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USMISSION GENEVA 
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THE WHITE HOUSE WASHINGTON DC
USMISSION USUN NEW YORK

C O N F I D E N T I A L CANBERRA 000620 
 
NOFORN 
 
WHITE HOUSE CEQ FOR VAN DYKE, STATE OES/EGC FOR AMB. WATSON 
 
E.O. 12958: DECL: 06/18/2018 
TAGS: SENV ETRD PREL AS
SUBJECT: CLIMATE CHANGE: AUSTRALIA EMBRACING CLIMATE 
PROTECTIONISM? 
 
Classified By: Economic Counselor Edgard Kagan, Reasons 1.4(b)(d) 
 
¶1. (C/NF) Summary.  At a recent "Chatham House Rules" seminar 
for Australian government and academic thinkers on emissions 
trading, Ross Garnaut, the Australian National University 
Professor who is heading the climate change review 
commissioned by the Federal and the State and Territory 
Governments, said that he would be recommending in his July 4 
Draft Report to government that Australia impose some form of 
tariff at the border to create a "level playing field" in 
terms of  carbon pricing under an emissions trading scheme in 
¶2010.  Garnaut said his recommendation would apply to 
developed countries only, but that Australia should seek to 
work out through the WTO a separate multilateral deal with 
developing countries that export to tax carbon at a sectoral 
level, allowing the governments in question to keep revenue 
but reduce the trade impact of climate change commitments. 
Garnaut, who is wary of this idea but come to grudgingly 
accept the that such a tariff may be a political necessity to 
ensure Australian support for effective action to control 
emissions, suggested that the interface between emissions 
caps and global trade was significant enough to potentially 
stop the entire global process to reduce emissions.   End 
Summary. 
 
BOAT HOUSE OR WOOD SHED? 
------------------------ 
 
¶2. (SBU) Econoff attended the fourth "Boat House" discussion 
series put on the Australian Bureau of Agriculture and 
Research Economics (ABARE), a series which brings together 
leading experts in government and industry to discuss, off 
the record, the latest research findings and policy concerns 
on topical issues.  This seminar dealt with the costs to the 
Australian economy of climate change, and the imposition of 
an emissions trading system in 2010.  ABARE is a federal 
government agency that conducts analysis and modeling of 
influences on Australia's resources and agricultural sectors. 
 Participants included Australia's Department of Climate 
Change, the Commonwealth Science and Industry Research 
Organization, Department of Resources, Energy and Tourism, 
Department of Agriculture, Fisheries and Forestry, Australian 
Securities Exchange, and international presenters from USDA, 
New Zealand Ministry of Agriculture and Forestry, and UK 
Department of Environment, Food, and Rural Affairs. 
 
¶2. (C/NF) As one of highlight speakers at the discussion, 
Ross Garnaut, an Australian National University professor who 
helped design Australia's economic reforms in the 1980s under 
the Hawke Government and served as Australia's Ambassador to 
China in 1986-88,  laid out the latest thinking of his 
Climate Change review process, which plans to release its 
draft report on July 4.  Garnaut has been commissioned by the 
federal and state governments to conduct a wide-ranging and 
public review of the economic issues surrounding actions to 
mitigate climate change, and will issue a final report to 
government in September. Garnaut first explained the 
difficulties in modeling the costs and affects of emissions 
Qdifficulties in modeling the costs and affects of emissions 
caps in general equilibrium economic models, confirming that 
the detailed modeling of policy choices has slowed the review 
significantly and that there had been a decision to release a 
separate report on modeling outcomes in August.  "No 
functioning model in the world can work out the range of 
reductions we are talking about," Garnaut claimed, adding 
that no model currently running can show results that match 
what has occurred in Europe under their emissions trading 
scheme. 
 
TRADE: FRIENDS, ROMANS, ETC. 
---------------------------- 
 
¶3. (C/NF) Turning away from the modeling question, Garnaut 
said that the most troubling impact of emissions trading 
would be on international trade.  Calling the interface 
between trade and constraining carbon in the economy the 
"dreadful problem," Garnaut said he could easily see a 
situation develop where the world experiences "ferocious rent 
seeking that would only be considered blatant protectionism 
in the past."  Nonetheless, Garnaut said his review would 
recommend in its report that the GOA "accept trade on a level 
playing field only with those developed countries that have 
UNFCCC compliant emissions reduction targets."  This would 
appear to contrast with official Australian policy as it now 
stands.  In December 2007 at the Bali Conference, Trade 
Minister Simon Crean said that countries should be "quite 
concerned about such systemic threats (carbon equivalency 
measures) to the international trading system." 
 
¶4. (C/NF) "Level playing field" measures at the border would 
not apply to all countries equally, Garnaut suggested. 
Instead, Garnaut said trade with developing countries would 
have to be exempted from such tariffs because those countries 
have currently no specific emissions reduction mandate under 
the UNFCCC, and may not have under a potential post-2012 
framework.  Australia's major economic drivers (fossil fuels 
and commodities) are largely export-oriented, and would find 
off-shoring to other locations difficult.  But producers of 
domestic goods would also be under pressure against imports, 
especially those from China and India, that did not also 
price carbon.  Garnaut said he would recommend that, in the 
absence of specific reduction targets or emissions caps in 
developing country trade partners, Australia should push for 
a multilateral framework within the WTO that forces 
developing countries that export to Australia to "equalize" 
the carbon price of their exports to developed countries. 
The developing countries would keep the revenue generated for 
their own purposes, but if they failed to tax at an adequate 
level, would face WTO action and lose those revenues. 
Garnaut did not address the challenge of negotiating such a 
WTO framework in a timeframe consistent with the ETS 
implementation in Australia, or whether a post-2012 deal 
which included some form of commitment by developing 
countries, but not an outright cap, would be sufficient to 
avoid doing so. 
 
