Australian Government responds to Cutler Review on Innovation

So this budget is the first one to follow the Australian Government's review of the "National Innovation System".

The so-called Cutler report, which was released last year, and a Government response entitled "Powering Ideas", released along with the Budget, are both available here.

The main recommendations of that report were to fund research infrastructure, increase research funding, increase business research funding and improve collaboration between business and research institutions. The Government seems to have responded to many of the main recommendations of the report, with its simplification of reseach concessions in the tax code, various investments in research infrastructure (great stimulus of course) and several other measures.

One big message is that Australian expenditure on research has declined in recent years relative to GDP, while other nations have increased.

So the current budget includes a 25% increase in spending on science and innovation.

Commonwealth spending on science and innovation has fallen 22 per cent as a share of GDP since 1993–94. Business spending on research and development collapsed in the late 1990s, and while it has grown since then, we still lag many of the countries we compete with. The proportion of Australian firms introducing innovations has been stuck at one in three for years. A decade of policy neglect has hurt Australia’s innovation performance, making us less productive and competitive, and reducing our ability to meet the needs and aspirations of Australian families and communities.

Meanwhile, the bar keeps rising. China’s R&D spending has grown by 22 per cent a year since 1996, compared to 8 per cent a year in Australia. Australia spends 2 per cent of GDP on research and development. Austria, Denmark, Germany, Iceland, Switzerland, Taiwan, and the United States spend more than 2.5 per cent; Finland, Japan, South Korea, and Sweden spend more than 3 per cent; Israel spends more than 4 per cent.
While Commonwealth spending on science and innovation fell to 0.58 per cent of GDP in 2007–08, Denmark is steadily increasing government spending on R&D — from 0.89 per cent of GDP in 2008, to 0.94 per cent in 2009, with a target of 1 per cent in 2010. In the United States, President Obama has pledged to double funding for federal science agencies over the next decade.

One figure from the Budget Education overview struck me.



The Government should be happy that after years for rewarding Australian academics for every paper we write, our per capita publication rate is 20% above the OECD average. Don't inquire too closely into measures of impact of those papers!

Obviously we should be very much less happy that apparently the fraction of firms with "new products" is 30% below the OECD average. This despite very healthy levels of venture capital!

Research and Development Tax Credit

It's Budget night here in Australia.

Bill English might like to pay some attention to one of Wayne Swan's wackier new ideas: it's something called a Research and Development Tax Credit.

Wait! Perhaps someone in New Zealand has already thought of such a scheme?

(The eagle-eyed will want to look at the detail of the Australian proposal. Will it encourage new research? Or will businesses be able to use it to offset the costs of existing activities?)

Reaction to Australian Defence White Paper

Early reaction to the White Paper seems to be positive, the main criticism is with regard to the lack of budget planning. Budgetary questions are covered in one and a half pages of 140 or so.

The Minister says that more details of future funding will be in the budget the week after next.

But really, you can rely on Greg Sheridan to have the most entertaining account.

THE defence white paper is an almost incoherent blancmange of oddly unharmonised flavours.

It reads like a biblical commentary in which 50 Talmudic scholars, each representing an alternative school of thought, have been allowed to write alternative sentences.

The internal contradictions in the document are so staggering it looks like sentences have been bolted on almost at random, like pieces in a Meccano set manipulated by a two-year-old.

And yet, even he seems largely to agree with the decisions

For all that, the Government has mostly come up with the right decisions: 100 Joint Strike Fighters, 12 new submarines, the continuation of the army expansion program, new, big surface ships and so on.

In defence, to some extent equipment and budget are real policy, the rest window-dressing. Australia's neighbours in the Asia-Pacific will look at the equipment commitments more than anything else. They will see the air force, the navy and the army getting bigger and more capable. That's all that really counts. The white paper will reinforce Australia's reputation as a formidable defence power.

In New Zealand Defence Minister Wayne Mapp is not anticipating a matching increase in New Zealand funding.

Dr Mapp believes New Zealand's current defence budget is about right, and is confident the two countries will continue working closely together.

Neither does he seem to believe that Chinese growth poses much danger to the regional order.

Dr Mapp says China's military capacity has increased as its economic capacity has grown, but over the past 30 years the country has focused on trade and good relationships with its neighbours.

I hope a more considered response will emerge over the next few months. Not just Australia but also Japan have now announced significant increases in military spending in response to growing Chinese military capabilities. The point of a strategic review like our White Paper process would be to give this at least some thought, and to allow a public discussion that goes some way beyond just questions of trade.

