as the criteria, the appropriate criteria for innovation, for low emissions technologies are met, then there will be an entitlement for funding.

That will need to be governed by an independent body with the right expertise. The Australian Centre for Renewable Energy provides a model that can be developed into the sort of governing council that can play this role.

The paper has a very strong emphasis on the importance of good governance, of clear and simple objectives, of clearly defined instruments for support, simple program criteria, and the paper recommends that we should get away from the idea of tendering in a series of rounds for funding for particular projects, so that you've got a continuous project when someone's working on a good project and it's reached the stage where investment decisions need to be made.

They know the rules. They can go to the independent agency with an expectation of funding, rather than sitting around, waiting for the next round of competitive funding. It's also important that once the new schemes are put in place that there is continuity of funding. There's been too much chopping and changing in the past.

So the package of measures that I have in mind for the future is, first, there needs to be a substantial increase in funding of research and development and commercialisation of new technologies, in Australia and in the rest of the world. We'll get benefits, big benefits for ourselves from doing this, but we'll also be making a contribution to the rest of the world. We should be doing what we do in a way that actually tells the rest of the world that we're pulling our weight.

At the research and development end, the basic research end, we can probably accelerate the rate of funding rather faster there, because we've got the capacity in existing research institutions and the universities, in CSIRO and elsewhere. The increase in funding should be directed very much by criteria of our comparative advantage in research and our national interest in the success of various technologies.

It will take a little while to put in place the technology neutral broader arrangements for funding of innovation at the commercialisation end more generally. In the meantime, we can be completing those projects that are already covered by existing government projects.

I'm suggesting that our share of - Australia's share of a global - of an appropriate global commitment to low emissions technology would be to spend in the region of two to three billion dollars per year.

It's not all that easy to actually calculate exactly how much the existing funding is, but taking a reasonable expectation of the average level of funding from established programs, both the special programs related to emissions that have been put in place the last few years, the basic research that's going on through the research and development corporations in rural areas and the universities, state governments and so on. I think in aiming for about two and a half billion, we'll probably be looking for about a doubling of the level that would follow from extrapolation of estimates from current programs.

A third element, institutional element of funding for innovation that I'm advocating is that especially given the importance of bio-sequestration, of sequestration in the land sector, that the industry-based research and development corporations should qualify for a higher ratio of government support, matching government funding, if they are in the low emissions space. That could be particularly important in gearing up the rural areas of Australia to take full advantage of the opportunities created by linking bio-sequestration to the carbon pricing arrangement.

So, technological change can substantially reduce the costs of global and Australian transition to a low emissions economy. We cannot anticipate the precise shape of the technological change, but we know that there will be lots of opportunities. We will know that the ingenuity of the market, of firms and individuals acting in a million ways, will give us a high rate of innovation and a substantial reduction in the costs of mitigation.

This is what happens when you put in place the right incentives. The right incentives include appropriate support for research, development and commercialisation of new technologies, funded out of the carbon pricing arrangements. Thank you.

MARTIJN WILDER;
Thanks very much, Ross, for that presentation. We've now got time for questions. I'll just ask for those who do have questions to raise their hand. Also, if you could just speak into the microphone that will come to you and say your name. Keep it to one brief question or comment.

While the microphone - we've got a first question here - comes over to Simon, I'd just like to ask, Ross, one of the things you didn't mention is actually where a lot of this funding comes from. And one of the issues that's been put on the table in Europe is that fifty per cent of the auction revenue from phase three gets put into innovation. That seems to be quite a significant political issue, which the Greens are pushing at the moment. Did you just want to comment on the extent to which some of the money which, rather than a tax deduction, may be set aside for investment innovation that's raised from auction revenue?

ROSS GARNAUT;
Well, as I said at the end, Martijn, I see the increment in funding, above what is provided by other programs, as coming out of the carbon pricing. Say we were aiming at the mid-point of that two to three billion, we were spending two and a half billion on research development and commercialisation of new technologies, so that will be between a fifth and a quarter of early revenue. We won't get there immediately, the demand especially from the commercially-related activities will build up gradually over time. It might take five years to get up to that two and a half billion.

About half of that funding is committed already and I wouldn't envisage taking existing funding away, so the increment to be funded out of the carbon pricing would be - the arithmetic needs a lot more work and it will get a lot more work. In fact, arithmetic on all the budget matters will receive a lot more work by May 31 but we're looking at around about one-and-a-quarter billion a year of extra funding once the scheme is fully operational, fully utilised, in about five years' time.