¶5. (C/NF) This drew the attention of many at the discussion, 
and when pressed, Garnaut said he saw no way to avoid such 
action.  Otherwise, he argued, the problem of trade-exposed 
and emissions intensive industries "alone is enough to stop 
the world from getting to where we have to go."  He suggested 
that, in his view, and despite WTO Director General Pascal 
Lamy's protests to the contrary, it will be imperative that 
the WTO proactively to lay down principles and rules.  "This 
is one are where we may all suffer," Garnaut said, "and one 
where the disciplines of the WTO on open trade break down." 
The issue of comparable carbon pricing was almost inevitable, 
and will be highly disrupting and "corrupting" of the 
political and trade system, Garnaut prophesied.  "The WTO 
will not welcome this, but will have to sort out rules for 
partial support for trade leveling schemes," he concluded. 
Garnaut had hinted at this determination at a public lecture, 
attended by 500 people, at the Australia National University 
Qattended by 500 people, at the Australia National University 
on June 5.  In a response to a question on whether Australia 
should impose tariffs on goods from countries not pricing 
carbon, he said that as one of the architects of Australia's 
turn away from protectionism in the 1980s, he "would be the 
last person to argue such a position," but that the question 
of leveling the trade playing field absent a truly global 
emissions target would have to be considered carefully. 
 
¶6. (C/NF)  Garnaut had come to this view reluctantly, 
according to Ron Ben-David of the Victoria State Department 
of Premier and Cabinet, who has been seconded to the Federal 
Treasury to serve as Garnaut's "chief of staff" and principle 
liaison with the Australian government.  Ben-David told 
Econoff June 16 that Garnaut had taken a hard line against 
this position as late as November last year, but as the 
review process has drawn on has come to the reluctant 
conclusion that only some form of transparent trade-leveling 
scheme will work.  Garnaut is "very worried," Ben-David said, 
"that climate change will be used to justify a raft of new 
forms of protectionism."  However, with Europe already moving 
towards such measures, and major climate change legislation 
in the U.S., including Lieberman-Warner, also exploring the 
possibility, the review will recognize the reality that this 
is already happening and not leave Australia completely 
exposed.  "This is not advocacy," Ben-David said, "but 
reluctant recognition.  It is better to get this issue on the 
table and into the WTO process quickly and in an organized 
fashion that to see it develop haphazardly and unilaterally." 
 Garnaut has also come to the view that the threat of 
widespread challenges to free trade principles might be the 
only "Mutually Assured Destruction" tool that forces all 
sides to the table in a global climate change deal post-2012, 
Ben-David said. 
 
CERTAINLY NO CERTAINTY 
---------------------- 
 
¶7. (C/NF) At the same seminar, Department of Climate Change 
Assistant Secretary for Emissions Trading Barry Sterland 
presented on government progress towards the "green paper" 
planned to be released in July.  Noting that government and 
industry have worked closely in  consultations over the ETS 
design, Sterland said that industry has not yet taken on 
board that Australia, as a Kyoto member, has international 
obligations to consider when thinking about how an Australian 
ETS should look.  He said that while industries were looking 
for certainty on carbon pricing and international 
competitiveness, "firms will never have the certainty they 
want about carbon price, we are after all setting up a 
market."  Finally, Sterland said that the government "has a 
serious commitment to economic management, but a separate and 
equal commitment to a lower carbon future."  ABARE's Don 
Gunasekera then presented latest modeling on costs to the 
Australian economy without emissions mitigation.  According 
to Gunasekera, in a "business as usual" case, Australian 
economic growth falls by -.4 percent by 2030, -.8 percent  by 
2050, and then steps off the ledge and drops by  -7.3 percent 
by 2100, when Australia's population is projected to reach 42 
million. 
 
COMMENT 
------- 
 
¶8. (C/NF)   Garnaut's review is not necessarily a determinant 
of Australian government action, and the Department of 
Climate Change will release its own green paper on preferred 
government options for emissions trading in July.  However, 
the Garnaut Review is already seen by many in Australia as 
the most visible voice on action to mitigate climate change, 
as witnessed by the Prime Minister saying May 31 that he 
would "wait for Dr. Garnaut's report," before making any 
decision on whether petrol would be covered by the ETS.  If, 
per Garnaut's hints, the report suggests that countries 
acting to reduce emissions should use trade levers against 
those not doing so, it will be widely accepted as something 
that Australia should consider.  The recent outcry about 
rising fuel costs has alerted the Government and Opposition 
that some support for addressing climate change may erode 
once the costs to individuals of significant emissions 
reductions become clear.  Depending on the public response to 
the report (and  The Rudd government will likely find itself 
under pressure to implement "trade leveling" costs against 
non-carbon pricing nations. End Comment. 
Qnon-carbon pricing nations. End Comment. 
 
MCCALLUM