Oh and there is an interesting discussion of the Australian White paper here, with an even more intriguing discussion of the possibilities for an invasion of New Zealand here. (Hint: still not very likely.)

Australian Defence White Paper released

So the Australian Defence White paper has finally been released, on a Saturday.

It's available here.

There will be a significant build up in Australian defence spending.

The Government says it will keep its pledge to have 3 per cent real growth in defence spending until 2018. It says there will then be 2.2 per cent real growth in spending from 2018 to 2030 as well as 2.5 per cent fixed indexation to the defence budget during this period.

The Australian's account gives a summary of the conclusions in terms of future capabilities.

It seeks to defend the nation by creating a navy by 2030 with the teeth to deny even a sizeable enemy from dominating the northern air-sea approaches to Australia. This new navy will cost many tens of billions of dollars, easily the largest single investment since Federation. Yet it does so without broad agreement inside Canberra's defence establishment about the strategic rationale underpinning this build-up and with grave doubts hanging over the Government's ability to fund and manage this vast project or find enough crew to sail its new armada.

It also requires Australians to accept permanent real growth in defence spending for the next two decades regardless of economic circumstances. This amounts to a fundamental long-term shift in Australia's public spending priorities, a difficult proposition for any government to sell to voters, much less at a time of global recession.

The plan to double the submarine fleet from six to 12, acquire three powerful new air warfare destroyers, eight new well-armed and larger frigates, 24 new naval combat helicopters, a bigger fleet of more muscular patrol craft and to develop a serious anti-submarine warfare capability, represents a quantum leap in naval power for a mid-sized country such as Australia.

This, coupled with plans to purchase 100, rather than a smaller number, of the Joint Strike Fighters will create a formidable deterrent to any aggressor and will allow Australia to project power more deeply into the region than ever.

Of course I immediately searched for all references to New Zealand, here is the key paragraph.

As the ADF incorporates new systems and capabilities, maintaining the current level of interoperability between our separate defence forces will require a concerted effort on the part of both countries. With this in mind, Australia and New Zealand should look for opportunities to rebuild our historical capacity to integrate Australian and New Zealand force elements in the Anzac tradition. This operational integration would of course be without prejudice to our respective policy choices. It could be as modest as integrating our air transport logistics support to operations, or as ambitious as an Anzac task force capable of deploying seamlessly at short notice into our immediate region. To be effective, any integrated force elements would need to exercise regularly together as a unified capability.

There is also a mention of working with New Zealand on issues like Fiji and East Timor.

As foreshadowed by the Australian, there are indeed some sharp comments on the stategic consequences of China's rise, and more particularly its military buildup.

This from Rudd at the launch

"It's as plain as day that there is a significant military and naval build-up across the Asia-Pacific region - that's a reality, it's a truth, it's there.

"Either you can simply choose to ignore that fact, or to incorporate that into a realistic component of Australia's strategic assumptions about what this region will look like over the next two decades."

So for example this on China from the White Paper

China will also be the strongest Asian military power, by a considerable margin. Its military modernisation will be increasingly characterised by the development of power projection capabilities. A major power of China's stature can be expected to develop a globally significant military capability befitting its size. But the pace, scope and structure of China's military modernisation have the potential to give its neighbours cause for concern if not carefully explained, and if China does not reach out to others to build confidence regarding its military plans.

China has begun to do this in recent years, but needs to do more. If it does not, there is likely to be a question in the minds of regional states about the long-term strategic purpose of its force development plans, particularly as the modernisation appears potentially to be beyond the scope of what would be required for a conflict over Taiwan.

On the question of Taiwan there are two interesting comments. This in the White Paper

Taiwan will remain a source of potential strategic miscalculation, and all parties will need to work hard to ensure that developments in relation to Taiwan over the years ahead are peaceful ones. The Government reaffirms Australia's longstanding 'One China' policy.

Secondly, at the press conference Rudd was asked about Taiwan and replied with a strong emphasis on the importance of the US alliance. I've looked online for a transcript of these remarks with no success, but they were commented on by Gerard Henderson on Insiders this morning.

Updated: Here is the exchange in question, I can't for the life of me see it as anything other than a reiteration of the status quo.

JOURANLIST: Prime Minister if China attacks Taiwan in any way, will Australia help defend it?

PM: Thank you for that question. Australia’s policy in relation to the Taiwan Straits has been one of a bipartisan consensus going back a long, long time and will be into the future. It contains two elements. One is that we do not speculate on any future contingencies concerning what may or may not happen in the Taiwan Strait. The second part of my response to your question is that Australia takes seriously its alliance responsibilities to the United States.