I think that ratio of public expenditure on research and development, about a fifth of - in total quantum of revenue, although some of it is funded separately in the budget because it always has been, is appropriate. I think that would give us a research, development and commercialisation effort in Australia that is scaled appropriately to our economic size.

SIMON SMITH;
Thanks Ross for your speech. My name's Simon Smith from the State Environment Department. Ross, I guess, what I've seen in the UK and in parts of the United States is the setting of forward stretch regulatory standards for various things such as future buildings being low or zero carbon or future appliances having to meet certain levels of energy efficiency. Have you thought about the role of stretch standards as being part of the package to encourage innovators to bring forward new goods and services?

ROSS GARNAUT;
Generally, Simon, I focus on two main instruments for mitigation. Putting a price on carbon which introduces - strengthens the incentive to do all those other things, and where there is genuine innovation, where others learn from what you're doing, fiscal support through the mechanisms that I've just been talking about and they will be available for innovation and building right across the economy.

There is a role for regulation. The reason we have a carbon price, because there's a market failure associated with the external costs of greenhouse gases. The reason we're suggesting support for innovation, fiscal support, is that there's a market failure related to the leakage from the private investors' arms of - a lot of the benefits of knowledge goes to a lot of competitors.

One can identify genuine market failures in areas covered by the examples that you gave. Principal-agent problems which reduce incentives for renters of property to put in energy-saving arrangements, it'll also weaken incentives for those who are renting properties. Sometimes regulation can break through that.

There are information externalities. It costs a lot for an individual, especially a smaller firm or an individual, to learn what's best in the information area - emissions reduction area, so there's a case for regulation. I'm generally rather cautious about it because you can make a lot of mistakes but let me just say that if the work's been done carefully, if whoever's implementing the regulations is being quite transparent about the costs that the agency is imposing on the rest of the economy then you can get some additional benefits from that approach.

TIM BUCKLEY;
Tim Buckley from Arkx. Professor Garnaut, congratulations on your work. I think it's great. Just a question, going back to your earlier comment about ignorance, we're seeing the scare campaign from industry looking for compensation. The more money we give to compensation we've got less to fund innovation and tax cuts so could you maybe reflect on the evidence? We've had a decade in Europe of an ETS, what is the level of damage done by a decade of an ETS in the European markets to industry? Are you able to...

ROSS GARNAUT;
There have been a number of very careful studies of the question of carbon leakage. Carbon leakage is a rather specific phenomenon where because you're putting on measures that no one else is putting on. If you're in that situation, and Europe was in that situation seven years ago. Australia won't be in that position today but if you were in that situation there is a possibility that economic activity will go to countries which doesn't have similar controls, so similar constraints and that will lead to a total increase in global emissions.

Well, that's been studied carefully in Europe. It's been recognised as a result of careful studies that quantitatively that's much less important than is usually considered to be the case but there are examples of it. Overall it's small.

My approach to that would be to get the principles right for assisting trade-exposed industries. There is a case for it. The important thing is to get the principles right and to have the principles administered by an expert body so that it doesn't become just a political pressure shop. We've had enough of that sort of allocation of resources in Australia. We had it for eight decades with protection. It gave us the worst performing economy in the developed world in terms of productivity growth from 1901 effectively until the mid 80s, until we cleaned it up.

We don't want to go into all of that again. Sorry, equal worst performing with New Zealand over that period. I've set out the right principles in the paper last week. I've recommended an independent process for implementing that. I've suggested interim arrangements for the next three years which are in line - which are a modification of what the Government had proposed for the CPRS.

I think if all of that is done one can be confident that there would not be significant economic loss as a result of carbon pricing and therefore there'll be no legitimate case for making a noise that's resistant to carbon pricing on these grounds.

JULIEN VINCENT;
Hi Professor Garnaut. Hi Martijn. Julien Vincent from the Greenpeace Australia Pacific Climate Campaign. Thanks very much for the talk. I did want to first clarify one aspect. Clarify one aspect which was you said that current programs should run their full course initially. Do you still envisage carbon price revenue being put into a fund or a bank initially from 2012 onwards? So that's the first clarification, and just as an indication, can you give us some sort of idea of what you think that over the next 10 years or so we can achieve by using this amount of private money in terms of - sorry, public money in terms of leveraging private finance and the sorts of gains technologically and economically we can achieve through low emissions technology?

