After the government said the opposition’s emissions reduction policy would cost $26bn, should you believe it?

Another day, another set of scary numbers about climate change costs. Should we believe them?

Short answer: no.

As reported on page one of the Australian on Wednesday, the Coalition says the country’s largest companies would face a combined bill of up to $26bn under Labor’s 2030 climate target (a 45% cut in emissions below 2005 levels). It says it will “strangle growth” and is effectively a carbon tax.

Among those claimed to be in the gun were the energy giant Chevron (allegedly facing a carbon bill of up to $1.6bn), the aluminium producer Alcoa ($867m) and BlueScope steel ($890m). Woolworths was said to face a $77m bill, potentially pushing up food prices. Similar stories appeared in News Corp papers across the country based on short spreadsheets and background material provided by the Coalition.

Haven’t we heard this before?

Versions of it, yes. Headlines have claimed Labor’s climate policies could cost anywhere between $25bn and $60bn. Those estimates were dismissed by some of the researchers whose work the articles cited.

How did the government arrive at the latest numbers?

They spring from changes Labor plans to make to a scheme known as the safeguard mechanism, which was set up by Greg Hunt as part of Tony Abbott’s Direct Action climate policy.

Big polluting industrial sites that emit more than 100,000 tonnes each now get a limit on how much carbon pollution they can release. The limit is known as a baseline. There is no cost on the businesses if they stay within their baseline but, if they exceed it, they must buy an emissions offset – a carbon credit – for every tonne they go over it.

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Hunt implied that baselines would be reduced after 2020 to cut emissions but the Coalition doesn’t talk about that now. Instead, companies have been allowed to increase their baselines and, in most cases, pollute without penalty.

Labor says it would expand the safeguard mechanism so it also covered smaller industrial sites – those that emit more than 25,000 tonnes. It would also reduce pollution limits over time, as Hunt intended. To stay within their baseline, industrial sites would either have to cut emissions on site or pay for offsets for every tonne they go over their limit. Conversely, businesses that emitted less than their baseline would earn free carbon credits they could sell – a reward for reducing pollution.

There are questions about Labor’s approach that are yet to be answered – how rapidly it would require industrial sites to cut emissions over the next 11 years, for instance – but the Coalition has based its analysis on assumptions that have little to do with how the scheme would operate in the real world.

Crucially, it seems to have assumed that businesses under the mechanism would not cut pollution. The analysis seems to works on the idea they would just pay for international offsets to meet their obligations.

The Coalition has used two reports to assume these offsets would cost between $62 and about $100 a tonne by 2030 on an international market. That market does not now exist. (There are a handful of carbon markets that are mostly not linked.)

Why are the Coalition’s assumptions unreasonable?

For starters, it not yet clear what sort of offsets will be available to businesses under Labor’s version of the safeguard mechanism. The Coalition assumes a flood of international offsets, but Labor’s policy says it would allow only limited use of credits from overseas.

Australia has its own carbon offsets market, where credits sell for about $16 a tonne. The market is small owing to limited demand, reflecting that businesses are mostly allowed to pollute without penalty. Most of the offsets are created through native vegetation projects and paid for by taxpayers via the $2.55bn emissions reduction fund. Labor plans to expand it and have polluters pay for the offsets.

Internationally, an obvious market Australia could link to is the European emissions trading scheme, where the carbon price is now about $43 a tonne. That’s unlikely to be appealing to business in the short term.

Other offset markets may develop but it is also likely it will be cheaper to cut emissions or buy local offsets rather than pay for credits from overseas, especially in the early years. Analysts at RepuTex found the cost of emissions cuts should line up with the relatively cheap Australian carbon market – less than $20 a tonne – and that a 45% emissions target would push down wholesale electricity prices.

An analysis by Citigroup reportedly found that total costs for major emitters under Labor’s scheme were likely to rise by less than 1% a year from 2020 to 2030.

It is also worth noting that it is highly unlikely Labor would require every industrial site under the safeguard mechanism to cut emissions by 45%. It says it would provide “tailored treatment” for trade-exposed big polluters such as aluminium, steel and liquefied natural gas. It implies they would be shielded from some of the cost if their competitors overseas did not face a similar regulation.

Would Labor’s approach lead to businesses actually cutting emissions or just using offsets?

Both. While notable industrial players have repeatedly obstructed attempts to introduce bipartisan climate policy, many companies have been planning for a shift to a low-carbon world for a while. Some multinationals including Rio Tinto have contingencies for future carbon prices of up $140 a tonne built into their decision making.

Clean technology is getting cheaper. Some businesses under the safeguard mechanism would use offsets but others are investing or planning to invest in renewable energy and energy efficiency.

Is the Coalition suggesting we shouldn’t try to limit global warming to below two degrees?

Not explicitly, but it is worth asking.

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One of the odd things about the Coalition’s analysis is that it is partly based on a World Bank-backed study that found global carbon prices in 2030 would need to be between US$50 and US$100 to limit global warming to two degrees. But it doesn’t acknowledge that the Coalition has also committed to the two degrees goal (and more) by signing the Paris agreement.

Should we also assume the equivalent of up to a US$100 carbon price under Coalition policies? Or is it walking away from its commitment to Paris?

Media reporting often focuses on the cost of climate policy while ignoring the other side of the equation – the cost of doing nothing. Several studies have suggested it is significant.

A paper in the journal Nature estimated warming of between two and a half and three degrees could cut per-capita economic output by between 15% and 25% this century. Four degrees would be worse again.

This sort of scenario is increasingly being considered and factored in by insurers and long-term investors, who say they want action to avoid it. Whether political leaders and newspaper editors are listening is another question.