The New Zealand Option

I have yet to read Hugh White's Lowy Institute paper on Australian Defence Paper.

However I have listened to his recent talk at the Institute.

As I have noted earlier, White's analysis is that during the course of the coming century the growth of Chinese economic and military power will strain the international order in the Pacific and may lead to a significant danger of conflict.

White sees three options for Australia in this environment.

1/ To recommit to the US alliance and accept that this will require greatly increased military committments from Australia.

2/ To aim for a more self-reliant defence and a more independent foreign policy stance.

3/ The New Zealand option.

Now my readers outside Australia, particularly those in New Zealand, should note that this is a laugh line.

White is arguing that the first two options, which would see Australia retain its status as something called a "middle power", will require a much greater expenditure on defence as fraction of GDP. The third alternative is, for the moment, unthinkable.

(Are there any countries other than Canada and Australia that actually aspire to the status of "middle power"?)

If this analysis of China becomes widespread in Australia surely New Zealand's "independent" defence and foreign policy would come under much greater pressure from our nearest neighbour?

Debate on Australian Defence White Paper

I'm going to keep linking to discussions of the Australian Defence White Paper, largely because there will be a New Zealand Defence White Paper ramping up later in the year.

Hugh White's Lowy Institute paper, which I blogged about earlier, has now been released in full.

There have been a series of interesting and apparently well-informed comments on this in the Interpreter blog. Take a look here and work backwards.

I'm particularly sympathetic to Major Gen (Retd) Jim Molan's concerns that money be spent so that actual defence capabilities are consistent with the rhetoric of defence strategy as described in the White Paper and elsewhere.

The immediate priority for the government is not to be subverted by images of heroic strategic leadership (which do not have to be funded for many years) but to the serious but less sexy duty of repairing the current defence force.

Of course there is no show without Punch, and it was only a matter of time before Greg Sheridan got stuck into White in the pages of the Australian.

White is a very faithful lover. Many decades ago he fell in love with the idea of maritime denial as Australia's strategic lodestar and from that he deduced that the force structure for the ADF should focus overwhelmingly on submarines and fighter aircraft.

In his preposterous paper, which so far has escaped critical scrutiny, White calls for 200 JSFs and 18 submarines, and an enlarged but lightweight army, deliberately not equipped to fight even in medium-intensity theatres such as Afghanistan, configured as a gendarmerie for use in policing roles in the South Pacific.

I'd been puzzling over the exact role of White's Lowy paper in relation to Government debates about the official White paper. Particularly since White was responsible for drafting the previous Australian Defence White Paper in 2000.

Graeme Dobell is very enlightening on this point, and very entertaining on Army views on White.

Hugh spent enough years in Parliament House to know how the political wheels turn. Thus, I read his Lowy paper as not just a wonk prescription.

Don’t see the paper as a faux Defence White Paper. Consider it, instead, as a particularly well written and explicit Cabinet submission. It is the sort of policy paper that goes to Ministers as the White Paper is prepared. And in the final White Paper, much of the meaty stuff — such as the tough discussion of China — gets watered down or cut out.

The Australian Defence White Paper and China

The Australian this weekend carried a front page article on the Australian Defence White Paper.

It appears that the Rudd Government has overridden the assessment of Australian intelligence agencies. The intelligence agencies apparently regard failed and failing states in Australia's vicinity and involvement with the UN and the US in counter-insurgency operations further afield as the main challenges of the ADF in coming years.

Others in Defence wanted to see a more aggressive effort to confront China.

Senior Defence officials argued privately that the ADF needed to be structured to enable it to play a key support role alongside US forces in any future conflict with Beijing. "They saw the rise of China as the new Cold War and decided that this needed to be the focus of future strategy," said one Defence insider.

Apparently the hawks won, and there will be a significant build-up of Australian defence capabilities to combat the growth of Chinese military power.

The standoff between the intelligence doves and defence hawks has gone all the way to Kevin Rudd personally.

But the hawks have won, and Australia will spend more than $100 billion over the next two decades to boost its naval and air war-fighting capacity.

The rise of China will shape Australia's defence planning for a generation.

The Rudd Government's defence white paper, due out later this month, will call for a more potent and costly maritime defence for Australia.

The expansion of Australia's sea and air defences will include a doubling of the submarine fleet, 100 joint strike fighters, new spy planes, as well as powerful new surface warships.