ROSS GARNAUT;
Yeah, thanks. I certainly wasn't suggesting going - running dead on the new programs for a number of years. I'm suggesting moving as quickly as we can and I'm saying we can move immediately on some increased support; substantial increased support for basic research because the institutions that do that work are capable of handling more resources so we can get straight on with that. It may take a while for some of the other programs to build up.

Now, it's in the nature of innovation that you can't predict precisely what will happen. That's why it's innovation. From my experience of economic development in lots of places, I'd be pretty confident in saying if we get the incentives right we will be surprised at the progress. It will be a positive surprise.

I remember in the old debates about protection and those of us who were arguing for dismantling of the Australian system of protection and arguing against 80 years of Australian history, we would refer to the economic models that showed certain very clear gains in economic performance.

Well, what actually happened here once we got rid of protection was we moved much faster. We got much bigger gains and that was consistent with the experience of many other countries and the general lesson is that if you put in place clear incentives so businesses can respond to clear market signals they respond quickly and productively and find new ways of doing things.

Firms that have spent 80 years arguing that they can't change for 20 years, given the right incentives, will find ways of changing very quickly, and finding managements that can do that if the old management can't do it.

So, we can't predict precisely but one thing's pretty clear; is that all of the low emissions technologies are at a relatively early stage of technological development, at the stage where you get big reductions. Not as big in wind as others, because wind has been around for longer and we've already had a lot of those gains, although you're starting to have the Chinese bring to bear more productive manufacturing techniques and that's bringing down costs. So we haven't quite cracked the codes of Danish and German technology yet, but I presume that that will come.

I've mentioned nuclear and solar. I think in Australia we might be surprised at how much gain we get from investing properly in bio-sequestration. I go back to all of the elements of my paper number four, which included recognition of the co-benefits of promoting biodiversity and carbon sequestration. If the incentives are right we might be surprised at how quickly that goes and we will need to undertake research to find out the best ways of doing things.

There are some areas of potential low emissions technologies where if we don't do the basic work they might not be done well anywhere in the world and these happen to be areas of great opportunity.

All of the areas based on - the carbon farming areas are based on Australia's great strengths in biological sciences. We also have great strength in the geophysical sciences, so the geothermal power, the geo-sequestration. Australian innovation is going to be very important in determining how well the world goes in both of these areas, but I'm not going to predict precisely what's going to win and what loses. We can look back at what the market did in ten years' time and then we'll know.

MARTIJN WILDER;

One final question over here. Rob?

 

AUDIENCE MEMBER;
Thanks, Professor Garnaut, for your talk today. You touched on some of the structures that are appropriate to drive innovation when it's publicly funded early stage research. I think you, and probably others in the room, are familiar with DARPA, the Defence Advanced Research Projects Agency, a US phenomenon which came up with some useful things like the internet.

They've recently created ARPA-E to address the energy innovation challenges. These structures are quite different to what we have right now in terms of how research is funded and identified and the continuity of the research. Do you see a role here in Australia for an ARPA-C on climate or some sort of similar approach which changes the way the research is funded and allocated and driven?

ROSS GARNAUT;
I think if you look closely at our proposals you'll see a bit of the DNA of that and other US, especially US energy, programs. So, yes, I think there are things we learn and I think we've learnt some of them and they're in the paper.

MARTIJN WILDER;
Okay, we're out of time now so we're going to ask Paul Verschuer, who's MD of Foreign Exchange and Commodities, Carbon and Energy at Westpac Institutional Bank, to come up and give the vote of thanks. Thanks, Paul.

PAUL VERSCHUER;
Thank you. It is a point often forgotten in the current debate that the real solutions, the true step changes which will get us to our goal are likely not yet known. It is easy for forget, or to underestimate, the ability of man to innovate when required.

We are reminded today by Professor Garnaut not only of the importance of innovation but of the opportunity of innovation that for a nation such as Australia, with its existing educational and research excellence, the innovation opportunity, the economic opportunity from innovation is significant and potentially large.

Professor Garnaut, thank you for the insight and knowledge you have shared with us today. Thank you for your continuing thorough and reasoned contributions to such an important debate.

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