Bali, Climate Change and the Australian Economy 1

I am not sure why some people should be so surprised that the Rudd Government is presently reserving its position at Bali on short term mandatory targets.

How could it do otherwise? It is a new Government forming its position. It has set in place a process - the Garnaut Inquiry - that will not report until June next year. The position may change now that Mr Rudd has arrived in Bali, but I really would expect the new Government to reserve its position until it has worked through all the issues.

In the meantime, we need to be thinking about what climate change and the expected responses to climate change mean for the Australian economy, how we might respond.

Australia is presently two very different economies.

One is part of the global economy. This generates the international income we need to buy all those things that we import. The second is a domestic, non-internationally traded economy. This consumes most of our imports and makes its living from servicing other parts of the domestic economy plus the internationally traded sector.

We have a floating currency. Excluding the effects of capital flows, if our exports fall then the value of the currency falls. Imports rise in price, we buy less of them, and so the value of the currency stabilises.

In the medium to longer term, a lower value for the dollar encourages more exports. Exports rise. The value of the currency increases, allowing us to buy more from overseas and at a lower price.

But what happens if this rise in exports does not happen, if we are dealing with international structural changes the effect of which is to lower exports, permanently or at least for the very long term? Then we have a very real problem.

In this scenario, the value of the Australian dollar has to fall to the point at which imports are reduced to the level that we can afford in the longer term. The effect could be a major, long term, fall in Australia's standard of living.

I see this as a very real possibility based upon the combination of the projected effects of climate change with the current structure of the Australian economy. If I am right, then we need to start thinking about our responses.