The White Paper should finally emerge before the end of the month.

Also in the Weekend Australian a foretaste of Hugh White's forthcoming Lowy Institute paper on the White Paper. He seems to very much agree with expanding the submarine and fighter jet fleets. He calls on the Government to dramatically increase defence spending, in order to be able to maintain its strategic weight in the region against competitors whose GDPs are growing rapidly.

To build a focused force to achieve Australia's long-term strategic objectives as they are now defined would need spending 2.5 per cent of GDP or more. This is not unthinkable: it is comparable with our defence spending in the 1970s and '80s.

Ministers will be tempted to say we can afford all the forces we need within current funding projections if it is spent more efficiently. That may be wishful thinking. Huge efficiencies in defence are possible but they will require really forceful leadership to achieve, and that has been lacking for a long time. And even if new brooms can turn defence on its head, the long-term trends suggest that Australia has no choice but to spend more on defence or accept a steady decline in strategic weight. A mere 20 years ago Australia's economy was the second largest in Asia after that of Japan: larger than India's or China's. How quickly the balance has shifted.

I can't resist mentioning that currently the RAN is often unable to operate more than half of its existing submarine fleet due to skill shortages, and, one understands, low morale.

A side-note to New Zealand readers: to take the temperature of the current debate in Australia on relations with China you should google the names of Defence Minister Joel Fitzgibbon and Chinese-born businesswoman Helen Liu.

You might think that this enormous focus on the future of the Chinese relationship in our nearest neighbour and closest ally might arouse just the slightest interest in the New Zealand media. Particularly given that we are about to undertake our own Defence White Paper. Particularly given that Prime Minister Key is even now in China. As the indispensible Tailor of Panama St notes so eloquently today, that is far too much to expect of our dangerously withered media organisations.

What on earth is going on with the Australian ETS?

As was noted by several in the NZ blogosphere, Australian Treasurer Wayne Swan recently referred the Australian Emissions Trading Scheme (the Carbon Pollution Reduction Scheme) to a lower house finance committee. Since the committee was tasked with considering whether an ETS was the correct policy response to climate change, and given that the committee was to report after the Government had previously stated the measure would be passed, everyone took this to mean that the CPRS was very much on the back burner.

Almost immediately the Government was stating that this was not the case. By the end of the week the move, a ploy to reduce the power of the Senate and back the opposition into a corner on climate change policy, had been reversed.

Dennis Atkins, who is pretty much the only person worth reading in Brisbane's Courier Mail, has a very good analysis of what on earth was going on here.

Atkins frames this issue in terms of the chaotic state of affairs in Canberra currently, with an enormous stimulus package going through Parliament in the week of the worst natural disaster in Australia for at least a hundred years. This is on top of Rudd's notorious work rate and instincts for micromanagement.

All of this was happening in what is now a permanent state of semi-chaos in Canberra. Ministers and public servants are stretched to breaking point, too much is being asked with too-tight timelines and ridiculously minor decisions are not being made until they are ticked by the office of Prime Minister Kevin Rudd.

Swan's letter to Economics Committee chairman Craig Thomson sailed through this monster mash and it was apparently not given the attention it deserved, allowing a form of words too open to mis-interpretation.

Now the politics of the CPRS is clearly far from settled. Apparently the big mining companies have only recently realised the implications of the scheme for their businesses since the shine went off the global economy. As a result the Government is coming under vastly increased pressure from business interests.

There's plenty of bark left in the emissions trading dog, as an increasing number of companies and their representatives in Canberra have been telling ministers in recent weeks and will continue to do in the weeks and months ahead. While Wong repeats the mantra that carbon reduction cannot be put on the back burner because of the global financial crisis, business is not so sanguine.

Mining companies - especially those representing coal interests - have been laying what are said to be some alarming numbers on ministers' desks, highlighting job losses and potential mine closures.

On the other hand strong ETS advocates are increasingly willing to oppose the proposed scheme as being too weak. Some are even willing to go back to the drawing board and investigate a carbon tax, as in this open letter by 10 very eminent economists.

In his article Atkins also emphasizes that the Government will certainly struggle to get this bill through the Senate. The Greens oppose the scheme as too weak, and the Liberals oppose the current measure as too onerous. The Nationals are likely to oppose regardless.

Once again we are hearing that the Government may be willing to go to a double dissolution election over this issue. So the politics of the Australian ETS still have a lot of life in them yet!

Where Next? Kevin Rudd and the Historic Role of the Social Democrat

The Murdoch press in Australia has been in a tizzy over Kevin Rudd's seven thousand word essay on the global financial crisis in the Monthly. It declares neoliberalism dead and gives a call to arms for social democrats.

I was struck by this warning about the possible rise of various kinds of extremism if social democratic governments fail to make progress.

Social-democratic governments across the world must rise to the further challenge of developing a practical policy response to the crisis that rebuilds shattered economic growth, while also devising a new regulatory regime for the financial markets of the future. This is our immediate challenge. But if we fail, there is a grave danger that new political voices of the extreme Left and the nationalist Right will begin to achieve a legitimacy hitherto denied them. Again, history is replete with the most disturbing of precedents.

But much of the rest of the analysis is, by now, fairly conventional. The politics of tarring the Liberals with a "failed ideology" is too good to resist though of course.

Not for the first time in history, the international challenge for social democrats is to save capitalism from itself: to recognise the great strengths of open, competitive markets while rejecting the extreme capitalism and unrestrained greed that have perverted so much of the global financial system in recent times. It fell to Franklin Delano Roosevelt to rebuild American capitalism after the Depression. It fell also to the American Democrats, strongly influenced by John Maynard Keynes, to rebuild postwar domestic demand, to engineer the Marshall Plan to rebuild Europe and to set in place the Bretton Woods system to govern international economic engagement. And so it now falls to President Obama's administration - and to those who will provide international support for his leadership - to support a global financial system that properly balances private incentive with public responsibility in response to the grave challenges presented by the current crisis. The common thread uniting all three of these episodes is a reliance on the agency of the state to reconstitute properly regulated markets and to rebuild domestic and global demand.

The second challenge for social democrats is not to throw the baby out with the bathwater. As the global financial crisis unfolds and the hard impact on jobs is felt by families across the world, the pressure will be great to retreat to some model of an all-providing state and to abandon altogether the cause of open, competitive markets both at home and abroad. Protectionism has already begun to make itself felt, albeit in softer and more subtle forms than the crudity of the Smoot-Hawley Tariff Act of 1930. Soft or hard, protectionism is a sure-fire way of turning recession into depression, as it exacerbates the collapse in global demand. The intellectual challenge for social democrats is not just to repudiate the neo-liberal extremism that has landed us in this mess, but to advance the case that the social-democratic state offers the best guarantee of preserving the productive capacity of properly regulated competitive markets, while ensuring that government is the regulator, that government is the funder or provider of public goods and that government offsets the inevitable inequalities of the market with a commitment to fairness for all. Social democracy's continuing philosophical claim to political legitimacy is its capacity to balance the private and the public, profit and wages, the market and the state. That philosophy once again speaks with clarity and cogency to the challenges of our time.

The Australian Liberal Party and Agricultural Greenhouse Gas Emissions

Yesterday Australian Liberal Party leader Malcolm Turnbull gave an interesting speech on climate change policy to the Young Liberals conference. The associated change in policy direction was leaked to the Saturday newspapers, here for example.

Turnbull has been under pressure from the Nationals who are opposed to an emissions trading scheme. As a result we get this:

The Opposition Leader, Malcolm Turnbull, will announce a three-pronged policy of greenhouse gas reduction that will impose no direct costs on businesses or homes and require no behavioural change, and aims to eradicate divisions in the Coalition over climate change.

It's astonishing that a serious response to climate change can be advertised as requiring "no behvioural change" but there you go.

The speech itself is interesting, with three major policy proposals.

Our plan captures three gigantic opportunities for CO2 abatement that the Rudd Government has ignored:
· A Green Carbon Initiative - a comprehensive biocarbon strategy ofinvesting in the health of our landscape, restoring soil carbon by reversing over-grazing and excessive tillage, embedding CO2 in biochar (charcoal fertiliser), tree planting, and revegetation;
· Dramatically increasing energy efficiency, especially in buildings;
· Constructing at least two industrial scale carbon capture and storage power stations deploying industrial scale solar energy and geothermal energy and harnessing the energy of the oceans through tidal and wave power.

The Green Carbon Initiative aims to address the issues of terrestrial carbon sequestration discussed in my previous post. Turnbull has been talking to serious people about this and the measures he proposes seem worthwhile. Of course the small matter of the structure of the incentives in the Kyoto protocol and its successors needs to be addressed so that Australia gets full credit for any moves in this direction. It's hard to know how to weigh the contributions of serious thought and political opportunism in this proposal.

As to the second point, increased energy efficiency should be the FIRST priority of policy makers and politicians in response to the twin challenges of climate change and the need for economic stimulus. Here I would fault Turnbull only for inappropriate emphasis.

His third point which mainly emphasizes carbon capture and storage at coal fired power stations needs a serious caveat. CARBON CAPTURE AND STORAGE IS AN UNPROVEN TECHNOLOGY. On the other hand the various sources of alternative energy generation are already technologically feasible and even economic in the right circumstances. Again the emphasis is all wrong.

Finally the implication that the Rudd Government is not thinking about any of these approaches seems a little unfair!

Nevertheless the politics of climate change and emissions trading in Australia look to be very interesting in the coming year.

Political Emissions

The soft Australian target of a 5% reduction of year 2000 emissions by 2020 has been received with dismay in many quarters. The various corporate hand-outs for "trade exposed emissions intensive industries" along with various offsets for the consumer that look like yet more middle class welfare, also seem pretty unappealing to me. The whole point is supposed to be to create economic incentives to reduce emissions and achieve increases in growth while reducing carbon dioxide emissions per dollar of GDP. This scheme looks to be minimizing those incentives at every turn.

I don't agree with everything there but Anna Rose has a good summary in New Matilda. There have been dramatic shifts since the Green paper, for example

It's worth noting that LNG companies like Woodside and Santos are huge winners from the scheme, as they had been excluded from receiving assistance in the Government's Green paper in July. Now, they'll receive 60 per cent of their permits for free, despite being well positioned to make windfall gains from emissions trading since LNG is a less polluting fuel than coal and oil.

Writing in the Australian Financial Review, John Quiggin, takes issue with the Garnaut/Rudd-Labor argument for low per-centage but high per-capita emissions reductions. The AFR has some pernicious new trick though that stops me cutting and pasting the most apposite part. Shame!

Australasian Contributions to International Climate Change Negotiations

While we await Kevin Rudd's statement on the Australian Government's carbon emission targets on Monday, much attention has turned to the international negotiations on future climate change agreements.

Ross Garnaut wrote a very useful op-ed in the Australian this week. He notes that these negotiations will be much more difficult than either trade or arms control agreements, and proposes some warning signs for difficulties in such talks.

If you hear negotiators from the respective countries arguing that Australia needs high per capita entitlements because it is big and lightly populated, or Canada because it is cold, or Japan because it has few opportunities for geo-sequestration of emissions from fossil fuel combustion, or China because it is the workshop of the world, you will know that the world has lost the battle to avoid dangerous climate change.

It's a cheap shot but I can't resist pointing out that some of New Zealand's statement in Poznan sounds exactly like this

New Zealand is unique among Annex 1 countries. With nearly 50% of our total emissions coming from agriculture, no other developed country comes close to having such a large percentage of its emissions arising from food production.

(Hat-tip: Charles Finny)

Given the ACT party's clutch on climate change policty, some aspects of the New Zealand statement were reassuring. But would Rodney Hide agree with this?

As a consequence we are reviewing our suite of climate change policies. The objective here is not to step back from Kyoto. The Government fully understands and accepts its long-standing international obligations under Kyoto for the first commitment period.

Prior to the election Hide stated his preference for leaving Kyoto.

In any case, Garnaut has become convinced that the eventual target for international negotiations must be equal per capita emmissions from all nations, and that progress should be measured in terms of per capita emissions reductions rather than reductions of particular nations or groups of nations from benchmarks in 1990 for example. This seems pretty sensible to me.

I was happy to see the mention of research on agricultural emissions mitigation in New Zealand's statement, and the emphasis on forms of agreement that will be satisfactory for developing nations. These aspects are very consistent with Garnaut's thinking about ways in which developed countries can contribute initially.

My work on The Garnaut Climate Change Review (Cambridge University Press, 2008) has led me to the view that any allocation of emissions entitlements with a prospect of being accepted by most developing countries must be based on convergence towards low levels of per capita entitlements at some time in the future. There will need to be headroom for rapidly growing developing countries. Through a transition period, the commitments of lower-income developing countries would be one-sided, with compliance encouraged through incentives rather than penalties.

The agreement over emissions entitlements would need to include developed country commitments to public support for research, development and commercialisation of low-emissions technologies. The agreement could embody firm commitments by developed countries to cover additional development assistance for complying developing countries to adapt to the climate change that will inevitably be faced in the period ahead. It could be supported by a proposal for World Trade Organisation rules to constrain individual countries' measures to restrict trade with countries that are not reasonably complying with the requirements of an international mitigation effort.

At the centre of the agreement would be an understanding on the allocation across countries of a diminishing total of annual emissions entitlements. These would be allocated on the basis that emissions would converge towards equal per capita entitlements at some time in the future.

The difference between the basis of allocation of emissions entitlements proposed here, and the Kyoto approach of fixed but differentiated reductions, is large. Within principles designed to reduce global emissions through convergence over time towards equal per capita entitlements, a reduction of 10 per cent from 2000 levels by 2020 in Australia would represent a full proportionate contribution to a global effort to hold concentrations of carbon dioxide equivalents to 550 parts per million. It would represent a larger per capita reduction than was required of the US or the European Union. It would represent a larger per capita reduction for Australia than the EU's implementation of its proposed unconditional commitment to reduce emissions by 20 per cent from 1990 levels.

Chinese economy

There is increasing concern in Australia over the health of the Chinese economy and the impact this will have here. The collapse in commodity prices seems to suggest rough times ahead in Australia.

Reserve Bank governor Glenn Stevens this week suggested that the striking economic fact of the past few months was not the expected downturn in the US. It was that "China's economy has slowed much more quickly than anyone had forecast".

China reports many of its key indicators in ways that obscure what has actually happened most recently. Stevens said the Reserve Bank's analysis indicated that Chinese industrial production went backwards over the four months to October. He was "not sure that many economic forecasters have fully appreciated this yet". "There is every chance that the rate of growth of China's (gross domestic product) is currently noticeably below the 8 per cent pace that is embodied in various forecasts for 2009," he said.

Stevens did not spell out what "noticeably below" meant but the word is that this could be as low as 4 per cent. That's a very big deal for a mega-economy that, until only months ago, was supposed to be marching ahead at a double-digit pace but which already had been clubbed by a home-grown property bust.

Trans-Tasman contrasts in response to financial crisis

The Australian government dedicated half its surplus or $10.4 billion dollars to a stimulus package. The money goes out before Christmas to those most likely to spend it; pensioners and their carers, low income families and first home buyers ($14,000 from the State when you buy a house! That's twice the Howard government level.)

This was done without any detailed Treasury modelling because both officials and politicians were of the opinion that immediate action was needed. In particular it appears that Australian and international experts are not very confident of the continued health of the Chinese economy which is the main driver of growth in resource rich Australia.

The economy is still dominating the front pages and Rudd has announced the goal of avoiding recession and developing regulations in response to the crisis that will be a model for international developments. This is consistent with his extraordinary ambition to be seen as a player on the world stage.

I suppose that it is no surprise, given the Election season, that by contrast the front page news on the New Zealand Herald website at the moment is that Lockwood Smith has been known to make a dick of himself. Who knew?

Cullen will be happy to find that fishhooks in the detail of the Government's bank guarantee were big news in Australia this morning. So Australian moves are not without percieved missteps.

Meanwhile the outcome of the NZ election is not a topic of great interest.

Australian Response to Financial Crisis

Treasurer Wayne Swan is in Washington and New York this weekend, attending the G20 meeting and lobbying bigwigs. I've just listened to his interview with Barry Cassidy on Insiders, and I don't think you could really describe him as calm and collected. It seems that there is no government program that will not be reconsidered in light of the financial crisis.

Back in Canberra the Foreign Minister Stephen Smith has announced that the finance subcommittee of the Cabinet will meet later today.

What are New Zealand's alleged leaders doing this weekend?

THE government's cabinet budget committee will meet later today to take any action deemed necessary from key meetings of the International Monetary Fund and Group of 20 finance ministers in New York today.

Foreign Minister Stephen Smith said there was a growing realisation that the international financial crisis was worse than originally thought.

Update: Account of Clark's campaign opening speech just up, she does at least announce a deposit guarantee scheme.

Cloak and Dagger: DIO targets Japan

I'm a bit of a sucker for real life spy stories. But I missed this interesting report in the Canberra Times on the Australian Defence Intelligence Organisation's targets. They focus on the interest in Japan since Japan is such a close Australian ally. The shock that one would spy on an ally seems pretty naive but adds to the story!

According to briefings seen by The Canberra Times, DIO's Transnational, Scientific and Technical Intelligence branches keep a close watch on Japan's nuclear power industry and civilian space programs.

According to one Defence intelligence analyst, this is more than a watching brief. ''We put quite a lot of effort into the Japanese target,'' he said. ''After all they have lots of nuclear reactors, an advanced space sector and an enormous stockpile of plutonium.

Of course if you write such a story you can expect a bunch of guys in dark glasses to arrive at your house and turn the place upside down.

Short Selling in New Zealand?

A propos of yesterday's comments on short selling in New Zealand, it appears that neither the Australian newspaper nor the regulatory body ASIC are of the opinion that the practice is insignificant.

In a hurried decision yesterday, ASIC revealed covered shorts could be taken in dual-listed stocks such as BHP Billiton, Rio Tinto, ANZ Bank and Lion Nathan, as the stocks were at risk of being savagely shorted on their secondary exchanges in London and New Zealand.

This is in marked contrast to the points of view on Morning Report Monday. Not my bailiwick this issue, but it must be possible to find the truth one way or the other.

In general the ban on short selling seems to be attracting increasing criticism.

Shared Values and Common Purpose

John McCain has an opinion piece in today's Australian. McCain's real connection with Asia and the South Pacific and committment to free trade are the best reasons why bloggers like The Hive, for example, are so excited about McCain's candidacy. The argument for McCain from an Antipodean point of view is put pretty well by Andrew Shearer at the Lowy Interpreter here.

It's heartening that as well as canvassing the long history of the Australia-US alliance and issues such as terrorism McCain includes a strong statement backing US leadership on climate change and against torture. The foreign policy statements seem to me to have a considerable neo-con, rather than Republican realist, flavour. (I can't resist noting that while it's true that Australians have "suffered terrible terrorist attacks" it shouldn't escape our attention that Australia has not.)

New Zealand readers of course will skim for that all important "Z"

In Asia this means engagement must begin with our allies. Our alliance with Australia sets the standard. Our ally Japan has proved a strong and reliable partner to the US and Australia. South Korea is taking on new global responsibilities. We can reinvigorate our traditional alliances with Thailand and The Philippines and build on newly strengthened partnerships with Singapore and India. And we should recognise our shared values and common purpose with New Zealand.

Now is that the same as small-a "allies"? Having run through 'allies' and 'partners' we get 'and we should recognise'? The tone is quite grudging.

The Increasing Importance of Uranium

It's going to be very interesting to see whether Australia now moves toward selling uranium to India. But even without that a lot is going on with respect to the politics and economics of uranium at the moment.

The week before last we had the extraordinary spectacle of Peter Garrett approving the expansion of the Beverly uranium mine in South Australia. Apparently the joke about Garrett now is "every appearance a sell-out."

Last week the Chinese company Sinosteel placed a bid to develop a large uranium mine in South Australia. This places the totally opaque foreign investment rules here under still more pressure. If the Right in New Zealand thinks it is unclear what is and is not a strategic asset they should take a look at the situation in Australia.

The Foreign Affairs minister Steven Smith threatened to reneg on a deal made by the Howard government to sell uranium to Russia in response to the situation in Georgia with a predictably stern response from the Russians.

Why all this interest in Australian uranium?

There is an urgent need to expand world uranium production which currently stands at around 64% of consumption. (Whether this is a serious problem for the nuclear power industry is debatable. The Three Mile Island and Chernobyl accidents depressed demand in the 80s to the extent that there are currently very large stockpiles.) China in particular is rapidly building nuclear power reactors and needs to assure its supply of fuel. Australia has about 23% of known reserves. Canada and Kazakhstan are the other countries with large reserves and mining industries.

Garnaut's new report

Ross Garnaut has released a supplementary report on emissions trading in Australia. He is recommending a very slow start to the program with a target of a 5% reduction on year 2000 emissions by 2020 unless a deal that includes all nations emerges from Copenhagen.

Paul Kelly notes that this takes the heat off Rudd

There are two main stories in the Garnaut report about the 2020 target. Garnaut is advising Rudd to run on two tracks: what Australia does with a comprehensive global agreement and what it does with an ongoing ad hoc post-Kyoto global compromise.

Taking the second scenario (absent any all-in global deal), Garnaut advises Rudd to settle on a 5 per cent Australian reduction by 2020. He stresses this would be consistent with reaching Rudd's non-negotiable 60 per cent reduction target by 2050.

The reason 5 per cent is the most likely target in practice is because, as Garnaut argues, there is only a chance the world will reach a comprehensive deal any time soon. Given this likely failure, Garnaut wants a modest start for Australia.

Because it is inconceivable that Rudd would choose a more ambitious target than Garnaut's, the best calculation under this scenario is that the Rudd Government will settle somewhere between zero and minus 5per cent from year 2000 levels.